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What changed in Zai Lab Ltd's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Zai Lab Ltd's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+933 added−2173 removedSource: 10-K (2024-02-27) vs 10-K (2023-03-01)

Top changes in Zai Lab Ltd's 2023 10-K

933 paragraphs added · 2173 removed · 697 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

182 edited+94 added−841 removed43 unchanged
Biggest changeOur Commercial Products The following table summarizes the status of our approved commercial products: Product Indications Regulatory Status Commercial Rights Partner 1 st line and 2 nd line ovarian cancer maintenance treatment Platinum sensitive relapsed ovarian cancer maintenance treatment Launched in mainland China, Hong Kong, and Macau Mainland China, Hong Kong, and Macau GSK Newly diagnosed glioblastoma multiforme (“GBM”) Recurrent GBM Launched in mainland China, Hong Kong, and Macau Mainland China, Hong Kong, Macau, and Taiwan NovoCure Unresectable, locally advanced, or metastatic malignant pleural mesothelioma (“MPM”) Launched in Hong Kong and Macau Mainland China, Hong Kong, Macau, and Taiwan 4 th line gastrointestinal stromal tumors (“GIST”) Launched in mainland China, Hong Kong, and Taiwan; approved in Macau Mainland China, Hong Kong, Macau, and Taiwan Deciphera Community-acquired bacterial pneumonia (“CABP”) Acute bacterial skin and skin structure infections (“ABSSSI”) Launched in mainland China Mainland China, Hong Kong, Macau, and Taiwan Paratek ZEJULA (Niraparib) -3- ZEJULA is an oral, once-daily small-molecule poly (ADP-ribose) polymerase (“PARP”) 1/2 inhibitor.
Biggest changeThe following table provides an overview of our partners and the approved indications and current geographic markets for our commercial products: Product Our Approved Indications Our Current Markets Partner 1 st line and 2 nd line ovarian cancer maintenance treatment Platinum sensitive relapsed ovarian cancer maintenance treatment Mainland China, Hong Kong, and Macau Newly diagnosed and recurrent glioblastoma multiforme (“GBM”) Mainland China, Hong Kong, Macau, and Taiwan 4 th line gastrointestinal stromal tumors (“GIST”) Mainland China, Hong Kong, Macau, and Taiwan Community-acquired bacterial pneumonia (“CABP”) Acute bacterial skin and skin structure infections (“ABSSSI”) Mainland China Generalized myesthenia gravis (“gMG”) Mainland China The following sections include more information on our commercial products.
We also obtained the right of first negotiation to be Paratek Bermuda Ltd.’s partner to develop certain derivatives or modifications of omadacycline in our licensed territory. Paratek Bermuda Ltd. retains the right to manufacture the licensed product in our licensed territory to support development and commercialization of the same outside our licensed territory.
We also obtained the right of first negotiation to be Paratek Bermuda Ltd.’s partner to develop certain derivatives or modifications of omadacycline in our licensed territory. Paratek Bermuda Ltd. retains the right to manufacture the licensed product in our licensed territory to support development and commercialization of the same outside of our licensed territory.
In addition, in the ordinary course of our business, we collect and store personal information, including personal information about our clinical trial subjects, customers, and employees in mainland China. We may need to share such personal information with our subsidiaries, licensors, partners, or contractors located outside mainland China.
In addition, in the ordinary course of our business, we collect and store personal information, including personal information about our clinical trial subjects, customers, and employees in mainland China. We may need to share such personal information with our subsidiaries, licensors, partners, or contractors located outside of mainland China.
We offer rebates to our distributors, consistent with pharmaceutical industry practice. We retain no ownership control over the products sold to our distributors, and all significant risks (including inventory risks) and rewards associated with the products are generally transferred to the distributors upon delivery to and acceptance by the distributors.
We offer rebates to our distributors, consistent with pharmaceutical industry practice. We retain no ownership control over the products sold to our distributors, and all significant risks (including inventory risks) and rewards associated with the products are generally transferred to our distributors upon delivery to and acceptance by the distributors.
According to the Foreign Investment Law of the People’s Republic of China and its implementing rules, which jointly established the legal framework for the administration of foreign-invested companies, a foreign investor may, in accordance with other applicable laws, freely transfer into or out of mainland China its contributions, profits, capital earnings, income from asset disposal, intellectual property rights, royalties acquired, compensation, or indemnity legally obtained, and income from liquidation, made or derived within the territory of mainland China in RMB or any foreign currency, and any entity or individual shall not illegally restrict such transfer in terms of the currency, amount, and frequency.
According to the Foreign Investment Law of the People’s Republic of China and its implementing rules, which jointly established the legal framework for the administration of foreign-invested companies, a foreign investor may, in -24- accordance with other applicable laws, freely transfer into or out of mainland China its contributions, profits, capital earnings, income from asset disposal, intellectual property rights, royalties acquired, compensation, or indemnity legally obtained, and income from liquidation, made or derived within the territory of mainland China in RMB or any foreign currency, and any entity or individual shall not illegally restrict such transfer in terms of the currency, amount, and frequency.
Deciphera (Ripretinib) In June 2019, we entered into a license agreement with Deciphera, pursuant to which we obtained an exclusive license under certain patents and know-how of Deciphera to develop and commercialize products containing ripretinib in the field of prevention, prophylaxis, treatment, cure, or amelioration of any disease or medical condition in humans in Greater China.
Deciphera (Ripretinib) In June 2019, we entered into a license agreement with Deciphera, pursuant to which we obtained an exclusive license under certain patents and know-how of Deciphera to develop and commercialize products containing ripretinib (QINLOCK) in the field of prevention, prophylaxis, treatment, cure, or amelioration of any disease or medical condition in humans in Greater China.
As a result, any restriction on currency exchange may limit the ability of our Chinese subsidiaries to use their potential future RMB revenues to pay dividends to us. The -2- Chinese government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of mainland China.
As a result, any restriction on currency exchange may limit the ability of our Chinese subsidiaries to use their potential future RMB revenues to pay dividends to us. The Chinese government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of mainland China.
GOVERNMENT REGULATION Government Regulation of Pharmaceutical Product Development and Approval Chinese Regulation of Pharmaceutical Product Development and Approval Since mainland China’s entry into the World Trade Organization in 2001, the Chinese government has made significant efforts to standardize regulations, develop its pharmaceutical regulatory system and strengthen intellectual property protection.
Government Regulation Chinese Government Regulation of Pharmaceutical Product Development, Approval, and Marketing Since mainland China’s entry into the World Trade Organization in 2001, the Chinese government has made significant efforts to standardize regulations, develop its pharmaceutical regulatory system and strengthen intellectual property protection.
Since our subsidiaries located in mainland China operate computer networks as part of their normal operations, we are required to comply with the requirements of mainland China’s cyber security, data protection, and privacy laws and regulations.
Data Privacy and Data Protection : Since our subsidiaries located in mainland China operate computer networks as part of their normal operations, we are required to comply with the requirements of mainland China’s cyber security, data protection, privacy, and data transfer laws and regulations.
Additionally, we make available on our website our securities filings with the Hong Kong Stock Exchange. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC and the Hong Kong Stock Exchange.
Additionally, we make available on our website our securities filings with the Hong Kong Stock Exchange. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC and the Hong Kong Stock Exchange, as applicable.
Chinese Regulation of Product Liability In addition to the strict new drug approval process, certain Chinese laws have been promulgated to protect the rights of consumers and to strengthen the control of medical products in mainland China.
Product Liability : In addition to the strict new drug approval process, certain Chinese laws have been promulgated to protect the rights of consumers and to strengthen the control of medical products in mainland China.
Under certain circumstances, our exclusive sub-license to certain intellectual property Paratek Bermuda Ltd. licensed from Tufts University may be converted to a non-exclusive license if Paratek Bermuda Ltd.’s exclusive license from Tufts University is converted to a non-exclusive license under the Tufts Agreement.
Under certain circumstances, our exclusive sub-license to certain intellectual property Paratek Bermuda Ltd. licensed from Tufts University may be converted to a non-exclusive license if Paratek Bermuda Ltd.’s exclusive license from Tufts University is converted to a -11- non-exclusive license under the Tufts Agreement.
Mainland China’s network and data protection regime is constantly evolving, and we continue to face uncertainties as to whether our efforts to comply with these requirements will be sufficient.
Mainland China’s network and data protection regime is evolving, and we continue to face uncertainties as to whether our efforts to comply with these requirements will be sufficient.
Pursuant to the terms of the agreement, we are responsible for (i) developing and commercializing licensed products under a territory development plan; and (ii) performing certain development activities to support Five Prime’s global development and registration of licensed products, including Five Prime’s global Phase III registrational trial of bemarituzumab (FPA144) in combination with FOLFOX in front-line gastric and gastroesophageal cancer (the “bemarituzumab FPA144-004 Study”) in the licensed territory under a global development plan.
