Form 10-Q
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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
    
    
        
    
to
    
    
        
    
Commission File Number:
001-38205
 
 
ZAI LAB LIMITED
(Exact Name of Registrant as Specified in its Charter)
 
 
 
Cayman Islands
 
98-1144595
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
4560 Jinke Road
Bldg. 1, Fourth Floor
Pudong
ShanghaiChina
 
201210
(Address of principal executive offices)
 
(Zip Code)
+86 21 6163 2588
(Registrant’s Telephone Number, Including Area Code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading
Symbol(s)
  
Name of each exchange
on which registered
American Depositary Shares, each representing 1 Ordinary Share, par value $0.00006 per share
  
ZLAB
  
The Nasdaq Global Market
     
Ordinary Shares, par value $0.00006 per share*
  
9688
  
The Stock Exchange of Hong Kong Limited
 
*
Included in connection with the registration of the American Depositary Shares with the Securities and Exchange Commission. The ordinary shares are not registered or listed for trading in the United States but are listed for trading on The Stock Exchange of Hong Kong Limited.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days
.    
Yes
  ☒    No  ☐ 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)
.    
Yes
  ☒    No  ☐ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer  
       
Non-accelerated filer      Smaller reporting company  
       
         Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).
    Yes  ☐    No  
As of April 30, 2021,
 
94,908,743
 
ordinary shares of the registrant, par value $0.00006 per share, were outstanding, of which
65,326,281
 
ordinary shares were held in the form of American Depositary Shares.
 
 
 

Table of Contents
Zai Lab Limited
Quarterly Report on Form
10-Q
 
 
  
Page
 
PART I.
 
  
 
3
 
Item 1.
 
  
 
3
 
 
 
  
 
3
 
 
 
  
 
4
 
 
 
  
 
5
 
 
 
  
 
6
 
 
 
  
 
7
 
 
 
  
 
8
 
Item 2.
 
  
 
21
 
Item 3.
 
  
 
30
 
Item 4.
 
  
 
31
 
PART II.
 
  
 
32
 
Item 1.
 
  
 
32
 
Item 1A.
 
  
 
32
 
Item 2.
 
  
 
33
 
Item 3.
 
  
 
33
 
Item 4.
 
  
 
33
 
Item 5.
 
  
 
33
 
Item 6.
 
  
 
34
 
  
 
35
 
 
 
2

Table of Contents
PART I—FINANCIAL INFORMATION
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form
10-Q
and the audited consolidated financial information and the notes thereto included in our Annual Report on Form
10-K
for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission, or SEC, on March 1, 2021.
This discussion contains certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are identified by words such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially,” “contemplate,” “project,” “seek,” “target,” “would” or the negative of these terms or similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information, including all matters that are not historical facts. These forward-looking statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements because they relate to events and depend on circumstances that may or may not occur in the future. Factors that might cause such a difference include, but are not limited to, those discussed in the “Risk Factors” section of our Annual Report on Form
10-K
and those “Risk Factors” discussed below in Part II, Item 1A. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this Quarterly Report on Form
10-Q,
speak only as of their date, and except as required by law, we undertake no obligation to update or revise these statements in light of future developments. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.
Item 1. Financial Statements
Zai Lab Limited
Unaudited condensed consolidated balance sheets
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
 
           
As of
 
           
March 31,

2021
   
December 31,
2020
 
    
Notes
    
$
   
$
 
Assets
                         
Current assets:
             
                        
     
                        
 
Cash and cash equivalents
     3        1,013,420       442,116  
Short-term investments
     5        —         744,676  
Accounts receivable (net of allowance of $2 and $1 as of March 31, 2021 and 2020, respectively)
              8,815       5,165  
Inventories
     6        12,629       13,144  
Prepayments and other current assets
              14,321       10,935  
             
 
 
   
 
 
 
Total current assets
              1,049,185       1,216,036  
Restricted cash,
non-current
     4        743       743  
Investments in equity investees
     7        1,473       1,279  
Prepayments for equipment
              244       274  
Property and equipment, net
     8        29,016       29,162  
Operating lease
right-of-use
assets
              16,652       17,701  
Land use rights, net
              7,784       7,908  
Intangible assets, net
              1,585       1,532  
Long term deposits
              910       862  
Value added tax recoverable
              23,698       22,141  
             
 
 
   
 
 
 
Total assets
           
 
1,131,290
 
 
 
1,297,638
 
             
 
 
   
 
 
 
Liabilities and shareholders’ equity
                         
Current liabilities:
                         
Accounts payable
              41,415       62,641  
Current operating lease liabilities
              5,602       5,206  
Other current liabilities
     11        45,639       30,196  
             
 
 
   
 
 
 
Total current liabilities
              92,656       98,043  
Deferred income
              16,657       16,858  
Non-current
operating lease liabilities
              12,307       13,392  
             
 
 
   
 
 
 
Total liabilities
           
 
121,620
 
 
 
128,293
 
             
 
 
   
 
 
 
Commitments and contingencies (Note 18)
                         
Shareholders’ equity
                         
Ordinary shares (par value of $0.00006 per share; 500,000,000 shares authorized, 88,519,172 and 74,666,725 shares issued and outstanding as of March 31, 2021 and 2020, respectively)
              5       5  
Additional
paid-in
capital
              1,967,802       1,897,467  
Accumulated deficit
              (946,513     (713,603
Accumulated other comprehensive loss
     15        (11,624     (14,524
             
 
 
   
 
 
 
Total shareholders’ equity
           
 
1,009,670
 
 
 
1,169,345
 
             
 
 
   
 
 
 
Total liabilities and shareholders’ equity
           
 
1,131,290
 
 
 
1,297,638
 
             
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
3

Table of Contents
Zai Lab Limited
Unaudited condensed consolidated statements of operations
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
 
           
Three Months Ended March 31,
 
           
2021
   
2020
 
    
Notes
    
$
   
$
 
Revenue
   9        20,103       8,218  
Expenses:
                       
Cost of sales
            (7,505     (2,084
Research and development
            (203,852     (33,742
Selling, general and administrative
            (35,838     (18,714
           
 
 
   
 
 
 
Loss from operations
            (227,092     (46,322
Interest income
            214       1,655  
Interest expenses
            —         (59
Other
expense
,
 net
            (6,227     (3,125
           
 
 
   
 
 
 
Loss before income tax and share of gain (loss) from equity method investment
            (233,105     (47,851
Income tax expense
   10        —         —    
Share of gain (loss) from equity method investment
            195       (137
           
 
 
   
 
 
 
Net loss
            (232,910     (47,988
           
 
 
   
 
 
 
Net loss attributable to ordinary shareholders
            (232,910     (47,988
           
 
 
   
 
 
 
Loss per share - basic and diluted
   12        (2.64     (0.66
Weighted-average shares used in calculating net loss per ordinary share - basic and diluted
            88,374,928       72,956,538  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
4

Table of Contents
Zai Lab Limited
Unaudited condensed consolidated statements of comprehensive loss
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
 
    
Three Months Ended March 31,
 
    
2021
   
2020
 
 
 
    
$
   
$
 
 
 
Net loss
     (232,910     (47,988
Other comprehensive income, net of tax of nil:
                
Foreign currency translation adjustments
     2,900       3,539  
    
 
 
   
 
 
 
Comprehensive loss
  
 
(230,010
 
 
(44,449
    
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
5

Zai Lab Limited
Unaudited condensed consolidated statements of shareholders’ (deficit) equity
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
 
    
Ordinary shares
    
Additional
          
Accumulated
other
       
    
Number of

Shares
    
Amount
    
paid

in capital
    
Accumulated

deficit
   
comprehensive

(loss) income
   
Total
 
           
$
    
$
    
$
   
$
   
$
 
Balance at December 31, 2020
     87,811,026        5        1,897,467        (713,603     (14,524     1,169,345  
Issuance of ordinary shares upon vesting of restricted shares
     81,600        0        0        —         —          
Exercise of shares option
     58,364        0        702        —         —         702  
Issuance of ordinary shares in connection with collaboration and license arrangement (Note 16)
     568,182        0        62,250        —         —         62,250  
Issuance cost adjustment for secondary listing
     —          —          65        —         —         65  
Share-based compensation
     —          —          7,318        —         —         7,318  
Net loss
     —          —          —          (232,910     —         (232,910
Foreign currency translation
     —          —          —          —         2,900       2,900  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at March 31, 2021
     88,519,172        5        1,967,802        (946,513     (11,624     1,009,670  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at December 31, 2019
     68,237,247        4        734,734        (444,698     4,620       294,660  
Issuance of ordinary shares upon vesting of restricted shares
     80,200        0        0        —         —          
Exercise of shares option
     49,278        0        346        —         —         346  
Issuance of ordinary shares upon
follow-on
public offering, net of issuance cost of $740
     6,300,000        0        280,568        —         —         280,568  
Share-based compensation
     —          —          6,463        —         —         6,463  
Net loss
     —          —          —          (47,988     —         (47,988
Foreign currency translation
     —          —          —          —         3,539       3,539  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at March 31, 2020
     74,666,725        4        1,022,111        (492,686     8,159       537,588  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
“0” in above table means less than 1,000 dollars.
 
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Zai Lab Limited
Unaudited condensed consolidated statements of cash flows
(In thousands of U.S. dollars (“$”) except for number of shares and per share data)
 
    
Three Months Ended March 31,
 
    
2021
   
2020
 
    
$
   
$
 
Operating activities
    
                        
     
                        
 
Net loss
     (232,910     (47,988
Adjustments to reconcile net loss to net cash used in operating activities:
                
Allowance for doubtful accounts
     1       1  
Inventory write-down
     14       —    
Depreciation and amortization expenses
     1,448       1,070  
Amortization of deferred income
     (78     (78
Share-based compensation
     7,318       6,463  
Noncash research and development expenses
 
(Note 16)
     62,250       —    
Share of (gain) loss from equity method investment
     (195     137  
Loss on disposal of property and equipment
     4       —    
Noncash lease expenses
     1,322       1,062  
Changes in operating assets and liabilities:
                
Accounts receivable
     (3,651     (296
Inventories
     502       (45
Prepayments and other current assets
     (3,386     (1,375
Long term deposits
     (47     (349
Value added tax recoverable
     (1,558     (1,156
Accounts payable
     (21,226     4,495  
Other current liabilities
     21,707       (1,408
Operating lease liabilities
     (893     (663
Deferred income
     (122     289  
    
 
 
   
 
 
 
Net cash used in operating activities
     (169,500     (39,841
    
 
 
   
 
 
 
Cash flows from investing activities:
                
Proceeds from maturity of short-term investments
     743,902       50,000  
Purchase of property and equipment
     (1,683     (1,043
Purchase of intangible assets
     (214  
 
(5
    
 
 
   
 
 
 
Net cash used in investing activities
     742,005       48,952  
    
 
 
   
 
 
 
Cash flows from financing activities:
                
Repayment of short-term borrowings
     —         (1,430
Proceeds from exercises of stock options
     702       346  
Proceeds from issuance of ordinary shares upon public offerings
     —         281,295  
Payment of public offering costs
     (973     (727
    
 
 
   
 
 
 
Net cash (used in) provided by financing activities
     (271     279,484  
    
 
 
   
 
 
 
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
     (930     (947
    
 
 
   
 
 
 
Net increase in cash, cash equivalents and restricted cash
     571,304       287,648  
Cash, cash equivalents and restricted cash - beginning of period
     442,859       76,442  
    
 
 
   
 
 
 
Cash, cash equivalents and restricted cash - end of period
     1,014,163       364,090  
    
 
 
   
 
 
 
Supplemental disclosure on
non-cash
investing and financing activities:
                
Payables for purchase of property and equipment
     439       280  
Payables for intangible assets
     26       11  
Payables for public offering costs
     26       —    
Supplemental disclosure of cash flow information:
                
Cash and cash equivalents
     1,013,420       363,580  
Restricted cash,
non-current
     743       510  
    
 
 
   
 
 
 
Total cash and cash equivalents and restricted cash
     1,014,163       364,090  
    
 
 
