ZLAB - Zai Lab: Encouraging Developments Amid Ever-Present Geopolitical Risk

2023-07-12 15:34:17 ET

Summary

• Zai Lab's Q1 2023 earnings show a significant growth in product revenues, a decrease in R&D expenses, and a decrease in net loss compared to 2022.
• Despite underperforming compared to the S&P 500, Zai Lab's earnings projections suggest substantial growth, with an almost break-even EPS and a significant sales increase expected by 2025.
• Zai Lab's pipeline has made steady progress, but it faces unique political and economic risks being based in China, which may impact its valuation and operational efficiency.

Introduction

Zai Lab ( ZLAB ) is a global biopharmaceutical firm known for its patient-focused and innovative practices. With substantial presence in Greater China and the US, it aims to address significant medical needs in oncology, autoimmune disorders, infectious diseases, and neuroscience. The company's experienced team partners with global biopharmaceutical firms to develop a robust pipeline of products. Zai Lab's commercial offerings include treatments for conditions like ovarian cancer and glioblastoma multiforme, and it possesses commercial rights in various regions, including mainland China, Hong Kong, and Macau.

The following article provides a brief overview of Zai Lab.

Q1 2023 Earnings

Let's first review earnings. In the first quarter of 2023 , Zai Lab saw a significant growth in product revenues, increasing by 36.2% to $62.8 million compared to $46.1 million in 2022. ZEJULA and Optune experienced notable revenue growth. However, QINLOCK revenue decreased, while NUZYRA's revenue saw a significant rise. A $3.9 million adjustment was made to rebalance QINLOCK and NUZYRA prices.

R&D expenses fell to $48.5 million, due to cost-sharing from partners, offset slightly by higher payroll costs. Conversely, SG&A expenses increased to $62.5 million, driven by higher service fees and payroll costs.

Net loss decreased to $49.1 million in Q1 2023, thanks to increased product revenue and non-operating income. As of March 31, 2023, the company had $931.4 million in cash and equivalents, down from $1,009.3 million at the end of 2022.

ZLAB Stock Assessment

Per Seeking Alpha data, Zai Lab's earnings projections suggest substantial growth, with an almost break-even EPS (-$0.06) and a significant sales increase (67.28% YoY to $825.78 million) expected by 2025. Its FY1 had five upward revisions, demonstrating positive sentiment. However, profitability metrics are currently negative, with a gross profit margin of -56.09%, EBIT margin of -170.53%, and net income margin of -177.42%. The stock has underperformed compared to the S&P 500, showing negative returns over the past year. Despite this, Zai Lab has a solid capital structure, with a market cap of $2.73 billion, minimal debt ($20.30 million), and a significant cash balance ($930.39 million), leading to an enterprise value of $1.82 billion.

Pipeline Developments/Geopolitical Risks

Zai Lab's pipeline has been making steady progress, with significant developments across oncology, autoimmune disorders, infectious diseases, and neuroscience. Key developments include the successful Phase 2 study of TIVDAK for head and neck cancer, the inclusion of KRAZATI in NCCN guidelines for specific cancers, and positive results from the Phase 3 trial of KarXT for schizophrenia. Furthermore, other drugs such as Bemarituzumab and Odronextamab are progressing through various phases of clinical trials, with some anticipated to have data readouts by the end of 2023.

Being based in China, Zai Lab faces unique political and economic risks that can impact its valuation. The regulatory landscape in China can be complex and unpredictable, which may result in unforeseen delays or hurdles in the drug approval process. Additionally, the tense geopolitical environment, particularly between China and the U.S., might pose risks in terms of potential trade restrictions or other punitive measures. Economically, China's evolving healthcare reform measures may affect the company's pricing and market access strategies. Zai Lab's stock could therefore trade at lower valuations than a comparable U.S.-based company, given these risks and the generally lower multiples attributed to China-based stocks. However, the company's broad geographic presence and partnerships with global biopharmaceutical companies can potentially mitigate these risks, making Zai Lab a unique proposition in the biotech sector.

My Analysis & Recommendation

Zai Lab has demonstrated strong growth in revenues and made significant strides in its clinical trials and product pipeline. Despite the company's current lack of profitability, its projected growth trajectory paints an optimistic future. The company's nearly break-even EPS and robust sales increase expected by 2025, coupled with the positive developments in its product pipeline, make it a compelling investment.

However, investors need to consider the inherent risks associated with its base in China. Regulatory uncertainties, geopolitical tensions, and economic shifts in China could impact Zai Lab's operational efficiency and valuation. Although the company has implemented strategies to mitigate these risks, including global partnerships, they remain a key consideration.

In light of these factors, a "Hold" recommendation is suggested for Zai Lab at the current market cap of ~$2.7 billion. I can, however, see its place in a well-balanced, biotechnology-focused portfolio, but Zai Lab doesn't scream "Buy" for me. I'd like to first see Zai Lab be involved with a blockbuster drug that can eat away at those losses before considering a rating upgrade. This recommendation considers the company's promising growth potential and the significant progress in its product pipeline, balanced against the existing geopolitical and regulatory risks in its home market. Moving forward, investors should closely monitor Zai Lab's ongoing clinical trials and product developments, as well as the geopolitical and regulatory landscape in China, to make informed investment decisions.

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