Pursuant to the terms of the agreement, we are responsible for (i) developing and commercializing licensed products under a territory development plan; and (ii) performing certain development activities to support global development and registration of licensed products, including the global Phase III registrational trial of bemarituzumab (FPA144) in combination with FOLFOX in front-line gastric and gastroesophageal cancer (the “bemarituzumab FPA144-004 Study”) in the licensed territory under a global development plan.
Item 1. Business Overview We are a patient-focused, innovative, commercial-stage, global biopharmaceutical company with a substantial presence in both Greater China and the United States. We are focused on discovering, developing, and commercializing products that address medical conditions with significant unmet needs in the areas of oncology, autoimmune disorders, infectious diseases, and neuroscience.
Item 1. Business Overview We are a patient-focused, innovative, commercial-stage, global biopharmaceutical company with a substantial presence in both Greater China and the United States. We are focused on discovering, developing, and commercializing products that address medical conditions with significant unmet needs in the areas of oncology, autoimmune disorders, infectious disease, and neuroscience.
NovoCure (Tumor Treating Fields) In September 2018, we entered into a license and collaboration agreement with NovoCure, pursuant to which we obtained an exclusive license under certain patents and know-how of NovoCure to develop and commercialize Tumor Treating Fields products in all human therapeutic and preventative uses in the field of oncology in Greater China.
NovoCure (Tumor Treating Fields) In September 2018, we entered into a license and collaboration agreement with NovoCure, pursuant to which we obtained an exclusive license under certain patents and know-how of NovoCure to develop and commercialize any Tumor Treating Fields (OPTUNE) products in all human therapeutic and preventative uses in the field of oncology in Greater China.
Entasis (SUL-DUR) In April 2018, we entered into a license and collaboration agreement with Entasis, pursuant to which we obtained an exclusive license under certain patents and know-how of Entasis to develop and commercialize Entasis’s proprietary compounds, durlobactam with sulbactam (the combination, SUL-DUR) with the possibility of developing and commercializing a combination of such compounds with imipenem in all human diagnostic, prophylactic and therapeutic uses in Greater China, Korea, Vietnam, Thailand, Cambodia, Laos, Malaysia, Indonesia, the Philippines, Singapore, Australia, New Zealand, and Japan.
Innoviva (Sulbactam-Durlobactam) In April 2018, we entered into a license and collaboration agreement with Entasis, a wholly owned subsidiary of Innoviva, pursuant to which we obtained an exclusive license under certain patents and know-how of Entasis to develop and commercialize Entasis’s proprietary compounds, durlobactam with sulbactam (the combination, SUL-DUR) with the possibility of developing and commercializing a combination of such compounds with imipenem in all human diagnostic, prophylactic and therapeutic uses in Greater China, Korea, Vietnam, Thailand, Cambodia, Laos, Malaysia, Indonesia, the Philippines, Singapore, Australia, New Zealand, and Japan.
As a result, we have adopted a consolidated risk management methodology and program, which includes a three lines of defense risk management framework to identify, assess, evaluate, and monitor key risks associated with our strategic objectives on an on-going basis, and a risk governance structure that includes oversight by the Audit Committee of the Board of Directors.
As a result, we have adopted a consolidated risk management methodology and program, which includes a three lines of defense risk management framework to identify, assess, evaluate, and monitor key risks associated with our strategic objectives on an on-going basis, and a risk governance structure that includes oversight by the Board of Directors (the “Board”), the Audit Committee of the Board of Directors (the “Audit Committee”), and management.
The introduction of new products or technologies, including the development of new processes or technologies by competitors or new information about existing products or technologies, results in increased competition for our marketed products and pricing pressure on our marketed products.
The introduction of new products or technologies, including the development of new processes or technologies by competitors or new information about existing products or technologies, results in increased competition for, and pricing pressure on, our commercial products.
We typically order raw materials and services on a purchase order basis and do not enter into long-term dedicated capacity or minimum supply arrangements. While we do experience price fluctuations associated with our raw materials, we have not experienced any material disruptions in the supply of these raw materials in the past.
We typically order raw materials and services on a purchase order basis and do not enter into long-term dedicated capacity or minimum supply arrangements. While we experience price fluctuations associated with our raw materials, we have not experienced material disruptions in the supply of our raw materials.
OVERVIEW OF SIGNIFICANT LICENSE AND STRATEGIC COLLABORATION AGREEMENTS GSK (Niraparib) In September 2016, we entered into a collaboration, development, and license agreement with Tesaro, Inc., a company later acquired by GSK, pursuant to which we obtained an exclusive sublicense under certain patents and know-how of GSK (including such patents and know-how licensed from Merck, Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc., and AstraZeneca UK Limited) to develop, manufacture, and commercialize GSK’s proprietary PARP inhibitor, niraparib, for the diagnosis and prevention of any human diseases or conditions (other than prostate cancer) in mainland -16- China, Hong Kong, and Macau.
GSK (Niraparib) In September 2016, we entered into a collaboration, development, and license agreement with Tesaro, Inc., a company later acquired by GSK, pursuant to which we obtained an exclusive sublicense under certain patents and know-how of GSK (including such patents and know-how licensed from Merck, Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc., and AstraZeneca UK Limited) to develop, manufacture, and commercialize GSK’s proprietary PARP inhibitor, niraparib (ZEJULA), for the diagnosis and prevention of any human diseases or conditions (other than prostate cancer) in mainland China, Hong Kong, and Macau.
Risk Factors. INSURANCE We maintain insurance policies that are required under Chinese laws and regulations as well as based on our assessment of our operational needs and industry practice.
Insurance We maintain insurance policies that are required under Chinese laws and regulations as well as based on our assessment of our operational needs and industry practice.
We use our website as a means of disclosing material non-public information – including information on our products; business activities and partnerships; research; ESG strategy, commitments, and reports; and other events and developments – and for complying with our disclosure obligations under Regulation FD. Our website address is www.zailaboratory.com.
We use our website as a means of disclosing material non-public information – including information on our products; business activities and partnerships; research; Trust for Life strategy, commitments, and reports; and other events and developments – and for complying with our disclosure obligations under Regulation FD. Our website address is -25- www.zailaboratory.com.
Potential risks identified through this forum are escalated and managed both at the functional line level and through the Chief Compliance Officer directly to executive leadership and/or the Audit Committee, as deemed appropriate. • Audit Committee: The Audit Committee is responsible for assisting the Board of Directors in its oversight of the Company’s risk management and internal controls; the integrity of our financial statements; compliance with applicable legal and regulatory requirements; the qualifications, independence, and performance of our auditors; and our internal audit and compliance functions. • Board of Directors: The Board of Directors is responsible for establishing our enterprise risk management and internal control system and reviewing its effectiveness.
Potential risks identified through this forum are escalated and managed both at the functional line level and through the Chief Compliance Officer directly to executive leadership and/or the Audit Committee, as deemed appropriate. • Audit Committee: The Audit Committee is responsible for assisting the Board of Directors in its oversight of the Company’s risk management and internal controls; the integrity of our financial statements; compliance with -23- applicable legal and regulatory requirements; the qualifications, independence, and performance of our auditors; and our internal audit and compliance functions. • Board of Directors: The Board of Directors oversees the management of risks inherent in the operation of our business and the implementation of our business strategies and is responsible for establishing our enterprise risk management and internal control system and reviewing its effectiveness.
Through our efforts, we seek to achieve overall corporate profitability by the end of 2025. We also seek to build and maintain the trust of our stakeholders. In 2022, we established our ESG Trust for Life strategy, which includes three commitments: improve human health, create better outcomes, and act right now with ethical business practices and strong corporate governance.
Through our efforts, we seek to achieve overall corporate profitability by the end of 2025. We also seek to build and maintain the trust of our stakeholders, including through our Trust for Life strategy, which includes three commitments: improve human health, create better outcomes, and act right now with ethical business practices and strong corporate governance.
In addition, as of the date of this Annual Report on Form 10-K, none of our subsidiaries have ever issued any dividends or distributions to us or their respective shareholders in or outside of mainland China, and neither Zai Lab Limited nor any of our subsidiaries has ever directly or indirectly paid dividends or made distributions to U.S. investors.
In addition, as of the date of this report, none of our subsidiaries have ever issued any dividends or distributions to us or their respective shareholders in or outside of mainland China, and neither Zai Lab Limited nor any of our subsidiaries has ever directly or indirectly paid dividends or made distributions to U.S. investors.
Risk Factors for a detailed discussion of the Chinese legal restrictions on the payment of dividends, our ability to transfer cash within the Company, and the potential for holders of our ADSs and ordinary shares to be subject to Chinese taxes on dividends paid by us in the event we are deemed a Chinese resident enterprise for Chinese tax purposes.
See Risk Factors for a detailed discussion of the Chinese legal restrictions on the payment of dividends, our ability to transfer cash within the Company, and the potential for holders of our securities to be subject to Chinese taxes on dividends paid by us in the event we are deemed a Chinese resident enterprise for Chinese tax purposes.
For more information regarding the risks related to our trade secrets, see Part I—Item 1A. Risk Factors—Risks Related to Intellectual Property – If we are unable to maintain the confidentiality of our trade secrets, our business and competitive position may be harmed.