   
 
 
 
Interest paid
     —         67  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
1. Organization and principal activities
Zai Lab Limited (the “Company”) was incorporated on March 28, 2013 in the Cayman Islands as an exempted company with limited liability under the Companies Law of the Cayman Islands. The Company and its subsidiaries (collectively referred to as the “Group”) are focused on developing and commercializing therapies that address medical conditions with unmet medical needs including, in particular, oncology, autoimmune disorders and infectious diseases.
The Group’s principal operations and geographic markets are in mainland China (hereinafter referred to as “China”), Hong Kong, Macau and Taiwan (hereinafter collectively referred to as “Greater China”). The Group has a substantial presence in Greater China and the United States.
2. Basis of presentation and consolidation and significant accounting policies
(a) Basis of presentation
The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form
10-Q
and Article 10 of Regulation
S-X.
Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). In the opinion of management, these financial statements reflect all normal recurring adjustments and accruals necessary for a fair statement of the Company’s unaudited condensed consolidated financial statements for such periods. The results of operations for any interim period are not necessarily indicative of the results for the full year. The December 31, 2020 condensed consolidated balance sheets data were derived from audited financial statements, but do not include all disclosures required by U.S. GAAP. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2020.
(b) Principles of consolidation
The unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All intercompany transactions and balances among the Group and its subsidiaries are eliminated upon consolidation.
(c) Use of estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the period. Areas where management uses subjective judgment include, but are not limited to, estimating the useful lives of long-lived assets, estimating the current expected credit losses for financial assets, assessing the impairment of long-lived assets, discount rate of operating lease liabilities, revenue recognition, allocation of the research and development service expenses to the appropriate financial reporting period based on the progress of the research and development projects, share-based compensation expenses, recoverability of deferred tax assets and a lack of marketability discount of the ordinary shares issued in connection with collaboration and license arrangement
 
(Note 16). Management bases the estimates on historical experience and various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates.
(d) Fair value measurements
The Group applies ASC topic 820 (“ASC 820”),
 Fair Value Measurements and Disclosures
, in measuring fair value. ASC 820 defines fair value, establishes a framework for measuring fair value and requires disclosures to be provided on fair value measurement.
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
 
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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
Financial instruments of the Group primarily include cash, cash equivalents and restricted cash, short-term investments, accounts receivable, prepayments and other current assets, accounts payable and other payables. As of March 31, 2021 and December 31, 2020, the carrying values of cash and cash equivalents, short-term investments, accounts receivable, prepayments and other current assets, accounts payable and other payable approximated their fair values due to the short-term maturity of these instruments, and the carrying value of restricted cash approximates its fair value based on the nature of the assessment of the ability to recover these amounts.
(e) Recent accounting pronouncements
Adopted Accounting Standards
In December 2019, the FASB issued ASU
2019-12,
Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes
. This update simplifies the accounting for income taxes as part of the FASB’s overall initiative to reduce complexity in accounting standards. The amendments include removal of certain exceptions to the general principles of ASC 740,
Income taxes
, and simplification in several other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. The update is effective in fiscal years beginning after December 15, 2020, and interim periods therein, and early adoption is permitted. Certain amendments in this update should be applied retrospectively or modified retrospectively, all other amendments should be applied prospectively. The Group adopted this standard on January 1, 2021. There was no material impact to the Group’s financial position or results of operations upon adoption.
(f) Significant accounting policies
For a more complete discussion of the Company’s significant accounting policies and other information, the unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2020.
3. Cash and cash equivalents
 
    
As of
 
    
March 31,
2021
    
December 31,
2020
 
    
$
    
$
 
Cash at bank and in hand
     1,012,587        441,283  
Cash equivalents
     833        833  
    
 
 
    
 
 
 
       1,013,420        442,116  
    
 
 
    
 
 
 
Denominated in:
  
 
 
      
 
 
   
US$
     186,078        297,813  
RMB (note (i))
     37,732        23,898  
Hong Kong dollar (“HK$”)
     789,029        119,695  
Australian dollar (“A$”)
     581        710  
    
 
 
    
 
 
 
       1,013,420        442,116  
    
 
 
    
 
 
 
Note:
 
(i)
Certain cash and bank balances denominated in RMB were deposited with banks in China. The conversion of these RMB denominated balances into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the government of the People’s Republic of China (“PRC”).
 
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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
4. Restricted cash,
non-current
The Group’s restricted cash balance of $743 and $743
as of March 31, 2021 and December 31, 2020, respectively, was long-term bank deposits held as collateral for issuance of letters of credit. These deposits will be released when the related letters of credit are settled by the Group.
5. Short-term investments
Short-term investments are primarily comprised of time deposits with original maturities between
three months and
one year
.
As of March 31, 2021, the Group held no short-term investment. As of December 31, 2020, the Group’s short-term investments consisted entirely of short-term held to maturity debt instruments with high credit ratings, which were determined to have no risk of expected credit loss. Accordingly
, no
allowance for credit loss was recorded as of December 31, 2020. 
6. Inventories
The Group’s inventory balance of $12,629 and $13,144
as of March 31, 2021 and December 31, 2020, respectively, mainly consisted of finished goods purchased from Tesaro Inc., now
GlaxoSmithKline
(GSK), and NovoCure Limited (“NovoCure”) for distribution in Hong Kong, as well as finished goods, work in process and certain raw materials for ZEJULA commercialization in China.
 
    
As of
 
    
March 31,

2021
    
December 31,

2020
 
    
            $            
    
            $            
 
Finished goods
     2,703        3,041  
Raw materials
     9,588        10,103  
Work in process
     338            
    
 
 
    
 
 
 
Inventories
     12,629        13,144  
    
 
 
    
 
 
 
The Group write-down inventory for any excess or obsolete inventories or when the Group believe that the net realizable value of inventories is less than the carrying value. During the three months ended March 31, 2021 and 2020, the Group recorded write-downs of $43 and $nil, respectively, in cost of revenues.
7. Investments in equity investees
In June 2017, the Group entered into an agreement with three third-parties to launch JING Medicine Technology (Shanghai) Ltd. (“JING”), an entity which provides services for product discovery and development, consultation and transfer of pharmaceutical technology. The capital contribution by the Group was RMB26,250 in cash, which was paid by the Group in 2017 and 2018, representing 20% and 18% of the equity interest of JING as of December 31, 2020 and March 31, 2021 respectively. The Group accounts for this investment using the equity method of accounting due to the fact that the Group can exercise significant influence on the investee.
 
The Group recorded its gain on deemed disposal in this investee of 
$463 and share of loss of $268 for the three months ended March 31, 2021, and recorded share of loss in this investee of $137 for the three months ended March 31, 2020.
 
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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
8. Property and equipment, net
Property and equipment consist of the following:
 
    
As of
 
    
March 31,

2021
    
December 31,

2020
 
    
            $            
    
            $            
 
Office equipment
     428        430  
Electronic equipment
     2,876        2,646  
Vehicle
     194        143  
Laboratory equipment
     12,357        11,933  
Manufacturing equipment
     12,116        12,198  
Leasehold improvements
     9,642        9,641  
Construction in progress
     2,915        2,423  
    
 
 
    
 
 
 
       40,528        39,414  
Less: accumulated depreciation
     (11,512      (10,252
    
 
 
    
 
 
 
Property and equipment, net
     29,016        29,162  
    
 
 
    
 
 
 
Depreciation expenses for the three months ended March 31, 2021 and 2020 were $1,340 and $1,006, respectively.
9. Revenue
The Group’s revenue is primarily derived from the sale of ZEJULA and Optune in China and Hong Kong. The table below presents the Group’s net product sales for the three months ended March 31, 2021 and 2020.
 
    
Three Months Ended March 31,
 
    
2021
    
2020
 
    
            $            
    
            $            
 
Product revenue - gross
     46,555        8,937  
Less: Rebate
     (26,452      (719
    
 
 
    
 
 
 
Product revenue - net
     20,103        8,218  
    
 
 
    
 
 
 
Sales rebates are offered to distributors in China and the amounts are recorded as a reduction of revenue. Estimated rebates are determined based on contracted rates, sales volumes and level of distributor inventories.
The following table disaggregates net revenue by product for the three months ended March 31, 2021 and 2020:
 
    
Three Months Ended March 31,
 
    
2021
    
2020
 
    
            $            
    
            $            
 
ZEJULA
     12,606        6,345  
Optune
     7,130        1,873  
Others
     367        —    
    
 
 
    
 
 
 
Total product revenue - net
     20,103        8,218  
    
 
 
    
 
 
 
10. Income Tax
No provision for income taxes has been required to be accrued because the Company and all of its subsidiaries are in cumulative loss positions for all the periods presented.
The Company recorded a full valuation allowance against deferred tax assets of all its consolidated entities because all entities were in a cumulative loss position as of March 31, 2021 and December 31, 2020. No unrecognized tax benefits and related interest and penalties were recorded in any of the periods presented.
 
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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
11. Other current liabilities
Other current liabilities consist of the following:
 
    
As of
 
    
March 31,

2021
    
December 31,

2020
 
    
            $            
    
            $            
 
Payroll
     7,694        13,694  
Professional service fee
     3,274        3,128  
Payables for purchase of property and equipment
     439        788  
Advance from customers
     3,280        —    
Accrued rebate to distributors
     23,166        7,067  
Others (note (i))
     7,786        5,519  
    
 
 
    
 
 
 
Total
     45,639        30,196  
    
 
 
    
 
 
 
Note:
 
(i)
Others are mainly payables to employees for exercising the share-based compensations, tax payables, payables for purchase of intangible assets, and payables related to travel and business entertainment expenses and conference fee
.
12. Loss per share
Basic and diluted net loss per share for each of the period presented are calculated as follows:
 
    
Three Months Ended March 31,
 
    
2021
    
2020
 
Numerator:
                                                       
Net loss attributable to ordinary shareholders
     (232,910      (47,988
Denominator:
                 
Weighted average number of ordinary shares- basic and diluted
     88,374,928        72,956,538  
    
 
 
    
 
 
 
Net loss per share-basic and diluted
     (2.64      (0.66
    
 
 
    
 
 
 
As a result of the Group’s net loss for the three months ended March 31, 2021 and 2020, share options and
non-vested
restricted shares outstanding in the respective periods were excluded from the calculation of diluted loss per share as their inclusion would have been anti-dilutive.
 
    
As of
 
    
March 31,
2021
    
March 31,

2020
 
Share options
         8,693,274            9,903,396  
Non-vested
restricted shares
     480,010        725,068  
13. Related party transactions
The table below sets forth the major related party and the relationship with the Group as of March 31, 2021:
 
Company Name
  
Relationship with the Group
MEDx (Suzhou) Translational Medicine Co., Ltd.
 
