ZLAB - Zai Lab Stock: De-Risking Through Market Tapping

2023-09-07 09:09:08 ET

Summary

• Zai Lab Limited is a biotech company that acts as a powerful partner for other biotechs to launch drug candidates in China.
• They currently distribute four drugs in mainland China and have a pipeline of cancer therapies awaiting approval.
• ZLAB has a strong financial position with significant cash reserves and potential for future sales growth.

Topline Summary

Zai Lab Limited ( ZLAB ) is a commercial-stage, global biotech with presence in the United States and China, bringing novel treatment approaches into the Chinese market that is difficult for US-based companies to enter. One of their main features is the ability to act as a powerful partner for other biotechs to launch drug candidates in China, bolstering global revenues for these partners while allowing ZLAB to stake a claim on drugs that have positive trials and relatively sure journeys to approval.

ZLAB Pipeline Overview

ZLAB currently distributes 4 drugs in mainland China that are also approved in the United States, including niraparib (a PARP inhibitor approved in patients with ovarian cancer, marketed in partnership with TESARO, now owned by GSK ( GSK )), ripretinib (a multikinase inhibitor approved in GI stromal tumor, in partnership with Deciphera Pharmaceuticals ( DCPH )) repotrectinib (a ROS1 inhibitor for patients with certain forms of lung cancer, marketed in partnership with Bristol Myers Squibb ( BMY )), Optune (tumor-treating fields approved in glioblastoma, marketed in partnership with NovoCure ( NVCR )), and the antibiotic omadacycline (marketed in partnership with Paratek Pharmaceuticals ( PRTK )).

This represents a wide range of different malignancies that ZLAB is able to impact on, as well as a lot of irons in the fire for further revenue growth. Of these drugs, niraparib represents the largest share of their current sales, breaking down like this:

• Niraparib - $43.0 million
• Optune - $13.7 million
• Ripretinib - $7.5 million
• Omadacycline - $4.6 million

The company expects to launch a fifth drug, efgartigimod alfa-fcab, for patients with a specific form of myasthenia gravis, a debilitating neurological disease.

Beyond that, ZLAB has amassed a veritable who's who of different cancer therapies that are either currently approved in the US (but not yet in China) or are headed in that direction, including:

• Repotrectinib in ROS1-positive non-small cell lung cancer, partnered with Bristol Myers Squibb, which has a US FDA priority review action date of November 27, 2023; a similar application is with the Chinese NMPA, as well. This agent was also granted Breakthrough Therapy designation in China for patients with NTRK -positive solid tumors, similar to the tissue-agnostic approval it currently has in the United States.
• Tisotumab vedotin, and antibody-drug conjugate developed by Seagen ( SGEN ) that recently had positive phase 3 trial findings announced in cervical cancer. ZLAB is a participant in the global study, as well as the extension study in greater China
• Bemarituzumab, an FGFR2b antibody being studied in stomach and esophageal cancer being developed by Amgen ( AMGN )

Their most recent strategic partnership was announced back in April with MediLink Therapeutics for distribution rights to ZL-1310, an antibody-drug conjugate targeting DLL3, which is an important emerging target in small cell lung cancer. We don't know much about the efficacy of this agent, but it is worth noting that a different ADC in the space, rovalpituzumab tesirine, had a pretty spectacular phase 3 trial failure in the same space, so some caution is warranted with respect to this collaboration.

As you can see, ZLAB has a unique business proposition based on making relatively small investments in promising agents, participating in the development of these therapies, and then getting to reap the reward of a potentially massive Chinese market.

Zai Lab Financial Overview

At the end of Q2 2023, ZLAB held $859 million in cash and equivalents, with total current assets reaching over $1 billion. Product revenues grew year over year in quarter 2, with $68.8 million versus $48 million in 2022, a growth rate of approximately 45% year over year. However, increases in cost of sales, general/admin, and research and development contributed to an overall increase in net losses, offset only by the gain of $10 million through the sale of "certain patent rights and related know-how."

Loss from operations was $89.5 million in total, compared with $98.7 million the year before. Net losses after interest and other factors were $120.9 million, which was down from $137.9 million in Q2 2022.

At this rate of net loss, ZLAB has roughly 7 quarters of cash runway left. However, they've chambered a lot of rounds for new drug approvals that are likely to come by the end of the year, and the company has not yet launched their myasthenia gravis drug, so sales will inevitably climb. And a lot of the current high R&D expense is going toward supporting development of new agents that will further bolster sales.

Strengths and Risks

Having their hands in so many different projects that are bound for success diversifies ZLAB to an incredible extent. However, although the potential patient population in China is larger than in the United States, it is not likely they will be able to achieve the same kind of penetrance that pharma companies can here.

Another potential risk to someone who would be a buyer today is that the earnings break-even point is still quite a ways off. They won't be a profitable company by 2024 at the rate their sales are growing, impressive though it may be. If the sales growth and expense growth rates remain steady, then the company will turn the corner by around 2026, and the cash reserves will hold steady throughout.

However, if sales are more modest, say...half of what they were year over year in quarter 2, then they do not currently have sufficient cash in the coffers to get to profitability.

So the company sits in a pretty solid place financially. As an American writer, I should also respect that the pharmaceutical market in China, as well as the governmental regulations posed on ZLAB, are not fully known to me. And of course this represents a potential risk to operations if there are issues with getting drug approvals.

However, it's also worth noting that the global studies supporting approval of these agents also do include China, so they are making significant strides in making sure that Chinese patients are represented, which is important since the prevalence of different biomarkers can be markedly different compared with America, and patients face different challenges with respect to access to optimal standards of care than they do in America.

Bottom-Line Summary

ZLAB has a lot going for it, and a lot more coming with its pipeline of partnered products. However, at this time you have time to put this on your watch list. In particular, I want to see that the sales growth trajectory remains in place, since that's going to be the determining factor on meeting its profitability goals without running out of cash first. To me, a re-evaluation quarterly is warranted, and if they can maintain a few more quarters of clear growth, then that will be the time to jump in. For those with more confidence in them growing sales, then my "hold" recommendation could be more considered a "tentative buy."

One thing is for sure: ZLAB is not going away soon, and they're not going to need to dilute shares for quite a while, and maybe never.

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