For more information regarding the risks related to our trade secrets, see Risk Factors – Risks Related to Intellectual Property – If we are unable to maintain the confidentiality of our trade secrets, our business and competitive position may be harmed .
Zai Lab (Shanghai) Co., Ltd., an operating subsidiary of ours that is domiciled in mainland China, received $416.5 million in capital contributions via twenty-three separate contributions from Zai Lab (Hong Kong) Limited, its sole shareholder, domiciled outside of mainland China, from 2014 to 2023 to fund its business operations in mainland China.
Zai Lab (Shanghai) Co., Ltd., an operating subsidiary of ours that is domiciled in mainland China, received $466.5 million in capital contributions via 24 separate contributions from Zai Lab (Hong Kong) Limited, its sole shareholder, domiciled outside of mainland China, from 2014 to 2023 to fund its business operations in mainland China.
Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant Chinese governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries. See Part I—Item 1A.
Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant Chinese governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries.
Market Opportunity for NUZYRA The World Health Organization has identified the worldwide development of resistance to currently available antibacterial agents as one of the greatest threats to human health. In 2020, the estimated incidence of CABP in mainland -6- China was approximately 10 million patients, and in 2015, the estimated incidence of ABSSSI in mainland China was 2.8 million patients.
The World Health Organization has identified the worldwide development of resistance to currently available antibacterial agents as one of the greatest threats to human health. In 2020, the estimated incidence of CABP in mainland China was approximately 10 million patients, and in 2015, the estimated incidence of ABSSSI in mainland China was 2.8 million patients.
TIVDAK (Tisotumab vedotin) TIVDAK is an antibody drug conjugate (“ADC”) composed of Genmab’s human monoclonal antibody directed against cell surface tissue factor (“TF”) and Seagen’s ADC technology that utilizes a protease-cleavable linker that covalently attaches the microtubule-disrupting agent monomethyl auristatin E (“MMAE”) to the antibody.
Tisotumab Vedotin Tisotumab vedotin is an ADC composed of Genmab’s human monoclonal antibody directed against cell surface tissue factor and Seagen’s ADC technology that utilizes a protease-cleavable linker that covalently attaches the microtubule-disrupting agent monomethyl auristatin E (“MMAE”) to the antibody.
We do not incorporate the information on or accessible through our website into this Annual Report on Form 10-K, and you should not consider any information on, or that can be accessed through, our website as part of this Annual Report on Form 10-K.
We do not incorporate the information on or accessible through our website into this report, and you should not consider any information on, or that can be accessed through, our website as part of this report.
ZEJULA is intended to avoid or slow a recurrence of the cancer if it is in remission after prior treatment. In the maintenance setting, ZEJULA does not require the addition of radiation or chemotherapies to kill tumor cells. Since 2016, we have had an exclusive license agreement with Tesaro Inc.
ZEJULA is intended to avoid or slow a recurrence of the cancer if it is in remission after prior treatment. In the maintenance setting, ZEJULA does not require the addition of radiation or chemotherapies to kill tumor cells. We have an exclusive license from Tesaro Inc.
INTELLECTUAL PROPERTY Our commercial success depends in part on our ability to obtain and maintain proprietary or intellectual property protection for our product candidates and our core technologies and other know-how to operate without infringing, misappropriating, or otherwise violating the proprietary rights of others and to prevent others from infringing, misappropriating, or otherwise violating our proprietary or intellectual property rights.
Intellectual Property Our commercial success depends, in part, on our ability to obtain and maintain proprietary protection for our know-how and innovation pertaining to our commercial products and product candidates as well as our core technologies; to operate without infringing, misappropriating, or otherwise violating the proprietary rights of others; and to prevent others from infringing, misappropriating, or otherwise violating our proprietary rights.
We maintain liability insurance for certain clinical trials, which covers the patient human clinical trial liabilities such as bodily injury, product liability insurance, general insurance policies covering property loss due to accidents or natural disasters, and director and officer (“D&O”) insurance.
We maintain liability insurance for certain clinical trials, which covers the patient human clinical trial liabilities such as bodily injury, product liability insurance, general insurance policies covering property loss due to accidents or natural disasters, and director and officer (“D&O”) insurance. We do not maintain insurance to cover intellectual property infringement or misappropriation.
GISTs are the most common mesenchymal tumors, accounting for about 1/20 of gastrointestinal tumors, with an estimated annual incidence of around 20,000 to 30,000 newly diagnosed patients per year in mainland China.
GISTs are the most common mesenchymal tumors of the gastrointestinal tract, accounting for about 0.1-3% of gastrointestinal tumors, with an estimated annual incidence of around 30,000 newly diagnosed patients per year in mainland China.
We also seek to engage our employees through our Culture Committee with the launch of our Diversity, Equity, and Inclusion (“DEI”) Council and employee resource groups, such as our women’s leadership community and local DEI committees. We seek to bring together employees with different backgrounds and expertise to support our growth while also creating an inclusive culture.
We also engage our employees through employee resource groups, such as our women’s leadership community and local diversity, equity, and inclusion committees. We seek to bring together employees with different backgrounds and expertise to support our growth while also creating an inclusive culture.
Paratek (Omadacycline) In April 2017, we entered into a license and collaboration agreement with Paratek Bermuda Ltd., a subsidiary of Paratek, pursuant to which we obtained both an exclusive license under certain patents and know-how of Paratek Bermuda Ltd. and an exclusive sub-license under certain intellectual property that Paratek Bermuda Ltd. licensed from Tufts University to develop, manufacture, and commercialize products containing omadacycline (ZL-2401) as an active ingredient in Greater China in the field of all human therapeutic and preventative uses other than biodefense.
Novo Holdings (Omadacycline) In April 2017, we entered into a license and collaboration agreement with Paratek Bermuda Ltd., a subsidiary of Paratek (which was subsequently acquired by Gurnet Point Capital and Novo Holdings A/S), pursuant to which we obtained both an exclusive license under certain patents and know-how of Paratek Bermuda Ltd. and an exclusive sub-license under certain intellectual property that Paratek Bermuda Ltd. licensed from Tufts University to develop, manufacture, and commercialize products containing omadacycline (NUZYRA) as an active ingredient in the field of all human therapeutic and preventative uses other than biodefense in Greater China.
Available Information We file reports and other information with the SEC and The Stock Exchange of Hong Kong Limited (“Hong Kong Stock Exchange”).
Available Information We file reports and other information with the Securities and Exchange Commission (“SEC”) and The Stock Exchange of Hong Kong Limited (“Hong Kong Stock Exchange”).
In addition, in certain cases, our CROs, licensors, licensees, partners, and contractors are also required to comply with these laws, and our agreements with them require them to comply with these requirements, but there is always a risk that they may not fully comply with them.
In addition, in certain cases, our CROs, licensors, licensees, partners, contractors, and other third parties with which we do business are also required to comply with these laws, and our agreements with them require them to comply with these requirements, but there is a risk that they may not fully comply with them.
Under the agreement, we received from Mirati the right to research, develop, manufacture, and exclusively commercialize adagrasib in all indications in Greater China, with Mirati retaining exclusive rights for the development, manufacturing, and commercialization of adagrasib outside Greater China and certain co-commercialization, manufacture, and development rights in Greater China.
Under the agreement, we received the right to research, develop, manufacture, and exclusively commercialize adagrasib in all indications in Greater China, with BMS retaining exclusive rights for the development, manufacturing, and commercialization of adagrasib outside of Greater China as well as certain co-commercialization, manufacture, and development rights in Greater China. We will purchase the licensed products exclusively from BMS.
Coverage and Reimbursement Chinese Coverage and Reimbursement Historically, most Chinese healthcare costs had been borne by patients out-of-pocket, which had limited the growth of more expensive pharmaceutical products. However, in recent years the number of people covered by government and private insurance has increased.
Additional rules and regulations govern the process of procurement, storage, sales, and transportation. Coverage and Reimbursement Historically, most Chinese healthcare costs had been borne by patients out-of-pocket, which had limited the growth of more expensive pharmaceutical products. However, in recent years, the number of people covered by government and private insurance has increased.
Mirati (Adagrasib) -19- In May 2021, we entered into a collaboration and license agreement with Mirati pursuant to which we and Mirati agreed to collaboratively develop MRTX849 (adagrasib) in Greater China.
BMS (Adagrasib) In May 2021, we entered into a collaboration and license agreement with Mirati (a company later acquired by BMS) pursuant to which we agreed to collaboratively develop MRTX849 (adagrasib) in Greater China.
During 2022 and 2021, the aggregate amount of product revenue generated from our five largest customers accounted for approximately 37.7% and 39.9%, respectively. We select distributors based on their business qualifications and distribution capabilities, such as distribution network coverage, quality, number of personnel, cash flow conditions, creditworthiness, logistics, compliance standard, and past performance, and their capacity for customer management.