(Formerly known as
Qiagen (Suzhou) translational
 
medicine Co., Ltd)
   Significant influence held by Samantha Du’s (Director, Chairwoman and Chief Executive Officer of the Company) immediate family
 
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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
For the three months ended March 31, 2021 and 2020, the Group incurred $103 and $55 research and development expense with MEDx (Suzhou) Translational Medicine Co., Ltd. for product research and development services, respectively. All of the transactions are carried out with normal business terms and are on arms’ length basis.
14. Share-based compensation
Share options
On March 5, 2015, the Board of Directors of the Company approved an Equity Incentive Plan (the “2015 Plan”) which is administered by the Board of Directors. Under the 2015 Plan, the Board of Directors may grant options to purchase ordinary shares to management including officers, directors, employees and individual advisors who render services to the Group to purchase an aggregate of no more than 4,140,945 ordinary shares of the Group (“Option Pool”). Subsequently, the Board of Directors approved the increase in the Option Pool to 7,369,767 ordinary shares.
In connection with the completion of the initial public offering (the “IPO”), the Board of Directors has approved the 2017 Equity Incentive Plan (the “2017 Plan”) and all equity-based awards subsequent to the IPO would be granted under the 2017 Plan.
For the three months ended March 31, 2020
, the Group granted 842,500 share options to certain management, employees and individual advisors of the Group at the exercise price ranging from $44.94 to $51.48 per share under the 2017 Plan. These options granted have a contractual term of
ten years
and generally vest over a five or
three-year
period, with 20% or 33.3% of the awards vesting beginning on the anniversary date one year after the grant date.
For the three months ended March 31, 
2021, the Group granted 15,100 share options to certain management and employees of the Group at the exercise
price of
 
$162.02 per share under the 2017 Plan. These options granted have a contractual term of
ten years
and generally vest over a
five-year
period, with 20% of the awards vesting beginning on the anniversary date one year after the grant date.
The weighted-average grant-date fair value of the options granted in the
three months ended March 31, 
2021 and 2020 were $162.02 and $48.68 per share, respectively. The Group recorded compensation expense related to the options of $5,549 and $4,921 for the three months ended March 31, 2021 and 2020, respectively, which were classified in the
accompanying unaudited condensed 
consolidated statements of operations as follows:
 
    
Three Months Ended March 31,
 
    
2021
    
2020
 
    
$
    
$
 
Selling, general and administrative
     3,259        2,744  
Research and development
     2,290        2,177  
    
 
 
    
 
 
 
Total
     5,549        4,921  
    
 
 
    
 
 
 
 
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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
As of March 31, 2021, there was $67,009 of total unrecognized compensation expense related to unvested share options granted. That cost is expected to be recognized over a weighted-average period of 1.41
years which is determined based on the number of shares and unrecognized years.
Non-vested
restricted shares
For the three
months ended March 31, 
2020, 50,000 ordinary shares were authorized for grant to the independent directors. The restricted shares will vest and be released from the restrictions in full on the first anniversary from the date of the agreement. Upon termination of the independent directors’ service with the Group for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
For the three
months ended March 31, 
2020, 12,000 ordinary shares were authorized for grant to certain management. One fifth of the restricted shares will vest and be released from the restrictions on each yearly anniversary from the date of the agreement. Upon termination of the certain management’s service with the Group for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
For the three
months ended March 31, 
2021, 19,260 ordinary shares were authorized for grant to the independent directors. The restricted shares will vest and be released from the restrictions in full on the first anniversary from the date of the agreement. Upon termination of the independent directors’ service with the Group for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
For the three
months ended March 31, 
2021, 3,100 ordinary shares were authorized for grant to certain management. One fifth of the restricted shares will vest and be released from the restrictions on each yearly anniversary from the date of the agreement. Upon termination of the certain management’s service
with the Group for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
The Group measured the fair value of the
non-vested
restricted shares as of respective grant dates and recognized the amount as compensation expense over the deemed service period using a graded vesting attribution model on a straight-line basis
.
As of March 31, 2021, there was $17,469 of total unrecognized compensation expense related to
non-vested
restricted shares. The Group recorded compensation expense related to the restricted shares
of $
1,769 and $1,542 for the three months ended March 31, 2021 and 2020, respectively, which were classified in the
accompanying unaudited condensed 
consolidated statements of operations as follows:
 
    
Three Months Ended March 31,
 
    
2021
    
2020
 
    
$
    
$
 
Selling, general and administrative
     1,211        1,068  
Research and development
     558        474  
    
 
 
    
 
 
 
Total
     1,769        1,542  
    
 
 
    
 
 
 
15. Accumulated other comprehensive income (loss)
The movement of accumulated other comprehensive income (loss) is as follows:
 
    
Foreign currency

translation adjustments
 
    
$
 
Balance as of December 31, 2020
     (14,524
Other comprehensive
income
     2,900  
    
 
 
 
Balance as of March 31, 2021
     (11,624
    
 
 
 
 
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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
16. Licenses and collaborative arrangement
The following is a description of the Group’s significant ongoing collaboration agreements for the three months ended March 31, 2021.
License and collaboration agreement with Deciphera Pharmaceuticals, LLC (“Deciphera”)
In June 2019, the Group entered into a license agreement with Deciphera, pursuant to which it obtained an exclusive license under certain patents and know-how of Deciphera to develop and commercialize products containing ripretinib in the field of the prevention, prophylaxis, treatment, cure or amelioration of any disease or medical condition in humans in Greater China.
Under the terms of the agreement, the Group paid Deciphera an upfront license fee of $20,000 and two milestone payments of $7,000, and accrued for a milestone payments of $5,000. The Group also agreed to pay certain additional development, regulatory and commercial milestone payments up to an aggregate of $173,000,
and certain tiered royalties (from low-to-high teens on a percentage basis and subject to certain reductions) based on the net sales of the licensed products in the territory. 
The Group has the right to terminate this agreement at any time by providing written notice of termination to Deciphera.
 
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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
License agreement with Turning Point Therapeutics Inc (“Turning Point”)
In July 2020,
the Group entered into an exclusive license agreement with Turning Point pursuant to which Turning Point exclusively licensed to the Group the rights to develop and commercialize products containing repotrectinib as an active ingredient in all human therapeutic indications, in Greater China.
Under the terms of the agreements, the Group paid an upfront 
payment of $25,000
to Turning Point. Turning Point is also eligible to receive up to 
$151,000
 in development, regulatory and sales milestones. Turning Point will also be eligible to receive certain tiered royalties (from mid-to-high teens on a percentage basis and subject to certain reductions) based on annual net sales of repotrectinib in Greater China. 
The Group has the right to terminate this agreement at any time by providing written notice of termination to Turning Point.
In January 2021, the Group entered into a license agreement with Turning Point, which expanded their collaboration. Under the terms of the new agreement, the Group obtained exclusive rights to develop and commercialize TPX-0022, Turning Point’s MET, SRC and CSF1R inhibitor, in Greater China.
The Group paid an upfront license fee in the amount of $25,000 to Turning Point. The Group also agreed to pay certain development, regulatory and commercial milestone payments up to an aggregate of $336,000.
 Turning Point will also be eligible to receive certain tiered royalties (from mid-teens to low-twenties on a percentage basis and subject to certain reductions) based on annual net sales of TPX-0022 in Greater China. In addition, Turning Point will have the right of first negotiation to develop and commercialize an oncology product candidate discovered by the Group. 
 
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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
License and collaboration agreement with Five Prime Therapeutics, Inc. (“Five Prime”)
In December 2017,
the Group entered into a license and collaboration agreement with Five Prime (a company later acquired by Amgen Inc.), pursuant to which it obtained an exclusive license under certain patents and know-how of Five Prime to develop and commercialize products containing Five Prime’s proprietary afucosylated FGFR2b antibody known as bemarituzumab (FPA144) as an active ingredient in the treatment or prevention of any disease or condition in humans in Greater China. 
Under the terms of the agreement, the Group made an upfront payment of
 $5,000
and a milestone payment of $
2,000
to Five
Prime. Additionally, the Group also agreed to pay further development and regulatory milestone payments of up to an aggregate
of
 
$37,000
 
to Five Prime
 
and certain tiered royalties (from high-teens to low-twenties on a percentage basis and subject to certain reductions) based on the number of patients the Group enrolls in the bemarituzumab study.
The Group has the right to terminate this agreement at any time by providing written notice of termination to Five Prime.
 
17

Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
License agreement with Cullinan Pearl Corp. (“Cullinan”)
In December 2020,
the Group entered into a license agreement with Cullinan, a subsidiary of Cullinan Management, Inc., formerly Cullinan Oncology, LLC, pursuant to which it obtained an exclusive license under certain patents and
know-how
of Cullinan to develop, manufacture and commercialize products containing
CLN-081
as an active ingredient in all uses in humans and animals in Greater China
.
Under the terms of the agreement, the Group paid an upfront payment
of $20,000 to
 
Cullinan. Cullinan is also eligible to receive up
 to $211,000
in development, regulatory and sales-based milestone payments. Cullinan is also eligible to receive certain tiered royalties (from high-single-digit to
low-teen
tiered royalties on a percentage basis and subject to certain reductions) based on annual net sales of
CLN-081
in Greater China.
The Group has the right to terminate this agreement at any time by providing written notice of termination to Cullinan.
License agreement with Takeda Pharmaceutical Company Limited (“Takeda”)
In December 2020, the Group entered into an exclusive license agreement with Takeda. Under the terms of the license agreement, Takeda exclusively licensed to the Group the right to exploit products in the licensed field during the term.
Under the terms of the agreement, the Group paid an upfront payment
 
of $6,000 t
o
Takeda. Takeda is also eligible to receive up
 
to $481,500 in development,
 regulatory and sales-based milestone payments. Takeda is also eligible to receive certain tiered royalties (from high-single-digit to
low-teen
tiered royalties on a percentage basis and subject to certain reductions) based on net sales of each product sold by selling party during each year of the applicable royalty term.
The Group has the right to terminate this agreement at any time by providing written notice of termination to Takeda.
Collaboration and license agreement with argenx BV (“argenx”)
In January 2021, the Group entered into a collaboration and license agreement with argenx. The Group received an exclusive license to develop and commercialize products containing argenx’s proprietary antibody fragment, known as efgartigimod, in Greater China. The Group is responsible for the development of the licensed compound and licensed product, and will have the right to commercialize such licensed product in the territory.
 
1
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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
Pursuant to the collaboration and license agreement, a share issuance agreement was entered into between the Group and argenx. As the upfront payment to argenx, the Group issued
568,182 ordinary shares of the Company to argenx with par value $0.00006 per share on the closing date of January 13, 2021. In determining the fair value of the ordinary shares at closing, the Company considered the closing price of the ordinary shares on the closing date and included a lack of marketability discount because the shares are subject to certain restrictions. The fair value of the shares on the closing date was determined to be $62,250 in the aggregate. The Group recorded this upfront payment in research and development expenses.
In addition, the Group made a
non-creditable,
non-refundable
development cost-sharing payment of $75,000 to argenx. Argenx is also eligible to receive a cash payment of $25,000
upon the first regulatory approval of a licensed product by the U.S. Food and Drug Administration for myasthenia gravis and tiered royalties (from mid-teen to low-twenties on a percentage basis and subject to certain reductions) based on annual net sales of all licensed product in the territory. 
Full details of the licenses and collaborative arrangements are included in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on March 1, 2021. As noted above, the Group has entered into various license and collaboration agreements with third party licensors to develop and commercialize product candidates. Based on the terms of these agreements the Group is contingently obligated to make additional material payments upon the achievement of certain contractually defined milestones. Based on management’s evaluation of the progress of each project noted above, the licensors will be eligible to receive from the Group up to an aggregate of approximately
 $
2,871,396
in future milestone payments upon the achievement of contractually specified development milestones, such as regulatory approval for the product candidates, which may be before the Group has commercialized the product or received any revenue from sales of such product candidate, which may never occur
.
17. Restricted net assets
The Group’s ability to pay dividends may depend on the Group receiving distributions of funds from its Chinese subsidiary. Relevant PRC statutory laws and regulations permit payments of dividends by the Group’s PRC subsidiary only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the unaudited condensed consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Group’s PRC subsidiary.
In accordance with the Company Law of the PRC, a domestic enterprise is required to provide statutory reserves of at least 
10% of its annual
after-tax
profit until such reserve has reached 50%
of its respective registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide discretionary surplus reserve, at the discretion of the Board of Directors, from the profits determined in accordance with the enterprise’s PRC statutory accounts. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. The Group’s Chinese subsidiary was established as domestic invested enterprise and therefore is subject to the above-mentioned restrictions on distributable profits.
During the three months ended March 31, 2021 and 2020, no
appropriation to statutory reserves was made because the Chinese subsidiary had substantial losses during such periods. 
As a result of these PRC laws and regulations subject to the limit discussed above that require annual appropriations of 10% of
after-tax
income to be set aside, prior to payment of dividends, as general reserve fund, the Group’s Chinese subsidiary is restricted in their ability to transfer a portion of their net assets to the Group.
Foreign exchange and other regulation in China may further restrict the Group’s Chinese subsidiary from transferring funds to the Group in the form of dividends, loans and advances. As of March 31, 2021 and December 31, 2020, amounts restricted are the paid-in capital of the Group’s Chinese subsidiaries, which amounted to
 $306,010 and $205,858
,
respectively
.
18. Commitments and Contingencies
(a) Purchase commitments
As of March 31, 2021, the Group’s commitments related to purchase of property and equipment contracted but not yet reflected in the unaudited condensed consolidated financial statement were $16,991 and $5,507 which are expected to be incurred within one year and within one to two years, respectively.
 
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Zai Lab Limited
Notes to the unaudited condensed consolidated financial statements
(In thousands of U.S. dollars (“$”) and Renminbi (“RMB”) except for number of shares and per share data)
 
(b) Contingencies
The Group is a party to or assignee of license and collaboration agreements that may require it to make future payments relating to milestone fees and royalties on future sales of licensed products (Note 16).
19. Subsequent Event
In April 2021, the Company closed an underwritten public offering of 4,776,000 American depositary shares (“ADSs”) at a price of $150.00 per ADS and 224,000 ordinary shares at a price of HK$1,164.20 per ordinary share. In addition, the underwriters fully exercised their option to purchase an additional 716,400 ADSs at the public offering price. Total proceeds, net of underwriting fees and offering expenses, were approximately $818,052.
In April 2021, the Group granted 479,363 share options to certain management and employees of the Group at the exercise
 
price of
 $130.96 per share under the 2017 Plan. These options granted have a contractual term of ten years and generally vest over a five-year
period, with 20% of the awards vesting beginning on the anniversary date one year after the grant date.
In April 2021, 188,150 ordinary shares were authorized for grant to certain management and employees of t
he Group.
 
One-fifth
 
of the re
stricted shares will vest and be released from the restrictions on each yearly anniversary from the date of the agreement. Upon termination of the certain management’s service with the Group for any reason, any shares that are outstanding and not yet vested will be immediately forfeited.
 
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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a commercial stage, biopharmaceutical company with a substantial presence in both Greater China and the United States. We are discovering, developing and commercializing innovative products that target medical conditions with unmet needs affecting patients in China and worldwide, particularly in the areas of oncology, autoimmune disorders, and infectious diseases. As of May 10, 2021, we have three commercialized products that have received marketing approval and eleven programs in late-stage product development.
Since our inception, we have incurred net losses and negative cash flows from our operations. Substantially all of our losses have resulted from funding our research and development programs and general and administrative costs associated with our operations. Developing high quality product candidates requires a significant investment related to our research and development activities over a prolonged period of time, and a core part of our strategy is to continue making sustained investments in this area. Our ability to generate profits and to generate positive cash flow from operations over the next several years depends upon our ability to successfully market our current three commercial products ZEJULA, Optune and QINLOCK
®
, and our other product candidates that we are able to successfully commercialize. We expect to continue to incur substantial expenses related to our research and development activities. In particular, our licensing and collaboration agreements require us to make upfront payments upon our entry into such agreements and milestone payments upon the achievement of certain development, regulatory and commercial milestones as well as tiered royalties based on the net sales of the licensed products. These upfront payments and milestone payments upon the achievement of certain development and regulatory milestones are recorded in research and development expense in our consolidated financial statements and totaled $171.3 million for the three months ended March 31, 2021. In addition, we expect to incur substantial costs related to the commercialization of our product candidates, in particular during the early launch phase.
Furthermore, as we pursue our strategy of growth and development, we anticipate that our financial results will fluctuate from quarter to quarter based upon the balance between the successful marketing of our commercial products and our significant research and development expenses. We cannot predict whether or when new products or new indications for marketed products will receive regulatory approval or, if any such approval is received, whether we will be able to successfully commercialize such product(s) and whether or when they may become profitable.
 
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Recent Developments
Recent Business Developments
In January 2021, we entered into an exclusive development and commercialization agreement with argenx, a global immunology company, for efgartigimod in Greater China. Pursuant to the terms of the agreement, we have agreed to fund and undertake all clinical development and regulatory submissions in the territories, participate in certain global studies, and plan to launch and commercialize the licensed product once approved. argenx received a $75.0 million (before a lack of marketability discount) upfront payment in the form of 568,182 newly issued our ordinary shares calculated at a price of $132.00 per share, and received $75.0 million as a guaranteed
non-creditable,
non-refundable
development cost-sharing payment, and will receive an additional $25.0 million milestone payment upon approval of efgartigimod in the United States. argenx is also eligible to receive tiered
royalties (mid-teen to low-twenties on
a percentage basis) based on annual net sales of efgartigimod in the licensed territories.
In addition, in January 2021, we entered into an exclusive development and commercialization agreement with Turning Point for
TPX-0022,
its MET, SRC and CSF1R inhibitor, in Greater China. Turning Point received a $25.0 million upfront payment, and will receive up to approximately $336.0 million in potential development, regulatory and sales-based milestone payments. Turning Point will also be eligible to receive tiered royalties
(mid-teen-
to
low-twenties
on a percentage basis) based on annual net sales of
TPX-0022
in the licensed territories.
In March 2021, we received approval from the China National Medical Products Administration (NMPA) for our New Drug Application for QINLOCK for the treatment of adult patients with advanced gastrointestinal stromal tumors who have received prior treatment with three or more kinase inhibitors, including imatinib.
In April 2021, we successfully completed a global
follow-on
offering of our American Depositary Shares and ordinary shares and raised approximately $857.5 million, not including underwriting discounts and commissions and other offering expenses.
Recent Regulatory Developments
PRC Medical Device Regulations
The sale and marketing of imported medical device products in China are subject to notifications (for Class I devices) or registrations (for Class II and III devices) with the NMPA. We launched Optune in China in June 2020 after the NMPA approved Optune in May 2020 in combination with temozolomide for the treatment of patients with newly diagnosed GBM and also as a monotherapy for the treatment of patients with recurrent GBM. Optune is regulated as a Class III imported medical device in China, and we act as the Chinese legal agent for our collaboration partner, Novocure, who is the foreign marketing authorization holder (MAH) for Optune in China. We are preparing to submit to the NMPA a Marketing Authorization Application for Optune Lua for the treatment of unresectable, locally advanced or metastatic malignant pleural mesothelioma.
The Chinese State Council passed new Medical Device Regulations (State Council Order #739), or Order #739, to replace the existing Medical Device Regulations (State Council Order #680), or Order #680. Order #739 was recently published by the National Medical Products Administration (NMPA) and will become effective on June 1, 2021. Order #739 largely follows the legislative structure of Order #680. We, as the Chinese legal agent for Optune in China, are subject to the statutory compliance requirements under Order #680 and will be subject to similar requirements under Order #739. The following updates from Order #739 we believe are the most relevant to our compliance obligations and our business operations in China:
 
   
Chinese legal agent
. Under Order #739, foreign device MAHs will still need to appoint a Chinese legal entity to submit regulatory applications and correspond with regulatory authorities. Nevertheless, the local appointees may only need to play a secondary role to assist the foreign device MAHs in the performance of compliance obligations under Order #739.
 
   
Liabilities for non-compliance
. Order #739 significantly increases MAH’s liabilities for non-compliance. Order #739 also introduces personal liability on the legal representatives, main responsible persons, directly responsible supervisors or other personnel of MAHs. While Order #680 does not differentiate the liability of local legal agents from the foreign device MAHs, Order #739 makes it clear that local appointees will assume a lesser degree of liability compared to the foreign device MAHs. If local appointees fail to perform the statutory responsibilities and obligations on behalf of the MAHs, they will be subject to administrative fines up to RMB 0.5 million, and their responsible personnel will only be subject to a five-year debarment. In comparison, foreign MAHs who refuse to fulfill the administrative penalties can result in a ten-year import ban.
 
   
MAH system
. The MAH system will be rolled out nationwide. MAHs will be responsible for the safety and effectiveness of their products during the entire product life cycle. They must establish a quality management system and ensure its effectiveness, define and implement a post-approval study and risk control plan, conduct adverse event monitoring and re-evaluation, establish and implement the product tracing and recall system, and fulfill other statutory obligations imposed by the NMPA.
 
   
Clinical evidence
. The NMPA will allow versatile clinical evidence to demonstrate product safety and effectiveness. Such evaluation can be based on clinical study data or analysis of clinical literature and clinical data on predicate devices.
 
   
Expanded access
. Expanded access to investigational devices will be made available for patients in the study sites upon ethics committee approval and the patients’ giving informed consent, provided that the investigational devices are used for critical, life-threatening diseases without an effective treatment method and can confer clinical benefits on patients based on medical judgment.
 
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PRC Biosecurity Law
On April 15, 2021, the PRC Biosecurity Law took effect.
Factors Affecting our Results of Operations
Research and Development Expenses
We believe our ability to successfully develop product candidates will be the primary factor affecting our long-term competitiveness, as well as our future growth and development. Developing high quality product candidates requires a significant investment of resources over a prolonged period of time, and a core part of our strategy is to continue making sustained investments in this area. As a result of this commitment, our pipeline of product candidates has been steadily advancing and expanding, with eleven late-stage clinical product candidates being investigated.
To date, we have financed our activities primarily through private placements, our initial public offering in September 2017, a secondary listing on the Stock Exchange of Hong Kong and multiple follow-on offerings. Through March 31, 2021, we have raised approximately $164.6 million in private equity financing and approximately $1,644.6 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us in our initial public offering, our secondary listing and our follow-on offerings. Our operations have consumed substantial amounts of cash since inception. The net cash used in our operating activities was $169.5 million and $39.8 million, for the three months ended March 31, 2021 and March 31, 2020, respectively. We expect our expenditures to increase significantly in connection with our ongoing activities, particularly as we advance the clinical development of our eleven late-stage clinical product candidates and continue research and development of our clinical and pre-clinical-stage product candidates and initiate additional clinical trials of, and seek regulatory approval for, these and other future product candidates. These expenditures include:
 
   
expenses incurred for payments to CROs, investigators and clinical trial sites that conduct our clinical studies;
 
   
employee compensation related expenses, including salaries, benefits and equity compensation expense;
 
   
expenses for licensors;
 
   
the cost of acquiring, developing and manufacturing clinical study materials;
 
   
facilities, depreciation and other expenses, which include office leases and other overhead expenses;
 
   
costs associated with pre-clinical activities and regulatory operations;
 
   
expenses associated with the construction and maintenance of our manufacturing facilities; and
 
   
costs associated with operating as a public company.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of personnel compensation and related costs, including share-based compensation for commercial and administrative personnel. Other selling, general and administrative expenses include product distribution and promotion costs, professional service fees for legal, intellectual property, consulting, auditing and tax services as well as other direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies used in selling, general and administrative activities. We anticipate that our selling, general and administrative expenses will increase in future periods to support increases in our commercial and research and development activities and as we continue to commercialize, develop, and manufacture our products and assets. These increases will likely include increased headcount, increased share compensation charges, increased product distribution and promotion costs, expanded infrastructure and increased costs for insurance. We also incur increased legal, compliance, accounting and investor and public relations expenses associated with being a public company.
 