During 2023 and 2022, our five largest customers accounted for approximately 35.0% and 37.7% of our total product revenue, respectively. We select distributors based on their business qualifications and distribution capabilities, such as distribution network coverage, quality, number of personnel, cash flow conditions, creditworthiness, logistics, compliance standard, past performance, and capacity for customer management.
The development of new or improved treatment options or standards of care or cures for the diseases our products treat reduces and could eliminate the use of our products or may limit the utility and application of ongoing clinical trials for our product candidates.
The development of new or improved treatment options or standards of care in our therapeutic areas could reduce or eliminate the use of our products or may limit the utility and application of ongoing clinical trials for our product candidates.
Our Distribution Channel We rely on independent third-party distributors in Greater China to sell our commercialized products, which is consistent with the pharmaceutical industry norm. We believe that distributors help us effectively execute our marketing strategies specifically tailored to each geographical location and the hospitals located within their distribution territories across mainland China.
Our Customers We rely on independent third-party distributors in Greater China to sell our commercialized products, which is consistent with the pharmaceutical industry norm. This allows us to execute marketing strategies that are specifically tailored to each product and the geographic location of the hospitals located within the distribution territories of our customers across mainland China.
We launched NUZYRA in mainland China in December 2021. In January 2023, NUZYRA was included in the NRDL for the treatment of adults with CABP and ABSSSI for IV formulation.
We launched NUZYRA in mainland China in December 2021 for the treatment of adults with CABP and ABSSSI for both oral and intravenous (“IV”) formulation. NUZYRA was included in the NRDL for the treatment of adult patients with CABP and ABSSSI in January 2023 for its IV formulation and in January 2024 for its oral formulation.
BMS (Repotrectinib) In July 2020, we entered into an exclusive license agreement with Turning Point pursuant to which Turning Point exclusively licensed to us the rights to develop and commercialize products containing repotrectinib as an active ingredient in all human therapeutic indications in Greater China.
BMS (Repotrectinib) In July 2020, we entered into an exclusive license agreement with Turning Point (a company later acquired by BMS) pursuant to which we obtained an exclusive license to develop and commercialize products containing repotrectinib as an -12- active ingredient in all human therapeutic indications in Greater China. We will purchase the licensed products exclusively from BMS.
We do not maintain insurance to cover intellectual property infringement or misappropriation. -67- HUMAN CAPITAL RESOURCES We know that our employees are integral to our success, and we are committed to building and maintaining a strong and engaged workforce that is focused on delivering on our mission to become a leading global biopharmaceutical company and to positively impact human health in China and beyond.
Human Capital Resources Our employees are integral to our success, and we are committed to building and maintaining a strong and engaged workforce that is focused on delivering on our mission to become a leading global biopharmaceutical company and to positively impact human health in China and beyond.
None of our employees are represented by a labor union or covered by a collective bargaining agreement, and we have not experienced -68- any material work stoppages or labor disputes. Further, we have been able to recruit strong employees to support our business and operations.
None of our employees are represented by a labor union or covered by a collective bargaining agreement, and we have not experienced any material work stoppages or labor disputes. Further, we have been able to recruit strong employees to support our business and operations. -22- Risk Management We are committed to acting ethically, which includes identifying and responsibly managing risk.
Bemarituzumab Bemarituzumab is a humanized monoclonal antibody (IgG1 isotype) specific to the human FGFR2b receptor that is in clinical development as a targeted therapy for gastric and GEJ cancer patients whose tumors overexpress FGFR2b. Since 2017, we have had an exclusive license from Five Prime Therapeutics, Inc.
Bemarituzumab Bemarituzumab is a humanized monoclonal antibody (IgG1 isotype) specific to the human fibroblast growth factor receptor 2 isoforma IIb (“FGFR2b”) that is in clinical development as a targeted therapy for gastric and gastroesophageal junction (“GEJ”) cancer patients whose tumors overexpress FGFR2b. We have an exclusive license from Five Prime Therapeutics, Inc.
Pursuant to the terms of the agreement, provided that we enroll and treat a specified number of patients in the bemarituzumab FPA144-004 Study in mainland China, we are eligible to receive a low single-digit percentage quarterly royalty, on a licensed product-by-licensed product basis on net sales of all licensed product outside the licensed territory until the tenth (10th) anniversary of the first commercial sale of each such licensed product outside the licensed territory.
If we enroll and treat a specified number of patients in the bemarituzumab FPA144-004 Study in mainland China, we will be eligible to receive a low single-digit percentage quarterly royalty on annual net sales of the licensed products outside of the licensed territory until the tenth anniversary of the first commercial sale of each such licensed product outside of the licensed territory.
For more information on this license agreement, see Part I—Item 1. Business—Overview of Significant License and Strategic Collaboration Agreements—BMS (Repotrectinib).
For more information on this agreement, see Overview of Significant License and Collaboration Agreements – BMS (Repotrectinib) .
However, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of mainland China to pay capital expenses such as the repayment of foreign currency-denominated loans.
Regulations Relating to Foreign Exchange : Approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of mainland China to pay capital expenses such as repayment of foreign currency-denominated loans. For more information, see Dividends and Other Distributions .
Compliance with the two-invoice system is a prerequisite for pharmaceutical companies to participate in the tender and procurement processes of public hospitals, which currently provide most of Chinese -51- healthcare services. Manufacturers and distributors that fail to implement the two-invoice system may lose their qualifications to participate in the tender and procurement process.
Compliance with the two-invoice system is a prerequisite for pharmaceutical companies to participate in the tender and procurement processes of public hospitals, which currently provide most of Chinese healthcare services.
Under the terms of the agreement, we will be responsible for recruiting patients in mainland China to argenx’s global registrational trials for the development of efgartigimod.
Under the terms of the agreement, we are responsible for recruiting patients in mainland China to argenx’s global registrational trials for the development of efgartigimod. We will purchase the licensed products exclusively from argenx.
The number of full-time employees by function as of such date was as follows: By Function Number of employees Research and Development 832 Commercial 965 Manufacturing 84 General and Administrative* 155 Total 2,036 * Includes finance, legal, human resources, information technology, and other general and administrative functions.
The number of full-time employees by function as of such date was as follows: -21- By Function Number of Employees Research and Development 757 Commercial 1,178 Manufacturing 70 General and Administrative* 170 Total 2,175 * Includes finance, legal, human resources, information technology, and other general and administrative functions.
This will make it easier for medical device companies to conduct medical device registration studies. Other Chinese National- and Provincial-Level Laws and Regulations We are subject to changing regulations under many other laws and regulations administered by governmental authorities at the national, provincial, and municipal levels, some of which are or may become applicable to our business.
Other Chinese National- and Provincial-Level Laws and Regulations : We are subject to changing requirements under many other laws and regulations administered by governmental authorities at the national, provincial, and municipal levels, some of which are or may become applicable to our business.
Our agreements with the CMOs typically specify requirements, including, but not limited to, product quality or service details, technical standards or methods, delivery terms, agreed price and payment, and product inspection and acceptance criteria. The CMOs procure the necessary raw materials themselves.
Our CMOs provide services to us on a short-term and project-by-project basis. Our agreements with CMOs typically specify requirements, including product quality or service details, technical standards or methods, delivery terms, agreed price and payment, and product inspection and acceptance criteria. Our CMOs procure the necessary raw materials themselves.
Our rights to develop and commercialize the licensed products are limited to the lead product (SUL-DUR) until such lead product receives initial FDA approval in the United States.
Our rights to develop and commercialize the licensed products are limited to the lead product (Sulbactam) until such lead product receives initial FDA approval in the United States. We will purchase the licensed products exclusively from Innoviva.
Drug Administration Law The Drug Administration Law as promulgated by the SCNPC in 1984, and the Implementing Measures of the Drug Administration Law as promulgated by the State Council in August 2002, established the legal framework for the administration of pharmaceutical products, including the development and manufacturing of new drugs and the medicinal preparations by medical institutions.
The Drug Administration Law and related implementing measures established the legal framework for the administration of pharmaceutical products, including the development and manufacturing of new drugs and the medicinal preparations by medical institutions.
Investment Risk Management -69- To help meet our liquidity needs without significantly increasing our risk, we have an investment policy, which was approved by the Audit Committee and provides guidelines and specific instructions for the investment of our funds.
Investment Risk Management To help meet our liquidity needs without significantly increasing our risk, we have an investment policy, which was approved by the Audit Committee and provides guidelines and specific instructions for the investment of our funds. Our investment strategy aims to minimize risks by reasonably and conservatively matching the maturities of the portfolio to anticipated operating cash needs.
As of January 31, 2023, we had 2,036 full-time employees, of which 1,956 were located in Greater China.
As of January 31, 2024, we had 2,175 full-time employees, of which 2,088 were located in Greater China.
Trademarks and Domain Names We conduct our business using trademarks with various forms of the “ZAI LAB” and “ 再鼎医药 ” brands, as well as domain names incorporating some or all of these trademarks. RESEARCH AND DEVELOPMENT We believe research and development is important to our future growth and our ability to remain competitive.
Trademarks and Domain Names We conduct our business using trademarks with various forms of the “ZAI LAB” and “ 再鼎医药 ” brands, as well as domain names incorporating some or all of these trademarks.
Furthermore, the Plan encourages enterprises and individuals to participate in commercial health insurance and various forms of supplementary insurance. The evolving medical insurance system makes innovative drugs more affordable and universally available to the Chinese population, which renders greater opportunities to drug manufacturers that focus on the research and development of innovative drugs, such as high-cost cancer therapeutics.
In addition to the NRDL, there is an evolving medical insurance system that makes innovative drugs more affordable and available to the Chinese population, which offers greater opportunities to drug manufacturers that focus on the research and development of innovative drugs, such as higher-cost cancer therapeutics. This system includes commercial health insurance and various forms of supplementary insurance.
Unless earlier terminated, the agreement continues in effect on a product-by-product basis until the expiration of all applicable royalty terms with respect to all products in any region in the territory. argenx (Efgartigimod) In January 2021, we entered into a collaboration and license agreement with argenx, pursuant to which we obtained an exclusive license under certain patents and know-how of argenx to develop and commercialize products containing efgartigimod as an active ingredient in all human and animal uses for any preventative or therapeutic indications in Greater China.
Under the agreement, we agreed not to commercialize certain competing products in our licensed territory. argenx (Efgartigimod) In January 2021, we entered into a collaboration and license agreement with argenx, pursuant to which we obtained an exclusive license under certain patents and know-how of argenx to develop and commercialize products containing efgartigimod (including VYVGART) as an active ingredient in all human and animal uses for any preventative or therapeutic indications in Greater China.
We believe our long-term competitive position depends upon our success in discovering and developing innovative, cost-effective products that serve unmet medical needs, along with our ability to manufacture products efficiently and to launch and market them effectively in a highly competitive environment. Additional information about the competition that our marketed products face is set forth below in Part I—Item 1A.
We believe our long-term competitive position depends upon our success in discovering and developing innovative, cost-effective products that serve unmet medical needs, along with our ability to manufacture products efficiently and to launch and market them effectively in a highly competitive environment. For information on significant risks we face from competition, see Risk Factors .
Permits and Licenses for Drug Manufacturing Operations Pharmaceutical Manufacturing Permit and GMP Requirements According to the Drug Administration Law and the Implementing Measures of the Drug Administration Law, to manufacture pharmaceutical products in mainland China, a pharmaceutical manufacturing enterprise must first obtain a Pharmaceutical Manufacturing Permit issued by the relevant provincial medical products administration where the enterprise is located.
Drug Manufacturing Operations To manufacture pharmaceutical products in mainland China, a pharmaceutical manufacturing enterprise must first obtain a Pharmaceutical Manufacturing Permit issued by the relevant provincial medical products administration where the enterprise is located, which is effective for five years.
In August 2021, the Hong Kong Department of Health approved our post-approval variation for ZEJULA as a maintenance treatment for adult patients with high-grade serous epithelial ovarian cancer who are in a complete response or partial response to first-line platinum-based chemotherapy. ZEJULA was approved and launched in Macau for the same indication.
We also launched ZEJULA in Hong Kong in 2018 for adult patients with platinum-sensitive, relapsed high-grade, serous epithelial ovarian cancer who are in a complete response or partial response to platinum-based chemotherapy and in Hong Kong and Macau in 2021 as a maintenance treatment for adult patients with high-grade serous epithelial ovarian cancer who are in a complete response or partial response to first-line platinum-based chemotherapy.
The agreement contains customary provisions for termination by either party, including in the event of a material breach by the other party that remains uncured, by us for convenience, for certain bankruptcy events, and by Seagen upon a challenge of the licensed patent rights.
These agreements also contain customary provisions for termination by either party, including in the event of a material breach by the other party that remains uncured; by us for convenience upon a specified notice period; for certain bankruptcy, insolvency, or other similar events; and by our partners upon challenge of their licensed patent rights.
The risk governance structure also includes a Risk Coordination Council that is comprised of leaders of governance and quality functions along with operational line leaders and serves as a forum to discuss and monitor risks across the organization.
Management oversight includes a Risk Coordination Council that is comprised of leaders of governance and quality functions along with operational line leaders and serves as a forum to discuss and monitor risks across the organization as well as other regional, divisional, or functional risk management committees or working groups, as deemed appropriate.
For example, our Chief Legal Officer, supported by our Chief Compliance Officer, is responsible for: developing and updating our enterprise risk management program and targets; reviewing and approving major risk management issues; promulgating and supervising implementation of risk management measures; providing guidance and support on our risk management approach to the relevant departments in the Company; and reporting to management, the Board of Directors, and the Audit Committee, as deemed appropriate. • Third Line of Defense: Our Internal Audit Division is responsible for evaluating the design, adequacy, operational effectiveness, and efficiency of our governance, risk management, and control processes. • Risk Coordination Council: The Risk Coordination Council, which is co-chaired by the Chief Compliance Officer and another rotating member and is comprised of governance function leaders as well as business operations leaders, provides a forum to discuss and identify, monitor, and manage risks across the organization.
For example, our Chief Legal Officer, supported by our Chief Compliance Officer, is responsible for: developing and updating our enterprise risk management program and targets; reviewing and approving management or mitigation plans for major risk management issues; overseeing implementation of risk management measures; providing guidance and support on our risk management approach to the relevant departments in the Company; and reporting to management, the Board of Directors, and the Audit Committee, as deemed appropriate. • Third Line of Defense: Our Internal Audit function is responsible for evaluating the design, adequacy, operational effectiveness, and efficiency of our enterprise risk management program, including our risk governance structure, processes for enterprise risk identification and management, and risk control processes.
We will purchase licensed products exclusively from Five Prime.
We will purchase the licensed products exclusively from NovoCure.
There are many companies, including biotechnology and pharmaceutical companies, engaged in developing products for the indications our approved products are approved to treat and the therapeutic areas we are targeting with our research and development activities. Some of our competitors may have substantially greater financial, marketing, research and development, and other resources than we do.
There are many companies, including biotechnology and pharmaceutical companies, engaged in developing products for the approved indications of our commercial products and the therapeutic areas we are targeting with our research and development activities.
We submitted an NDA to the NMPA in December 2022 for the treatment of infections caused by Acinetobacter baumannii , including multidrug-resistant and CRAB strains, which was granted priority review status in January 2023 and accepted in February 2023.
Our NDA for the treatment of infections caused by Acinetobacter baumannii , including MDR and CRAB strains, was accepted by the NMPA in February 2023 and has been granted priority review status.
In 2023, our key corporate strategic goals for driving innovation in China and beyond include: • Accelerating Medicines to Patients: We seek to advance our product pipeline by continuing to invest in research and development, including internal discovery activities; -1- • Expanding Our Pipeline: We seek the continued growth of our differentiated product pipeline through regional and global collaborations and corporate development activities; and • Continuing Our Commercial Excellence and Execution: We seek to continue delivering strong financial performance, including by increasing access to our existing commercial products and driving further increases in our efficiency and productivity as we continue preparations to launch eight additional products in Greater China in the next 2-3 years.
To execute on that mission, we have developed a corporate strategy with the following three pillars to help us drive innovation in China and beyond: • Accelerate Medicines to Patients: We seek to advance our product pipeline by continuing to invest in research and development, including internal discovery activities; • Expanding Our Pipeline: We seek to continue to expand and strengthen our differentiated product pipeline through synergistic regional and global collaborations and corporate development activities; and • Continue Our Commercial Excellence and Execution: We seek to continue delivering strong financial performance, including by increasing access to our existing commercial products and driving further increases in our efficiency and productivity as we continue preparations to launch multiple additional products or new indications for existing products in Greater China in the next 2-3 years.
However, the system still significantly limits the options for companies to use multiple distributors to reach a larger geographic area in mainland China. The reduction in distribution tiers resulted in a decrease in distribution mark-ups, hence the supply prices to public hospitals would also be reduced.
As a result, the system significantly limits the options for companies like us to use multiple distributors to reach a larger geographic area in mainland China. The reduction in distribution tiers resulted in a decrease in distribution mark-ups and an accompanying reduction in prices paid by public hospitals.
In addition, subsequent securities offerings of an issuer in the same overseas market where it has previously offered and listed securities shall be filed with the CSRC within three working days after the offering is completed. -63- Meanwhile, overseas offering and listing would be prohibited under certain circumstances, including but not limited to that (i) the offering and listing are expressly forbidden by the Chinese laws, regulations and relevant rules; (ii) the intended overseas securities offering and listing may endanger national security as reviewed and determined by competent authorities under the State Council in accordance with laws or (iii) there are material disputes with regard to the ownership of the equity held by the domestic company’s controlling shareholder or by other shareholders that are controlled by the controlling shareholder and/or actual controller.