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Table of Contents
Our Ability to Commercialize Our Product Candidates
As of March 31, 2021, eleven of our product candidates are in late-stage clinical development and various others are in clinical and pre-clinical development in China and the United States. Our ability to generate revenue from our product candidates is dependent on their receipt of regulatory approval for and successful commercialization of such products, which may never occur. Certain of our product candidates may require additional pre-clinical and/or clinical development, regulatory approval in multiple jurisdictions, manufacturing supply, substantial investment and significant marketing efforts before we generate any revenue from product sales.
Our License Arrangements
Our results of operations have been, and we expect them to continue to be, affected by our licensing, collaboration and development agreements. We are required to make upfront payments upon our entry into such agreements and milestone payments upon the achievement of certain development, regulatory and commercial milestones for the relevant product under these agreements as well as tiered royalties based on the net sales of the licensed products. These upfront payments and milestone payments upon the achievement of certain development and regulatory milestones are recorded in research and development expense in our unaudited condensed consolidated financial statements and totaled $171.3 million and $9.2 million for the three months ended March 31, 2021 and 2020, respectively.
Key Components of Results of Operations
Taxation
Cayman Islands
Zai Lab Limited is incorporated in the Cayman Islands. The Cayman Islands currently levies no taxes on profits, income, gains or appreciation earned by individuals or corporations. In addition, our payment of dividends, if any, is not subject to withholding tax in the Cayman Islands. For more information, see “Taxation—Material Cayman Islands Taxation” in our Annual Report on Form 10-K for the year ended December 31, 2020.
People’s Republic of China
Our subsidiaries incorporated in China are governed by the EIT Law and regulations. Under the EIT Law, the standard EIT rate is 25% on taxable profits as reduced by available tax losses. Tax losses may be carried forward to offset any taxable profits for up to following five years. For more information, see “Taxation—Material People’s Republic of China Taxation” in our Annual Report on Form 10-K for the year ended December 31, 2020.
Hong Kong
Our subsidiaries incorporated in Hong Kong are subject to
two-tiered
tax rates for the three months ended March 31, 2021 and 2020 on assessable profits earned in Hong Kong where the profits tax rate for the first HK$2 million of assessable profits is subject to profits tax rate of 8.25% and the assessable profits above HK$2 million is subject to profits tax rate of 16.5%. Our subsidiaries incorporated in Hong Kong did not have assessable profit for the three months ended March 31, 2021 and 2020.
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report. Our operating results in any period are not necessarily indicative of the results that may be expected for any future period.
 
(in thousands, except share and per share data)
  
Three months ended March 31,
 
  
2021
   
2020
 
Comprehensive Loss Data:
                
Revenue
   $ 20,103     $ 8,218  
Expenses:
                
Cost of sales
     (7,505     (2,084
Research and development
     (203,852     (33,742
Selling, general and administrative
     (35,838     (18,714
    
 
 
   
 
 
 
Loss from operations
   $ (227,092   $ (46,322
Interest income
     214       1,655  
Interest expenses
     —         (59
Other expense, net
     (6,227     (3,125
    
 
 
   
 
 
 
Loss before income tax and share of loss from equity method investment
   $ (233,105   $ (47,851
Income tax expense
     —         —    
Share of gain (loss) from equity method investment
     195       (137
    
 
 
   
 
 
 
Net loss attributable to ordinary shareholders
   $ (232,910   $ (47,988
Weighted-average shares used in calculating net loss per ordinary share, basic and diluted
     88,374,928       72,956,538  
Net loss per share, basic and diluted
   $ (2.64   $ (0.66
 
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Table of Contents
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Revenue
Our revenue is primarily derived from the sale of ZEJULA and Optune in China and Hong Kong. The amount of revenue of ZEJULA for the three months ended March 31, 2021, was adjusted by the normal process in China to compensate distributors for products recently sold at prices prior to the National Reimbursement Drug List (“NRDL”) implementation. The following table disaggregates net revenue by product for the three months ended March 31, 2021 and 2020:
 
(in thousands)
  
Three months ended March 31,
 
  
      2021      
    
%
    
      2020      
    
%
 
ZEJULA
   $ 12,606        62.7      $ 6,345        77.2  
Optune
     7,130        35.5        1,873        22.8  
Others
     367        1.8        —          —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Total product revenue—Net
   $ 20,103        100.0      $ 8,218        100.0  
    
 
 
    
 
 
    
 
 
    
 
 
 
Research and Development Expenses
The following table sets forth the components of our research and development expenses for the periods indicated.
 
(in thousands)
  
Three months ended March 31,
 
  
      2021      
    
%
    
      2020      
    
%
 
Research and development expenses:
                                   
Personnel compensation and related costs
   $ 12,697        6.2      $ 10,004        29.6  
Licensing fees
     171,282        84.0        9,240        27.4  
Payment to CROs/CMOs/Investigators
     15,526        7.6        9,830        29.1  
Other costs
     4,347        2.2        4,668        13.9  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 203,852        100.0      $ 33,742        100.0  
    
 
 
    
 
 
    
 
 
    
 
 
 
Research and development expenses increased by $170.2 million to $203.9 million for the three months ended March 31, 2021 from $33.7 million for the three months ended March 31, 2020. The increase in research and development expenses included the following:
 
   
$2.7 million for increased personnel compensation and related costs which was primarily attributable to increased employee compensation costs, due to hiring of more personnel during the three months ended March 31, 2021 and the grants of new share options and vesting of restricted shares to certain employees;
 
   
$162.0 million for increased licensing fees in connection with the upfront payments for new licensing agreements as well as certain milestone fees;
 
   
$5.7 million for increased payment to CROs, CMOs and investigators in the three months ended March 31, 2021 as we advanced our drug candidate pipeline; and
The following table summarizes our research and development expenses by program for the three months ended March 31, 2021 and 2020, respectively:
 
(in thousands)
  
Three months ended March 31,
 
  
      2021      
    
%
    
      2020      
    
%
 
Research and development expenses:
                                   
Clinical programs
   $ 186,256        91.4      $ 20,332        60.3  
Pre-clinical
programs
     2,500        1.2        688        2.0  
Unallocated research and development expenses
     15,096        7.4        12,722        37.7  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 203,852        100.0      $ 33,742        100.0  
    
 
 
    
 
 
    
 
 
    
 
 
 
During the three months ended March 31, 2021, 91.4% and 1.2% of our total research and development expenses were attributable to clinical programs and
pre-clinical
programs, respectively. During the three months ended March 31, 2020, 60.3% and 2.0% of our total research and development expenses were attributable to clinical programs and
pre-clinical
programs, respectively. Although we manage our external research and development expenses by program, we do not allocate our internal research and development expenses by program because our employees and internal resources may be engaged in projects for multiple programs at any given time.
 
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Selling, General and Administrative Expenses
The following table sets forth the components of our selling, general and administrative expenses for the periods indicated.
 
(in thousands)
  
Three months ended March 31,
 
  
      2021      
    
%
    
      2020      
    
%
 
Selling, General and Administrative Expenses:
                                   
Personnel compensation and related costs
   $ 23,412        65.3      $ 13,042        69.7  
Professional service fees
     3,583        10.0        2,027        10.8  
Other costs
     8,843        24.7        3,645        19.5  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 35,838        100.0      $ 18,714        100.0  
    
 
 
    
 
 
    
 
 
    
 
 
 
Selling, general and administrative expenses increased by $17.1 million to $35.8 million for the three months ended March 31, 2021 from $18.7 million for the three months ended March 31, 2020. The increase in general and administrative expenses included the following:
 
   
$10.4 million for increased personnel compensation and related costs which was primarily attributable to increased commercial and administrative personnel costs, due to hiring of more personnel during the three months ended March 31, 2021 and the grants of new share options and vesting of restricted shares to certain employees;
 
   
$1.5 million for increased professional service fee, mainly attributable to our increased legal, compliance, accounting and investor and public relations expenses associated with being a public company; and
 
   
$5.2 million for increased other costs, mainly including selling, rental, and administrative expenses primary attributable to the commercial operation in Hong Kong and China.
Interest Income
Interest income decreased by $1.5 million, to $0.2 million for the three months ended March 31, 2021, from $1.7 million for the three months ended March 31, 2020 primary due to the decrease of short-term investments balance.
Interest Expenses
Interest expenses is nil for the three months ended March 31, 2021, compared to $0.1 million for the three months ended March 31, 2020, as all the short-term borrowings were repaid in 2020.
Share of loss from equity method investment
In June 2017, we entered into an agreement with three third-parties to launch JING Medicine Technology (Shanghai) Ltd., or JING, an entity that will provide services for drug discovery and development, consultation and transfer of pharmaceutical technology. We account for our investment using the equity method of accounting because we do not control the investee but have the ability to exercise significant influence over the operating and financial policies of the investee. The c
apital contribution by us was RMB 26.3 million in cash, which was pa
id in 2017 and 2018, representing 20% and 18% of the equity interest of JING as of December 31, 2020 and March 31, 2021 respectively. We recorded the gain on deemed disposal in this investee of $0.5 million and share of loss of $0.3 million for the three months ended March 31, 2021, and recorded share of loss in this investee of $0.1 million for the three months ended March 31, 2020.
Other Expense, net
Other expense, net increased by $3.1 million for the three months ended March 31, 2021 and 2020 primarily as a result of a decrease in governmental subsidies and increase in foreign exchange loss.
Net Loss Attributable to Ordinary Shareholders
As a result of the foregoing, we had net loss attributable to ordinary shareholders of $232.9 million for the three months ended March 31, 2021 compared to net loss attributable to ordinary shareholders of $48.0 million for the three months ended March 31, 2020.
Critical Accounting Policies and Significant Judgments and Estimates
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.
 
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The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
Revenue recognition
In 2018, we adopted of ASC Topic 606 (“ASC 606”),
Revenue from Contracts with Customers,
in recognition of revenue. Under ASC 606, we recognize revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration expected to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services we transfer to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, we review the contract to determine which performance obligations we must deliver and which of these performance obligations are distinct. We recognize as revenue the amount of the transaction price that is allocated to each performance obligation when that performance obligation is satisfied or as it is satisfied.
Our revenue is all from product sales. We recognize revenue from product sales when we have satisfied the performance obligation by transferring control of the product to the customers. Control of the product generally transfers to the customers when the delivery is made and when title and risk of loss transfers to the customers. Cost of sales mainly consists of the acquisition cost of products and royalty fees.
We have applied the practical expedients under ASC 606 with regard to assessment of financing components and concluded that there is no significant financing component given that the period between delivery of goods and payment is generally one year or less. We have generated product sales revenue since 2018. For the three months ended March 31, 2021 and 2020, our product revenues were primarily generated from the sale of ZEJULA (niraparib) and OPTUNE (Tumor Treating Fields) to customers.
In China, we sell the products to distributors, who ultimately sell the products to healthcare providers. Based on the nature of the arrangements, the performance obligations are satisfied upon the product’s delivery to distributors. Rebates are offered to distributors, consistent with pharmaceutical industry practices. The estimated amount of unpaid or unbilled rebates, if any, is recorded as a reduction of revenue. Estimated rebates are determined based on contracted rates, sales volumes and level of distributor inventories. We regularly review the information related to these estimates and adjust the amount accordingly.
In Hong Kong, we sell the products to customers, which are typically healthcare providers such as oncology centers. We utilize a third party for warehousing services. Based on the nature of the arrangement, we have determined that we are a principal in the transaction since we are primarily responsible for fulfilling the promise to provide the products to the customers, maintain inventory risk until delivery to the customers and have latitude in establishing the price. Revenue is recognized at the amount to which we expect to be entitled in exchange for the sale of the products, which is the sales price agreed with the customers. Consideration paid to the third party is recognized in operating expenses.
We did not recognize any contract assets and contract liabilities as of March 31, 2021 and 2020.
Share-Based Compensation
We grant share options and
non-vested
restricted shares to eligible employees, management and directors and account for these share-based awards in accordance with ASC 718,
Compensation-Stock Compensation
. Employees’ share-based awards are measured at the grant date fair value of the awards and recognized as expenses (1) immediately at grant date if no vesting conditions are required; or (2) using graded vesting method over the requisite service period, which is the vesting period. To the extent the required vesting conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating to those awards are reversed. We determined the fair value of the stock options granted to employees using the Black-Scholes option valuation model.
We also grant share options to eligible non-employees and account for these share-based awards in accordance with ASC 718,
Compensation-Stock Compensation
. Non-employees’ share-based awards are measured at the grant date fair value of the awards and recognized as expenses (1) immediately at grant date if no vesting conditions are required; or (2) using graded vesting method over the requisite service period, which is the vesting period. All transactions in which goods or services are received in exchange for equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. To the extent the required vesting conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating to those awards are reversed. We determined the fair value of the stock options granted to non-employees using the Black-Scholes option valuation model.
 
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Fair Value Measurements
We apply ASC Topic 820,
 Fair Value Measurements and Disclosures
, or ASC 820, in measuring fair value. ASC 820 defines fair value, establishes a framework for measuring fair value and requires disclosures to be provided on fair value measurement.
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Include other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs which are supported by little or no market activity.
ASC 820 describes three main approaches, for example, to measuring the fair value of assets and liabilities: (1) market approach, (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
Financial instruments of our company primarily include cash, cash equivalents and restricted cash, short-term investment, accounts receivable, prepayments and other current assets, short-term borrowings, accounts payable and other current liabilities. As of each reporting date, the carrying values of cash and cash equivalents, short-term investment, accounts receivable, prepayments and other current assets, short-term borrowings, accounts payable and other current liabilities approximated their fair values due to the short-term maturity of these instruments, and the carrying value of restricted cash approximates its fair value based on the nature of and the assessment of the ability to recover these amounts.
Income Taxes
Current income taxes are provided on the basis of net income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. We follow the liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial statements carrying amounts and tax bases of assets and liabilities by applying enacted statutory tax rates that will be in effect in the period in which the temporary differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in our consolidated financial statements in the period of change.
In accordance with the provisions of ASC 740,
Income Taxes
, we recognize in our financial statements the benefit of a tax position if the tax position is “more likely than not” to prevail based on the facts and technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. We estimate our liability for unrecognized tax benefits which are periodically assessed and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. The ultimate outcome for a particular tax position may not be determined with certainty prior to the conclusion of a tax audit and, in some cases, appeal or litigation process.
We consider positive and negative evidence when determining whether some portion or all of our deferred tax assets will not be realized. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, our historical results of operations, and our tax planning strategies. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the level of our historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will not realize the deferred tax assets resulted from the tax loss carried forward in the future periods.
The actual benefits ultimately realized may differ from our estimates. As each audit is concluded, adjustments, if any, are recorded in our financial statements in the period in which the audit is concluded. Additionally, in future periods, changes in facts, circumstances and new information may require us to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur. As of March 31, 2021 and December 31, 2020, we did not have any significant unrecognized uncertain tax positions.
 
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B. Liquidity and Capital Resources
To date, we have financed our activities primarily through private placements, our September 2017 initial public offering on the Nasdaq stock exchange, our September 2020 secondary listing on the Stock Exchange of Hong Kong and multiple follow-on offerings. Through March 31, 2021, we have raised approximately $164.6 million in private equity financing and approximately $1,644.6 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us in our initial public offering, subsequent
follow-on
offerings, and our secondary listing. Our operations have consumed substantial amounts of cash since inception. The net cash used in our operating activities was $169.5 million and $39.8 million, for the three months ended March 31, 2021 and 2020, respectively.
As of March 31, 2021, we had cash, cash equivalents and restricted cash of $1,014.2 million. Our expenditures as a company principally focused on research and development, are largely discretionary and as such our current losses and cash used in operations do not present immediate going concern issues. Based on our current operating plan, we expect that our existing cash and cash equivalents as of May 10, 2021, will enable us to fund our operating expenses and capital expenditures requirements for at least the next 12 months after the date that the financial statements included in this Quarterly Report are issued. However, in order to bring to fruition our research and development objectives, we will ultimately need additional funding sources and there can be no assurances that they will be made available.
The following table provides information regarding our cash flows for the three months ended March 31, 2021 and 2020:
 
(in thousands)
  
Three months ended March 31,
 
  
        2021        
    
        2020        
 
Net cash used in operating activities
   $ (169,500    $ (39,841
Net cash provided by investing activities
     742,005        48,952  
Net cash (used in) provided by financing activities
     (271      279,484  
Effect of foreign exchange rate changes
     (930      (947
    
 
 
    
 
 
 
Net increases in cash, cash equivalents and restricted cash
   $ 571,304      $ 287,648  
    
 
 
    
 
 
 
Net cash used in operating activities
During the three months ended March 31, 2021, our operating activities used $169.5 million of cash, which resulted principally from our net loss of $232.9 million, adjusted for
non-cash
charges of $72.1 million, and cash provided in our operating assets and liabilities of $8.7 million. Our net
non-cash
charges during the three months ended March 31, 2021 primarily consisted of $62.3 million non-cash research and development expenses, a $1.4 million depreciation expense, a $7.3 million share-based compensation expense and a $1.3 million non-cash lease expense.
Net cash provided by investing activities
Net cash provided by investing activities was $742.0 million for the three months ended March 31, 2021 compared to $49.0 million for the three months ended March 31, 2020. The increase in cash provided by investing activities was primary due to the proceeds from maturity of short-term investments.
Net cash provided by financing activities
Net cash used in financing activities was $0.3 million for the three months ended March 31, 2021 compared to the net cash provided by financing activities of $279.5 million for the three months ended March 31, 2020. The cash used in financing activities was mainly attributable to the payment of costs of our secondary listing on Stock Exchange of Hong Kong in September 2020 net off by the proceeds from exercises of stock options. The decrease in cash provided by financing activities was primary due to the issuance of ADSs in our
follow-on
offering during the three months ended March 31, 2020.
C. Research and Development, Patents and Licenses, etc
Full details of our research and development activities and expenditures are given in the “Business” and “Operating and Financial Review and Prospects” sections of our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 1, 2021.
D. Trend Information
Other than as described elsewhere in this Quarterly Report on Form
10-Q,
we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material adverse effect on our revenue, income from continuing operations, profitability, liquidity or capital resources, or that would cause our reported financial information not necessarily to be indicative of future operation results or financial condition.
 
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E.
Off-balance
Sheet Arrangements
We currently do not engage in trading activities involving
non-exchange
traded contracts or interest rate swap transactions or foreign currency forward contracts. In the ordinary course of our business, we do not enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financial partnerships that are established for the purpose of facilitating
off-balance
sheet arrangements or other contractually narrow or limited purposes.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations as of March 31, 2021. Amounts we pay in future periods may vary from those reflected in the table.
 
(in thousands)
  
Total
    
Less than
1 year
    
1 to 3 years
    
3 to 5 years
    
More than
5 years
 
Purchase Obligations
   $ 22,498      $ 16,991      $ 5,507      $ —        $ —    
Operating Lease Obligations
     18,232        5,573        6,228        4,379        2,052  
We also have obligations to make future payments to third party licensors that become due and payable on the achievement of certain development, regulatory and commercial milestones as well as tiered royalties on net sales. We have not included these commitments on our balance sheet or in the table above because the commitments are cancellable if the milestones are not complete and achievement and timing of these obligations are not fixed or determinable.
Recently Issued Accounting Standards
For more information regarding recently issued accounting standards, please see “Part II—Item 8—Financial Statements and Supplementary Data—Recent accounting pronouncements” in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 1, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk including foreign exchange risk, credit risk, cash flow interest rate risk and liquidity risk.
Foreign Exchange Risk
Renminbi, or RMB, is not a freely convertible currency. The State Administration of Foreign Exchange, under the authority of the People’s Bank of China (“PBOC”), controls the conversion of RMB into foreign currencies. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. The cash and cash equivalents of our company included aggregated amounts of RMB247.9 million and RMB155.9 million, which were denominated in RMB, as of March 31, 2021 and December 31, 2020, respectively, representing 4% and 5% of the cash and cash equivalents as of March 31, 2021 and December 31, 2020, respectively.
Our business mainly operates in China with a significant portion of our transactions settled in RMB, and our financial statements are presented in U.S. dollars. We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge our exposure to such risk. Although, in general, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the exchange rate between the U.S. dollar and the RMB because the value of our business is effectively denominated in RMB, while the ADSs will be traded in U.S. dollars.
 
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The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the PBOC. On July 21, 2005, China changed
its decade-old policy
of pegging the value of the RMB to the U.S. dollar. Under the revised policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy resulted in a more than 20% appreciation of the RMB against the U.S. dollar in the following three years. Between July 2008 and June 2010, this appreciation halted, and the exchange rate between the RMB and U.S. dollar remained within a narrow band. In June 2010, the PBOC announced that China’s government would increase the flexibility of the exchange rate, and thereafter allowed the RMB to appreciate slowly against the U.S. dollar within the narrow band fixed by the PBOC. However, in August 2015, the PBOC significantly devalued the RMB.
To the extent that we need to convert U.S. dollars into RMB for our operations or if any of our arrangements with other parties are denominated in U.S. dollars and need to be converted into RMB, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amounts available to us.
Credit Risk
Our credit risk is primarily attributable to the carrying amounts of cash and cash equivalents and short-term investment. The carrying amounts of cash and cash equivalents and short-term investment represent the maximum amount of loss due to credit risk. As of March 31, 2021 and December 31, 2020, all of our cash and cash equivalents and short-term investments were held by major financial institutions located in China and international financial institutions outside of China which we believe are of high credit quality, and we will continually monitor the credit worthiness of these financial institutions.
Inflation
In recent years, China has not experienced significant inflation, and thus inflation has not had a material impact on our results of operations. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation in China.
Item 4. Controls and Procedures
Management’s Evaluation of our Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
As of March 31, 2021, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer and principal financial officer have concluded based upon the evaluation described above that, as of March 31, 2021, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2021, there have not been any changes in our internal controls over financial reporting (as such item is defined in Rules
13a-15(f)
and
15d-15(f)
promulgated under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We may be, from time to time, subject to claims and suits arising in the ordinary course of business. Although the outcome of these and other claims cannot be predicted with certainty, management does not believe that the ultimate resolution of these matters will have a material adverse effect on our financial position or on our results of operations. We are not currently a party to, nor is our property the subject of, any actual or threatened material legal or administrative proceedings.
Item 1A. Risk Factors
There have been no material changes from the risk factors set forth in our Annual Report on Form
10-K
for the year ended December 31, 2020, as filed with the SEC on March 1, 2021.
The following is a summary of significant risk factors and uncertainties that may affect our business which are discussed in more detail in our Annual Report on Form 10-K for the year ended December 31, 2020:
 
   
our ability to successfully commercialize ZEJULA, Optune, QINLOCK and any other products and product candidates that we may obtain regulatory approval for;
 
   
the anticipated amount, timing and accounting of revenues; contingent, milestone, royalty and other payments under licensing, collaboration, and acquisition agreements; tax positions and contingencies; collectability of receivables; pre-approval inventory; cost of sales; research and development costs; compensation and other selling, general and administrative expenses; amortization of intangible assets; foreign currency exchange risk; estimated fair value of assets and liabilities; and impairment assessments;
 
   
expectations, plans and prospects relating to sales, pricing, growth and launch of our marketed and pipeline products;
 
   
the potential impact of increased product competition in the markets in which we compete, including increased competition from new originator therapies, generics, prodrugs and biosimilars of existing products and products approved under abbreviated regulatory pathways, including generic or biosimilar versions of our products;
 
   
patent terms, patent term extensions, patent office actions and expected availability and any period of regulatory exclusivity;
 
   
the timing, outcome and impact of administrative, regulatory, legal or other proceedings related to our patents and other proprietary and intellectual property rights, tax audits, assessments and settlements, pricing matters, sales and promotional practices, product liability and other matters;
 
   
the drivers for growing our business, including our plans and intention to commit resources relating to discovery, research and development programs and business development opportunities as well as the potential benefits and results of certain business development transactions;
 
   
our ability to finance our operations and business initiatives and obtain funding for such activities;
 
   
the expectations, development plans and anticipated timelines, including costs and timing of potential clinical trials, filings and approvals of our products, product candidates and pipeline programs, including collaborations with third-parties, as well as the potential therapeutic scope of the development and commercialization of our and our collaborators’ pipeline products;
 
   
reputational or financial harm to our business arising from adverse safety events, including product liability claims or lawsuits affecting our or any of our licensors’ marketed products, generic or biosimilar versions of our or any of our licensors’ marketed products or any other products from the same class as one of our or any of our licensors’ products;
 
   
unexpected impacts on our business operations including sales, expenses, supply chain, manufacturing, cyber-attacks or other privacy or data security incidents, research and development costs, clinical trials and employees;
 
   
the potential impact of measures being taken worldwide designed to reduce healthcare costs and limit the overall level of government expenditures, including the impact of pricing actions and reduced reimbursement for our products;
 
   
our manufacturing capacity, use of third-party contract manufacturing organizations, plans and timing relating to changes in our manufacturing capabilities or activities in new or existing manufacturing facilities;
 
   
lease commitments, purchase obligations and the timing and satisfaction of other contractual obligations;
 
   
the impact of new laws, regulatory requirements, judicial decisions and accounting standards;
 
   
the disruption of our business relationships with our licensors;
 
   
the direct and indirect impact of the COVID-19 pandemic on our business and operations, our and our partners’ ability to effectively travel, as needed, during the COVID-19 pandemic, and the duration and impact of COVID-19 or any of its variants that may affect, precipitate or exacerbate one or more of any of the risks and uncertainties mentioned in this section;
 
   
our ability to effectively manage our growth;
 