Overseas offering and listing are prohibited under certain circumstances, including where (i) the offering and listing are expressly forbidden by applicable Chinese laws, regulations, and rules; (ii) the intended overseas securities offering and listing may endanger national security as reviewed and determined by competent authorities under the State Council; or (iii) there are material disputes with regard to the ownership of the equity held by the domestic company’s controlling shareholder or by other shareholders that are controlled by the controlling shareholder and/or actual controller.
The confidentiality agreements we enter into are designed to protect our proprietary information, and the agreements or clauses requiring assignment of inventions to us are designed to grant us ownership of technologies that are developed through our relationship with the respective counterparty.
These confidentiality agreements are designed to protect our proprietary information and generally include clauses requiring assignment of inventions to us to grant us ownership of technologies that are developed through our relationship with the respective counterparty. Such agreements may not provide adequate protection of our intellectual property and proprietary information rights.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeOur failure to comply with such laws and regulations could lead to government enforcement actions and significant penalties against us, which could materially and adversely impact our operating results; • The economic, political, and social conditions in mainland China, as well as governmental policies, could affect the business environment and financial markets in mainland China, our ability to operate our business, our liquidity, and our access to capital; -70- • If the Chinese government determines that our corporate structure does not comply with Chinese regulations, or if Chinese regulations change or are interpreted differently in the future, the value of our ADSs or ordinary shares may decline in value or become worthless; • The approval of, filing, or other procedures with the CSRC or other Chinese regulatory authorities may be required in connection with issuing securities to foreign investors under Chinese law, and, if required, we cannot predict whether we will be able, or how long it will take us, to obtain such approval or complete such filing or other procedures; • We may be exposed to liabilities under the FCPA and Chinese anti-corruption laws, and any determination that we have violated these laws could have a material adverse effect on our business or our reputation; • Restrictions on currency exchange may limit our ability to receive and use financing in foreign currencies; • We may rely on dividends and other distributions on equity paid by our Chinese subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our Chinese subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business; • Chinese regulations relating to the establishment of offshore special purpose companies by residents in mainland China may subject our China resident beneficial owners or our wholly foreign-owned subsidiaries in mainland China to liability or penalties, limit our ability to inject capital into these subsidiaries, limit these subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us; • Chinese regulations establish complex procedures for some acquisitions of mainland China based companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in mainland China; • Chinese manufacturing facilities have historically experienced issues operating in line with established GMPs and international best practices, and passing FDA, NMPA, and EMA inspections, which may result in a longer and costlier current GMP inspection and approval process by the FDA, NMPA, or EMA for our Chinese manufacturing processes and third-party contract manufacturers; • Our business benefits from certain financial incentives and discretionary policies granted by local governments.
Biggest changeIf these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our products or product candidates, on the anticipated timeline or at all, and our business could be substantially harmed; -26- • If we are unable to obtain and maintain patent protection for our products and product candidates through intellectual property rights, or if the scope of such intellectual property rights obtained is not sufficiently broad, third parties may compete directly against us; • We may not be able to protect our systems and networks, or the confidentiality of our confidential or other information (including personal information), from cyberattacks and other unauthorized access, disclosure, and disruption, which may materially and adversely affect us; • The pre-approval of, filing, or other procedures with the CSRC or other Chinese regulatory authorities may be required in connection with issuing securities to foreign investors under Chinese law, and, if required, we cannot predict whether we will be able, or how long it will take us, to obtain such approval or complete such filing or other procedures; • We may be exposed to liabilities under the FCPA and Chinese anti-corruption laws, and any determination that we have violated these laws could have a material adverse effect on our business or our reputation; • Certain of our investments may be subject to CFIUS review, which may delay or block a transaction from closing; • Restrictions on currency exchange may limit our ability to receive and use financing in foreign currencies; • We may rely on dividends and other distributions on equity paid by our Chinese subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our Chinese subsidiaries to make payments to Zai Lab Limited could have a material and adverse effect on our ability to conduct our business; • Chinese regulations relating to the establishment of offshore special purpose companies by residents in mainland China may subject our China resident beneficial owners or our wholly foreign-owned subsidiaries in mainland China to liability or penalties, limit our ability to inject capital into these subsidiaries, limit these subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us; • Chinese regulations establish complex procedures for some acquisitions of mainland China based companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in mainland China; • Our business benefits from certain financial incentives and discretionary policies granted by local governments.
However, the tax resident status of an enterprise is subject to determination by the Chinese tax authorities, and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the Chinese tax authorities determine that Zai Lab Limited or any of our subsidiaries outside of mainland China is a Chinese resident enterprise for EIT purposes that entity would be subject to a 25% EIT on its global income.
However, the tax resident status of an enterprise is subject to determination by Chinese tax authorities, and uncertainties remain with respect to the interpretation of the term “de facto management body.” If Chinese tax authorities determine that Zai Lab Limited or any of our subsidiaries outside of mainland China is a Chinese resident enterprise for EIT purposes that entity would be subject to a 25% EIT on its global income.
However, it is unclear whether our non-China shareholders would be able to claim the benefits of any tax treaties between their country of tax residence and mainland China in the event that Zai Lab Limited is treated as a Chinese resident enterprise.
However, it is unclear whether our non-Chinese shareholders would be able to claim the benefits of any tax treaties between their country of tax residence and mainland China in the event that Zai Lab Limited is treated as a Chinese resident enterprise.
We conduct pre-clinical and clinical activities and have business operations both in the United States and mainland China, any unfavorable government policies on international trade, such as capital controls or tariffs, may affect the demand for our drug products, the competitive position of our drug products, the hiring of scientists and other research and development personnel and import or export of raw materials in relation to drug development, or prevent us from selling our drug products in certain countries.
We conduct pre-clinical and clinical activities and have business operations both in the United States and mainland China, and any unfavorable government policies on international trade, such as capital controls or tariffs, may affect the demand for our products, the competitive position of our products, the hiring of scientists and other research and development personnel, and import or export of raw materials in relation to drug development or may prevent us from selling our products in certain countries.
Any failure by our third-party manufacturers to comply with cGMP standards or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of our product candidates.
Any failure by our third-party manufacturers to comply with cGMP standards or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of our product candidates.
We could encounter regulatory delays if a clinical trial is suspended or terminated by us or, as applicable, the IRBs or the ethics committee of the institutions in which such trials are being conducted, by the data safety monitoring board, which is an independent group of experts that is formed to monitor clinical trials while ongoing, or by the NMPA, FDA, or other regulatory authorities.
We could encounter regulatory delays if a clinical trial is suspended or terminated by us or, as applicable, the IRBs or the ethics committee of the institutions in which such trials are being conducted, by the data safety monitoring board, which is an independent group of experts that is formed to monitor clinical trials while ongoing, or by the NMPA, FDA, or other applicable regulatory authorities.
In particular, we have designed many of our clinical trials, and expect to design future trials, to include some patients with the applicable genomic mutation with a view to assessing possible early evidence of potential therapeutic effect. Genomically defined diseases, however, may have relatively low prevalence, and it may be difficult to identify patients with the applicable genomic mutation.
In particular, we have designed many of our clinical trials, and expect to design future clinical trials, to include some patients with the applicable genomic mutation with a view to assessing possible early evidence of potential therapeutic effect. Genomically defined diseases, however, may have relatively low prevalence, and it may be difficult to identify patients with the applicable genomic mutation.
NHSA, together with other government authorities, review the inclusion or removal of drugs from the NRDL, and the tier under which a drug will be classified, both of which affect the amounts reimbursable to program participants for their purchases of those drugs. These determinations are made based on a number of factors, including price and efficacy.
The NHSA, together with other government authorities, review the inclusion or removal of drugs from the NRDL, and the tier under which a drug will be classified, both of which affect the amounts reimbursable to program participants for their purchases of those drugs. These determinations are made based on a number of factors, including price and efficacy.
Reputational harm to our products, including product liability claims or lawsuits against us or any of our licensors, could cause us to incur substantial liabilities or loss of revenue or reputation. We face an inherent risk related to the use of our products and product candidates anywhere in the world.
Reputational harm to our products, including product liability claims or lawsuits against us or any of our licensors, could cause us to incur substantial liabilities or loss of revenue or harm our reputation. We face an inherent risk related to the use of our products and product candidates anywhere in the world.
If our manufacturing facilities are damaged or destroyed or production at such facilities is otherwise interrupted, or any new facilities are not approved by regulators, our business and prospects would be negatively affected.
If our manufacturing facilities are damaged or destroyed, or production at such facilities is otherwise interrupted, or if any new manufacturing facilities are not approved by regulators, our business and prospects would be negatively affected.
If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our products or product candidates.
If our CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols, regulatory requirements, or for other reasons, our clinical trials may be extended, delayed, or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our products or product candidates.
There is uncertainty as to whether the courts of the Cayman Islands or mainland China would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state. The recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law.
There is uncertainty as to whether the courts of the Cayman Islands or mainland China would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of securities laws of the United States or any state. The recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law.
There is no direct trading or settlement between Nasdaq and the Hong Kong Stock Exchange on which our ADSs and our ordinary shares are respectively traded.
There is no direct trading or settlement between Nasdaq and the Hong Kong Stock Exchange on which our ADSs and ordinary shares are respectively traded.
According to the Foreign Investment Law of the People’s Republic of China and its implementing rules, which jointly established the legal framework for the administration of foreign-invested companies, a foreign investor may, in accordance with other applicable laws, freely transfer into or out of mainland China its contributions, profits, capital -81- earnings, income from asset disposal, intellectual property rights, royalties acquired, compensation or indemnity legally obtained, and income from liquidation, made or derived within the territory of mainland China in RMB or any foreign currency, and any entity or individual shall not illegally restrict such transfer in terms of the currency, amount and frequency.
According to the Foreign Investment Law of the People’s Republic of China and its implementing rules, which jointly established the legal framework for the administration of foreign-invested companies, a foreign investor may, in accordance with other applicable laws, freely transfer into or out of mainland China its contributions, profits, capital earnings, income from asset disposal, intellectual property rights, royalties acquired, compensation or indemnity legally obtained, and income from liquidation, made or derived within the territory of mainland China in RMB or any foreign currency, and any entity or individual shall not illegally restrict such transfer in terms of the currency, amount, and frequency.
Further, future partnerships, strategic collaborations or other investments could also pose numerous additional risks to our operations, including: • problems integrating the purchased business, products, personnel, or technologies; • increases to our expenses; • the failure to have discovered undisclosed liabilities of the acquired asset or company; • diversion of management’s attention from their day-to-day responsibilities; • harm to our operating results or financial condition; • entrance into markets in which we have limited or no prior experience; and • potential loss of key employees, particularly those of the acquired entity.
Further, future partnerships, strategic collaborations, or other investments could also pose numerous additional risks to our operations, including: • problems integrating the purchased business, products, personnel, or technologies; • increases to our expenses; • failure to have discovered undisclosed liabilities of the acquired asset or company; • diversion of management’s attention from their day-to-day responsibilities; • harm to our operating results or financial condition; • entrance into markets in which we have limited or no prior experience; and -52- • potential loss of key employees, particularly those of the acquired entity.
In order to manufacture and distribute drug and medical device products in mainland China, we are required to: • obtain a manufacturing permit for each production facility from the NMPA and its relevant branches for the manufacture of drug and device products domestically; • obtain a marketing authorization, which includes an approval number, from the NMPA for each drug or device for sale in mainland China; • obtain a Pharmaceutical Distribution Permit from the provincial medical products administration if we were to sell drugs manufactured by third parties; and • renew the Pharmaceutical Manufacturing Permits, the Pharmaceutical Distribution Permits and marketing authorizations every five years, among other requirements.
In order to manufacture and distribute drug and medical device products in mainland China, we are required to: • obtain a manufacturing permit for each production facility from the NMPA and its relevant branches for the manufacture of drug and device products domestically; • obtain a marketing authorization, which includes an approval number, from the NMPA for each drug or device for sale in mainland China; • obtain a Pharmaceutical Distribution Permit from the provincial medical products administration if we were to sell drugs manufactured by third parties; and -53- • renew the Pharmaceutical Manufacturing Permits, the Pharmaceutical Distribution Permits, and marketing authorizations every five years, among other requirements.
The NMPA might require us to change our planned clinical study design or otherwise spend additional resources and effort to obtain approval of our product candidates. In addition, policy changes may contain significant limitations related to use restrictions for certain age groups, warnings, precautions, or contraindications, or may be subject to burdensome post-approval study or risk management requirements.
The NMPA might require us to change our planned clinical study design or otherwise spend additional resources and effort to obtain approval of our product candidates. In addition, policy changes may contain significant limitations related to use restrictions for certain age groups, warnings, precautions, or contraindications, or we may be subject to burdensome post-approval study or risk management requirements.
U.S. investors should consult their tax advisors regarding the determination of whether we are a PFIC for any taxable year and the potential application of the PFIC rules. If a U.S. Holder is treated as owning at least 10% of our ordinary shares, such holder may be subject to adverse U.S. federal income tax consequences. If a U.S.
U.S. investors should consult their tax advisors regarding the determination of whether we are a PFIC for any taxable year and the potential application of the PFIC rules. If a U.S. investor is treated as owning at least 10% of our ordinary shares, such holder may be subject to adverse U.S. federal income tax consequences.
In addition, our construction projects can only be put into operation after certain regulatory procedures with the relevant administrative authorities in charge of environmental protection, health and safety have been -133- completed. Our development operations primarily occur in mainland China and the United States and involve the use of hazardous and flammable materials, including chemicals and biological materials.
In addition, our construction projects can only be put into operation after certain regulatory procedures with the relevant administrative authorities in charge of environmental protection, health, and safety have been completed. Our development operations primarily occur in mainland China and the United States and involve the use of hazardous and flammable materials, including chemicals and biological materials.
Hence, the recognition and enforcement in mainland China of judgments of a court in any of these jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or even impossible. Failure to renew our current leases or locate desirable alternatives for our leased properties could materially and adversely affect our business.
Hence, the recognition and enforcement in -36- mainland China of judgments of a court in any of these jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or even impossible. Failure to renew our current leases or locate desirable alternatives for our leased properties could materially and adversely affect our business.
Chinese regulations relating to the establishment of offshore special purpose companies by residents in mainland China may subject our China resident beneficial owners or our wholly foreign-owned subsidiaries in mainland China to liability or penalties, limit our ability to inject capital into these subsidiaries, limit these subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
Chinese regulations relating to the establishment of offshore special purpose companies by residents in mainland China may subject our China resident beneficial owners or our wholly foreign-owned subsidiaries in mainland China to liability or penalties, limit our ability to inject capital into these subsidiaries, limit the ability of these subsidiaries to increase their registered capital or distribute profits to us, or otherwise adversely affect us.
We are closely monitoring legal and regulatory developments in this area to see how scientific data is interpreted, and we may be required to comply with additional regulatory requirements for sharing clinical study or other scientific data with our licensors or foreign regulatory authorities, although the scope of such requirements, if any, is currently unknown.
We are closely monitoring legal and regulatory developments in this area to see how scientific data is interpreted, and we may be required to comply -57- with additional regulatory requirements for sharing clinical study or other scientific data with our licensors or foreign regulatory authorities, although the scope of such requirements, if any, is currently unknown.
For these purposes, cash is a passive asset and the value of a non-U.S. corporation’s goodwill (which may be determined by reference to the excess of the sum of its market capitalization and liabilities over its booked assets) generally should be an active asset to the extent attributable to business activities that produce non-passive income.
For these purposes, cash is generally a passive asset and the value of a non-U.S. corporation’s -70- goodwill (which may be determined by reference to the excess of the sum of its market capitalization and liabilities over its booked assets) generally should be an active asset to the extent attributable to business activities that produce non-passive income.
Under those circumstances, KPMG would also be required to abide by corresponding approval, filing, and compliance procedures. Due to the lack of further interpretation, we are not certain about the scope of materials that would be deemed to have a sensitive impact or contain state or governmental authority work secrets.
Under -29- those circumstances, KPMG would also be required to abide by corresponding approval, filing, and compliance procedures. Due to the lack of further interpretation, we are not certain about the scope of materials that would be deemed to have a sensitive impact or contain state or governmental authority work secrets.
The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in certain additional restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business.
The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and additional restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights, and other operating restrictions that could adversely impact our ability to conduct our business.
Even if we are successful in defending against such challenges, the cost to us of any patent litigation or similar proceeding could be substantial, and it may consume significant management and other personnel time. We do not maintain insurance to cover intellectual property infringement, misappropriation or violation.
Furthermore, even if we are successful in defending against such challenges, the cost to us of any patent litigation or similar proceeding could be substantial, and it may consume significant management and other personnel time. We do not maintain insurance to cover intellectual property infringement, misappropriation, or violation.
Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain, or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions.
Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain, or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and -50- biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions.
If we or any of our licensors are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition, results of operations, and prospects may be adversely affected. Developments in patent law could have a negative impact on our business.
If we or any of our licensors are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition, results of operations, and prospects may be adversely affected. Developments or uncertainties in patent law could have a negative impact on our business.
If such costs become prohibitively expensive, we may be forced to cease certain aspects of our business operations. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage, use or disposal of biological or hazardous materials.
If such costs were to become prohibitively expensive, we may be forced to cease certain aspects of our business or operations. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage, use or disposal of biological or hazardous materials.
In particular, the Chinese legal system is based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and the Chinese legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules may not be uniform and enforcement of these laws, regulations and rules involves uncertainties.
In particular, the Chinese legal system is based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and the Chinese legal system continues to evolve, the interpretations of many laws, regulations and rules may not be uniform and enforcement of these laws, regulations and rules involves uncertainties.
On September 15, 2022, President Biden issued an Executive Order to instruct CFIUS to consider national security factors when evaluating transactions, specifically a deal’s effect on critical U.S. supply chains, U.S. technological leadership in biotechnology and biomanufacturing, cybersecurity risks, or risks to U.S. persons’ sensitive data.