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the disruption in the capital or credit markets which may adversely impact our ability to obtain necessary capital or credit market financing;
 
   
the geopolitical tensions that exist between China and the United States may adversely affect our business, our ability to grow, and our access to necessary capital or credit markets;
 
   
our ability to retain key executives and to attract, retain and motivate personnel; and
 
   
other risks and uncertainties, including those listed under “Part I—Item 1A—Risk Factors” in our Annual Report on
Form 10-K
for the year ended December 31, 2020.
These factors should not be construed as exhaustive and should be read with the other cautionary statements and other information in our Annual Report on Form 10-K for the year ended December 31, 2020 and our other filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
Effective on May 7, 2021, the Board appointed Tao Fu as the Chief Strategy Officer of the Company. Concurrently with his appointment as Chief Strategy Officer, Mr. Fu voluntarily resigned from his positions as the President and Chief Operating Officer of the Company and from his position as a director of the Company, effective immediately. In his new role as Chief Strategy Officer of the Company, Tao Fu will focus on the Company’s corporate development and other strategic objectives.
 
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Item 6. Exhibits.
Exhibit Index
 
Exhibit

Number
 
Exhibit Title
   
3.1
  Fifth Amended and Restated Memorandum Association of Zai Lab Limited (incorporated by reference to Exhibit 3.1 to our Annual Report on Form 10-K (File No. 001-38205) filed with the SEC on March 1, 2021)
   
3.2
  Fourth Amended and Restated Articles of Association of Zai Lab Limited (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to our Registration Statement on Form F-1 (File No. 333-219980) filed with the SEC on September 1, 2017)
   
4.1
  Form of Deposit Agreement (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to our Registration Statement on Form F-1 (File No. 333-219980) filed with the SEC on September 1, 2017)
   
4.2
  Form of American Depositary Receipt (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to our Registration Statement on Form F-1 (File No. 333-219980) filed with the SEC on September 1, 2017)
   
4.3
  Registrant’s Specimen Certificate for Ordinary Shares (incorporated by reference to Exhibit 4.3 to Amendment No. 2 to our Registration Statement on Form F-1 (File No. 333-219980) filed with the SEC on September 1, 2017)
   
4.4
  Third Amended and Restated Shareholders Agreement between Zai Lab Limited and other parties named therein dated June 26, 2017 (incorporated by reference to Exhibit 4.4 to our Registration Statement on Form F-1 (File No. 333-219980) filed with the SEC on August 15, 2017)
   
4.5
  Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act (incorporated by reference to Exhibit 4.5 to our Annual Report on Form 10-K (File No. 001-38205) filed with the SEC on March 1, 2021)
   
10.1*^
  Collaboration and License Agreement between argenx BV and Zai Auto Immune (Hong Kong) Limited dated January 6, 2021
   
10.2*^
  License Agreement between Turning Point Therapeutics, Inc. and Zai Lab (Shanghai) Co., Ltd. dated January 10, 2021
   
10.3*^
  Amendment No. 1 to License Agreement between Turning Point Therapeutics, Inc. and Zai Lab (Shanghai) Co., Ltd. dated March 31, 2021
   
31.1*
  Certification of Chief Executive Officer Required by Rule 13a-14(a)
   
31.2*
  Certification of Chief Financial Officer Required by Rule 13a-14(a)
   
32.1**
  Certification of Chief Executive Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code
   
32.2**
  Certification of Chief Financial Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code
   
101.CAL*
  Inline XBRL Taxonomy Extension Calculation Linkbase Document
   
101.LAB*
  Inline XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE*
  Inline XBRL Taxonomy Extension Presentation Linkbase Document
   
101.DEF*
  Inline XBRL Taxonomy Extension Definitions Linkbase Document
   
104*
  Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
 
*
Filed herewith
**
Furnished herewith
^
Certain confidential information contained in this exhibit has been omitted because it (i) is not material and (ii) would be competitively harmful if publicly disclosed.
 
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
       
ZAI LAB LIMITED
       
Dated: May 10, 2021       By:  
/s/ Billy Cho
        Name:  
Billy Cho
        Title:   Chief Financial Officer
 
35
EX-10.1

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT IS BOTH (I) NOT MATERIAL AND (II) WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED.

Exhibit 10.1

Execution Version

COLLABORATION AND LICENSE AGREEMENT

between

ARGENX BV

and

ZAI AUTO IMMUNE (HONG KONG) LIMITED

Dated as of 6 January 2021

 


TABLE OF CONTENT

 

ARTICLE I DEFINITIONS      1  
ARTICLE II COLLABORATION MANAGEMENT      14  
ARTICLE III DEVELOPMENT      18  
ARTICLE IV REGULATORY MATTERS      24  
ARTICLE V MANUFACTURING      27  
ARTICLE VI COMMERCIALIZATION      29  
ARTICLE VII GRANT OF RIGHTS      32  
ARTICLE VIII PAYMENTS AND RECORDS      36  
ARTICLE IX INTELLECTUAL PROPERTY      42  
ARTICLE X CONFIDENTIALITY AND NON-DISCLOSURE      48  
ARTICLE XI REPRESENTATIONS AND WARRANTIES      51  
ARTICLE XII INDEMNITY      55  
ARTICLE XIII TERM AND TERMINATION      58  
ARTICLE XIV EFFECTS OF TERMINATION      59  
ARTICLE XV MISCELLANEOUS      61  

SCHEDULES:

 

Schedule 1.22    Cost of Goods Sold
Schedule 1.65    Licensed Compound
Schedule 1.69    Licensed Patents
Schedule 3.2.1    Development Plan
Schedule 4.8    Pharmacovigilance
Schedule 5.3    Best Estimate of COGS
Schedule 6.2.1    Form of Commercialization Plans
Schedule 7.3    Authorized Subcontractors
Schedule 7.7.1    Certain In-License Agreement Terms
Schedule 8.1    Share Issuance Agreement
Schedule 10.4    Form of Press Release

 

 

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CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT IS BOTH (I) NOT MATERIAL AND (II) WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED.

Exhibit 10.1

Execution Version

 

COLLABORATION AND LICENSE AGREEMENT

This Collaboration and License Agreement (the “Agreement”) is made and entered into effective as of 6 January 2021 (the “Effective Date”) by and between argenx BV, a private limited company organized under the laws of Belgium with its principal place of business at Industriepark Zwijnaarde 7, 9052 Zwijnaarde (Ghent), Belgium (“Licensor”), and Zai Auto Immune (Hong Kong) Limited, a Hong Kong company, with an address at Room 2301, 23F, Island Place Tower, 510 King’s Road, North Point, Hong Kong (“Licensee”) and, solely with respect to Section 15.16 Zai Lab Limited, a China company, with an address at 4F, Bldg 1, Jinchuang Plaza 4560 Jinke Rd Shanghai, China, 201210 (“Parent”). Licensor and Licensee are sometimes referred to herein individually as a “Party” and collectively as the “Parties.”

RECITALS

WHEREAS, Licensor Controls (as defined herein) certain intellectual property rights with respect to the Licensed Compound (as defined herein) and Licensed Products (as defined herein) in the Territory (as defined herein);

WHEREAS, the Parties wish to collaborate on the development and commercialization of the Licensed Products in the Territory, in each case in accordance with the terms and conditions set forth below, taking into account the strong wish of the Licensor to have the commercialisation of the Licensed Product start as soon as possible in the Territory; and

WHEREAS, Licensor and Licensee wish to collaborate on the development and commercialization of the Licensed Products in the Territory, in each case in accordance with the terms and conditions set forth below.

NOW, THEREFORE, in consideration of the premises and the mutual promises and conditions hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, do hereby agree as follows:

ARTICLE I

DEFINITIONS

Unless otherwise specifically provided herein, the following terms shall have the following meanings:

1.1Accounting Standards” means, (a) with respect to Licensee, that Licensee shall maintain records and books of accounts in accordance with United States Generally Accepted Accounting Principles (GAAP), consistently applied and (b) with respect to Licensor, that Licensor shall maintain records and books of accounts in accordance with International Financial Reporting Standards (IFRS), consistently applied.

1.2Acquiring Person” has the meaning set forth in Section 7.8.3.


1.3Additional Indication” means, with respect to Licensed Products, each indication in the Field other than the Initial Indications, including any indication in which Licensed Products may be used in combination with one or more products of the Licensee.

1.4Affiliate” means, with respect to a Person, any subsidiary or any other Person that, directly or indirectly, through one or more intermediaries, is controlled by or is under common control with such Person. For purposes of this definition, “control” and, with correlative meanings, the terms “controlled by” and “under common control with” means (a) the possession, directly or indirectly, of the power to direct the management or policies of a business entity, whether through the ownership of Voting Stock, by contract relating to voting rights or corporate governance, or otherwise; or (b) the ownership, directly or indirectly, of more than fifty percent (50%) of the Voting Stock or other ownership interest of a business entity (or, with respect to a limited partnership or other similar entity, its general partner or controlling entity).

1.5Agreement” has the meaning set forth in the preamble hereto.

1.6Alliance Manager” has the meaning set forth in Section 2.11.

1.7Applicable Law” means federal, state, local, national and supra-national laws, statutes, rules, and regulations, including any rules, regulations or other requirements of the Regulatory Authorities, major national securities exchanges or major securities listing organizations, that may be in effect from time to time during the Term and applicable to a particular activity or jurisdiction hereunder.

1.8Biosimilar Product” means, with respect to a given Licensed Product in a particular jurisdiction after Regulatory Approval of such Licensed Product in such jurisdiction, a Third Party biologic product (a) whose licensing, approval, or marketing authorization relies in whole or in part on (i) a prior Regulatory Approval granted such Licensed Product or (ii) any data generated in support of a prior Regulatory Approval granted such Licensed Product, and (b) is determined by the competent Regulatory Authority of such jurisdiction to be interchangeable with the respective Licensed Product, including in terms of quality, safety, efficacy and dosing regimen.

1.9Binding Forecast” has the meaning set forth in Section 5.3;

1.10Board of Directors” has the meaning set forth in the definition of Change of Control.

1.11Breaching Party” has the meaning set forth in Section 13.2.1.

1.12Bundling Sale” has the meaning set forth in Section 8.4.7.

1.13Business Day” means a day other than a Saturday or Sunday on which banking institutions in Ghent, Belgium and Shanghai, the PRC are open for business.

1.14Calendar Quarter” means each successive period of three (3) months of the Gregorian calendar commencing on January 1, April 1, July 1 and October 1, except that the first Calendar Quarter of the Term shall commence on the Effective Date and end on the day immediately prior to the first to occur of January 1, April 1, July 1 or October 1 after the Effective Date, and the last Calendar Quarter shall end on the last day of the Term.

 

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1.15Calendar Year” means each successive period of twelve (12) months of the Gregorian calendar commencing on January 1 and ending on December 31, except that the first Calendar Year of the Term shall commence on the Effective Date and end on December 31 of the year in which the Effective Date occurs and the last Calendar Year of the Term shall commence on January 1 of the year in which the Term ends and end on the last day of the Term.

1.16Change of Control” with respect to either Party or a Controlling Entity of such Party shall be deemed to have occurred if any of the following occurs during the Term:

1.16.1. any “person” or “group” (as defined below) (a) is or becomes the “beneficial owner” (as defined below), directly or indirectly, of shares of capital stock or other interests (including partnership interests) of such Party or its Controlling Entity then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of the directors, managers or similar supervisory positions (“Voting Stock”) of such Party or its Controlling Entity representing fifty percent (50%) or more of the total voting power of all outstanding classes of Voting Stock of such Party or its Controlling Entity or (b) has the power, directly or indirectly, to elect a majority of the members of such Party’s or its Controlling Entity’s board of directors, or similar governing body (“Board of Directors”); the Parties acknowledge that in the case of certain entities organized under the laws of certain countries outside of the United States, the maximum percentage ownership permitted by law for a foreign investor may be less than fifty percent (50%), and that in such case such lower percentage shall be substituted in the preceding sentence, provided that such foreign investor has the power to direct the management or policies of such entity; or

1.16.2. such Party or its Controlling Entity enters into a merger, consolidation or similar transaction with another Person (whether or not such Party is the surviving entity) and as a result of such merger, consolidation or similar transaction (a) the members of the Board of Directors of such Party or its Controlling Entity immediately prior to such transaction constitute less than a majority of the members of the Board of Directors of such Party or its Controlling Entity or such surviving Person immediately following such transaction or (b) the Persons that beneficially owned, directly or indirectly, the shares of Voting Stock of such Party or its Controlling Entity immediately prior to such transaction cease to beneficially own, directly or indirectly, shares of Voting Stock of such Party or its Controlling Entity representing at least a majority of the total voting power of all outstanding classes of Voting Stock of the surviving Person in substantially the same proportions as their ownership of Voting Stock of such Party or its Controlling Entity immediately prior to such transaction; or

1.16.3. such Party sells or transfers to any Third Party, in one (1) or more related transactions, properties or assets representing all or substantially all of such Party’s assets to which this Agreement relates; or

1.16.4. the holders of capital stock of such Party or its Controlling Entity approve a plan or proposal for the liquidation or dissolution of such Party.

 

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For the purpose of this definition of Change in Control: (a) “person” and “group” have the meanings given such terms under Section 13(d) and 14(d) of the United States Securities Exchange Act of 1934 and the term “group” includes any group acting for the purpose of acquiring, holding or disposing of securities within the meaning of Rule 13d-5(b)(1) under the said Act; (b) a “beneficial owner” shall be determined in accordance with Rule 13d-3 under the aforesaid Act; and (c) the terms “beneficially owned” and “beneficially own” shall have meanings correlative to that of “beneficial owner.”

1.17Clinical Data” means all Information with respect to the Licensed Compound or any Licensed Product made, collected, or otherwise generated under or in connection with a Clinical Trial, including any data (including raw data), reports, and results with respect thereto.

1.18Clinical Trial” means a Clinical Phase I Trial, Clinical Phase II Trial, or Clinical Phase III Trial, and such other tests and studies in human subjects that are required by Applicable Law, or otherwise recommended by the Regulatory Authorities, to obtain or maintain Regulatory Approvals for a Licensed Product for one (1) or more indications, including tests or studies that are intended to expand the Product Labeling for such Licensed Product with respect to such indication.

1.19Clinical Phase I Trial” means a study in humans which provides for the first administration to humans of a product, conducted in healthy volunteers or patients to obtain information on product safety, tolerability, pharmacological activity or pharmacokinetics.

1.20Clinical Phase II Trial” means a clinical study (other than a Clinical Phase I Trial) in humans of the safety, dose ranging and efficacy of a product, which is prospectively designed to generate sufficient data (if successful) to commence pivotal studies/Clinical Phase III Trials.

1.21Clinical Phase III Trial” means a controlled, and usually multicenter, clinical study in humans of the efficacy and safety of a product, which is prospectively designed to demonstrate statistically whether such product is effective and safe for use in humans in the indication being investigated in a manner sufficient to submit an application to obtain Regulatory Approval to market such product.

1.22COGS” has the meaning ascribed thereto in Schedule 1.22.

1.23Commercialization” means any and all activities directed to the preparation for sale of, offering for sale of, or sale of Licensed Products, including activities related to marketing, promoting, distributing, and importing such Licensed Products, and interacting with Regulatory Authorities regarding any of the foregoing. For clarity, Commercialization does not include Manufacturing. When used as a verb, “to Commercialize” and “Commercializing” means to engage in Commercialization, and “Commercialized” has a corresponding meaning.

 

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1.24Commercially Reasonable Efforts” means, with respect to the performance of Development, Commercialization or other applicable activities with respect to the Licensed Products by Licensee, the carrying out of such activities using efforts and resources comparable to the efforts and resources commonly used in the biopharmaceutical industry for products of similar market potential at a similar stage in development or product life (without regard to the particular circumstances of Licensee, including any other product opportunities of Licensee) taking into account relevant factors such as safety, regulatory issues, intellectual property issues, and reimbursement. “Commercially Reasonable Efforts” shall be determined on a jurisdiction-by-jurisdiction and indication-by-indication basis, Commercially Reasonable Efforts require, with respect to the applicable obligation, that Licensee shall [***].

1.25Commercial Supply Agreement” has the meaning set forth in Section 5.3.

1.26Committee” means the JSC, the JDC, the JMC, the JCC, the JFC or another Sub-Committee (together, the “Committees”).

1.27Competing Product” means any product that [***] mode of action.

1.28Compliance Self-Audit” has the meaning set forth in Section 6.10.

1.29Confidential Information” means any technical, business, or other information or data provided orally, visually, in writing or other form by or on behalf of one Party to the other Party in connection with this Agreement, whether prior to, on, or after the Effective Date, including information relating to the terms of this Agreement, the Licensed Compound or any Licensed Product, any Exploitation of the Licensed Compound or Licensed Products, any Information with respect thereto developed by or on behalf of a Party or its Affiliates, or the scientific, regulatory or business affairs or other activities of either Party. The Licensed Know- How, Product Improvements and the Regulatory Data owned by Licensor pursuant to the terms of this Agreement are deemed to be Licensor’s Confidential Information and Licensee is deemed to be the receiving Party and Licensor the disclosing Party with respect thereto. The existence and terms of this Agreement, are the Confidential Information of each Party, with each Party being deemed the receiving Party of such Confidential Information.

1.30Control” means, with respect to any item of Information, Regulatory Documentation, material, Patent, or other property right, the possession of the right, whether directly or indirectly, and whether by ownership, license, covenant not to sue or otherwise (other than by operation of the license and other grants in ARTICLE 7), to gr ant a license, sublicense or other right (including the right to reference Regulatory Documentation) to or under such Information, Regulatory Documentation, material, Patent, or other property right as provided for herein without violating the terms of any agreement or other arrangement with any Third Party.

1.31Controlling Entity” means, with respect to a Party, any Person that controls such Party. For purposes of this definition, “control” means (a) the possession, directly or indirectly, of the power to direct the management or policies of a business entity, whether through the ownership of Voting Stock, by contract relating to voting rights or corporate governance, or otherwise; or (b) the ownership, directly or indirectly, of fifty percent (50%) or more of the Voting Stock or other ownership interest of a business entity (or, with respect to a limited partnership or other similar entity, its general partner or controlling entity).

1.32CMO” means a contract manufacturing organization.

1.33CRO” means a contract research organization.

 

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1.34CTA” means an application filed with a Regulatory Authority for authorization to commence human clinical studies, including (a) a Clinical Trial Application as defined in the PRC Drug Administration Law or an equivalent in other jurisdictions, and (b) all supplements, amendments, variations, extensions and renewals thereof that may be filed with respect to the foregoing.

1.35Default Notice” has the meaning set forth in Section 13.2.1(a).

1.36Development” means with regard to the Licensed Compound and the Licensed Product all activities related to research, pre-clinical and other non-clinical testing, test method development and stability testing, toxicology, formulation, process development, Clinical Trials, statistical analysis and report writing, the preparation and submission of Drug Approval Applications, regulatory affairs with respect to any of the foregoing, including the preparation and submission of CTAs, the maintenance of a pharmacovigilance and safety database, and all other activities necessary or reasonably useful or otherwise requested or required by a Regulatory Authority as a condition or in support of obtaining or maintaining a Regulatory Approval. For clarity, Development does not include Manufacturing. When used as a verb, “Develop” means to engage in Development.

1.37Development Plan” means a development plan setting forth in reasonable detail all Development activities to be performed by Licensee (a) to seek, obtain and maintain Regulatory Approvals for Licensed Products in the Territory, and (b) with respect to its responsibilities to perform Development activities for Global Trials in the Territory; which plan shall include in reasonable detail all items listed in Section 3.2.1.

1.38Dollars” or “$” means United States Dollars.

1.39Drug Approval Application” means an application filed with a Regulatory Authority for the approval of a pharmaceutical product to be marketed in the Territory.

1.40Effective Date” means the effective date of this Agreement as set forth in the preamble hereto.

1.41EMA” means the European Medicines Agency, and any successor agency(ies) or authority having substantially the same function.

1.42Exploit” or “Exploitation” means to make, have made, import, export, use, have used, sell, have sold, or offer for sale, including to Develop, Commercialize, register, modify, enhance, improve, Manufacture, have Manufactured, hold, or keep (whether for disposal or otherwise), or otherwise dispose of.

1.43FcRn” means the neonatal Fc receptor (UniProt ID: P55899).

1.44FDA” means the United States Food and Drug Administration, and any successor agency(ies) or authority having substantially the same function.

1.45Field” means all uses of the Licensed Products for any preventative or therapeutic indications, in humans and animals.

 

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1.46First Commercial Sale” means, with respect to a given Licensed Product and a given jurisdiction, the first commercial sale for monetary value for use or consumption by the end user in an arm’s length transaction of such Licensed Product to a Third Party in such jurisdiction after Regulatory Approval for such Licensed Product has been obtained in such jurisdiction. “First Commercial Sale” will not include any distribution or other sale solely for patient assistance, named patient use, compassionate use, or other patient access programs, non-registrational or registrational studies or similar programs or studies, in each case where a Licensed Product is supplied without charge or at the actual Manufacturing cost thereof (without allocation of indirect costs or any markup).

1.47Global Marketing Guidelines” has the meaning set forth in Section 6.5.

1.48Global Trial” means Development activities related to a Clinical Trial for a Licensed Product that are (a) conducted outside the Territory, or both inside and outside the Territory, and (b) are intended to support Regulatory Filings both inside and outside the Territory.

1.49Global Trial Plan” has the meaning set forth in Section 3.3.1.

1.50Good Clinical Practice” or “GCP” means, in respect of a Clinical Trial, the highest of the then current standards required by Applicable Law of: (a) the European Union, including Directive 2001/20/EC and guidance published by the European Commission or EMA in relation to such Directive; (b) the United States, including the provisions of Title 21 of the U.S. Code of Federal Regulations (including Parts 11, 50, 54, 56, 312, 314, 320, 601 and 610); (c) Japan; (d) the People’s Republic of China; or (e) such other countries in which a Licensed Product is tested.

1.51Good Laboratory Practice” or “GLP” means, in respect of laboratory activities, the highest of the then current standards required by Applicable Law of: (a) the European Union, including the Directive 2004/9/EC, Directive 2004/10/EC, guidance published by the European Commission or EMA in relation to such Directives and any local laws, rules and regulations that implement such Directives and guidance; (b) the United States, including the FDA’s Good Laboratory Practice regulations at 21 C.F.R. Part 58; (c) Japan; (d) the People’s Republic of China; or (e) such other countries in which a Licensed Product is tested.

1.52 [***]

1.53Indemnification Claim Notice” has the meaning set forth in Section 12.3.

1.54Indemnified Party” has the meaning set forth in Section 12.3.

1.55Information” means all knowledge of a technical, scientific, business and other nature, including know-how, technology, means, methods, processes, practices, formulae, instructions, skills, techniques, procedures, experiences, ideas, technical assistance, designs, drawings, assembly procedures, computer programs, apparatuses, specifications, data, results and other material, Regulatory Data, and other biological, chemical, pharmacological, toxicological, phar