In September 2022, President Biden issued an executive order to instruct CFIUS to consider national security factors when evaluating transactions, specifically a deal’s effect on critical U.S. supply chains, U.S. technological leadership in biotechnology and biomanufacturing, cybersecurity risks, or risks to U.S. persons’ sensitive data.
A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding -99- promising results in earlier trials. There are inherent uncertainties associated with the development of our products and product candidates.
A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. There are inherent uncertainties associated with the development of our products and product candidates.
None of our clinical study or other scientific data has been created or managed with government funds, or funded by any source that concerns state secrets, national security, or social and public interests. To date, we have received all requisite permissions to transfer clinical study data abroad.
None of our clinical study or other scientific data has been created or managed with government funds or funded by any source that concerns state secrets, national security, or social and public interests. To date, we have received requisite permissions to transfer clinical study data abroad.
Risks Related to Intellectual Property If we are unable to obtain and maintain patent protection for our products and product candidates through intellectual property rights, or if the scope of such intellectual property rights obtained is not sufficiently broad, third parties may compete directly against us.
Risks Related to Intellectual Property If we are unable to obtain and maintain protection for our products and product candidates through intellectual property rights, or if the scope of such intellectual property rights obtained is not sufficiently broad, third parties may compete directly against us.
In addition, our currency exchange losses may be magnified by Chinese exchange control regulations that restrict our ability to convert RMB into foreign currency. Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise their rights.
In addition, our currency exchange losses may be magnified by Chinese exchange control regulations that restrict our ability to convert RMB into foreign currency. -68- Holders of our ADSs have fewer rights than shareholders and must act through the depositary to exercise their rights.
As a result, Shareholders who exchange ADSs into ordinary shares, and vice versa, may not achieve the level of economic return the Shareholders may anticipate. There is uncertainty as to whether Hong Kong stamp duty will apply to the trading or conversion of our ADSs.
As a result, shareholders who exchange ADSs into ordinary shares, and vice versa, may not achieve the level of economic return they may anticipate. There is uncertainty as to whether Hong Kong stamp duty will apply to the trading or conversion of our ADSs.
Such authorities may impose a suspension or termination due to a number of factors, including: a failure to conduct the clinical trial in accordance with regulatory requirements or the applicable clinical protocols, a failure to obtain the regulatory approval and/or complete record filings with respect to the collection, preservation, use and export of mainland China’s human genetic resources, inspection of the clinical trial operations or trial site by the NMPA, FDA, or other regulatory authorities that results in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product candidate, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.
Such authorities may impose a suspension or termination due to a number of factors, including: a failure to conduct the clinical trial in accordance with regulatory requirements or the applicable clinical protocols; a failure to obtain the regulatory approval and/or complete record filings with respect to the collection, preservation, use, and export of mainland China’s human genetic resources; inspection of the clinical trial operations or trial site by the NMPA, FDA, or other regulatory authorities that results in the imposition of a clinical hold, unforeseen safety issues, or adverse side effects; failure to demonstrate a benefit from using a product candidate; changes in government regulations or administrative actions; or lack of adequate funding to continue the clinical trial.
These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.
These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.
Any of the foregoing may have a material adverse effect on our business, prospects, financial condition, and results of operations. Intellectual property litigation and proceedings could cause us to spend substantial resources and distract our personnel from their normal responsibilities.
Consequently, any of the foregoing may have a material adverse effect on our business, financial condition, results of operations, and prospects. Intellectual property litigation and proceedings could cause us to spend substantial resources and distract our personnel from their normal responsibilities.
Although the authorities in mainland China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the United States may not be efficient in the absence of mutual and practical cooperation mechanisms.
Although authorities in mainland China may establish a regulatory cooperation mechanism with authorities of another country or region to implement cross-border supervision and administration, such cooperation with authorities in the United States may not be efficient in the absence of mutual and practical cooperation mechanisms.
We will continue to review these and all future privacy and other laws and regulations to assess -112- whether additional procedural safeguards are warranted, which may cause us to incur additional expenses or otherwise limit our ability to collect and process personal data.
We will continue to review these and all future privacy and other laws and regulations to assess whether additional procedural safeguards are warranted, which may cause us to incur additional expenses or otherwise limit our ability to collect and process personal data.
The inability to enroll a sufficient number of patients with the applicable genomic alteration or that meet other applicable criteria for our clinical trials would result in significant delays and could require us to abandon one or more clinical trials altogether.
The inability to enroll a sufficient number of patients with the applicable genomic alteration or that meet other applicable criteria for our clinical trials would result in significant delays and could require us to abandon one or more clinical trials.
Any of these events could prevent us from achieving or maintaining market acceptance of the affected products or product candidates and could substantially increase the costs of commercializing our products and product candidates, if approved, and significantly impact our ability to successfully commercialize our products and product candidates and generate revenue.
Any of these events could prevent us from achieving or maintaining market acceptance of the affected products or product candidates, could substantially increase the costs of commercializing our products and product candidates, if approved, and could otherwise significantly impact our ability to successfully commercialize our products and product candidates and generate revenue.
The tax laws applicable to our business activities, however, are subject to change and uncertain interpretation. Our tax position could be adversely impacted by changes in tax rates, tax laws, tax practice, tax treaties or tax regulations or changes in the interpretation thereof by the tax authorities in jurisdictions in which we do business.
The tax laws applicable to our business activities, however, are subject to change and uncertain interpretation. Our tax position -71- could be adversely impacted by changes in tax rates, tax laws, tax practice, tax treaties or tax regulations, or changes in the interpretation thereof by the tax authorities in jurisdictions in which we do business.
We may need to significantly reduce our prices for our approved products or our other product candidates and devices for which we may receive regulatory approval in mainland China and face uncertainty of reimbursement, which could diminish our sales or affect our profitability.
We may need to significantly reduce our prices for our approved products or our other product candidates and devices for which we may receive regulatory approval in mainland China and face uncertainty of reimbursement, which could diminish our sales or adversely affect our profitability.
The depositary for the ADSs is entitled to charge holders fees for various services including for the issuance of ADSs upon deposit of ordinary shares, cancelation of ADSs, distributions of cash dividends or other cash distributions, distributions of ADSs pursuant to share dividends or other free share distributions, distributions of securities other than ADSs, and annual service fees.
The depositary for our ADSs is entitled to charge holders fees for various services including for the issuance of ADSs upon deposit of ordinary shares, cancelation of ADSs, distributions of cash dividends or other cash distributions, distributions of ADSs pursuant to share dividends or other free share distributions, distributions of securities other than ADSs, and annual service fees.
Furthermore, undesirable side effects could cause us to interrupt, delay or halt clinical trials or could cause regulatory authorities to interrupt, delay or halt our clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the NMPA, FDA or other regulatory authorities.
Furthermore, undesirable side effects could cause us to interrupt, delay, or halt clinical trials or could cause regulatory authorities to interrupt, delay, or halt our clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the NMPA, FDA, or other applicable regulatory authorities.
A loss of key personnel or their work product could hamper or prevent our ability to develop or commercialize our products and product candidates, which would have a material adverse effect on our business, results of operations, and financial condition.
A loss of key personnel or their work product could hamper or prevent our ability to develop or commercialize our products and product candidates, which would have a material adverse effect on our business, results of operations, financial condition, and prospects.
Our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our on-going clinical, nonclinical, and pre-clinical programs.
Our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether they devote sufficient time and resources to our on-going clinical, nonclinical, and pre-clinical programs.
Although we are not currently at risk of delisting pursuant to the HFCAA, if the PCAOB were to issue a new determination regarding limitations on its ability to inspect or investigate our independent auditor and we were to fail to meet the audit requirements of the HFCAA for two consecutive years, our securities may be prohibited from trading on a national securities exchange or over-the-counter market in the United States, and this could result in our ADSs being delisted from Nasdaq.
Although we are not currently at risk of delisting pursuant to the HFCAA, if the PCAOB were to issue a new determination regarding limitations on its ability to inspect or investigate our independent auditor and we were to fail to meet the audit requirements of the HFCAA for two consecutive years, our securities may be prohibited from trading on a national securities exchange or over-the-counter market in the United States, and this could result in our ADSs being delisted from the Nasdaq Global Market (“Nasdaq”).
If our two manufacturing facilities are unable to meet our intended production capacity in a timely fashion, we may have to engage a CMO for the production of clinical supplies of our products or product candidates.
If our two manufacturing facilities are unable to meet our intended production capacity in a timely fashion, we may have to engage a CMO(s) for the production of clinical supplies of our products or product candidates.
The presence of material weaknesses in internal control over financial reporting could result in financial statement errors which, in turn, could lead to errors in our financial reports and/ -124- or delays in our financial reporting, which could require us to restate our operating results.
The presence of material weaknesses in internal control over financial reporting could result in financial statement errors which, in turn, could lead to errors in our financial reports and/or delays in our financial reporting, which could require us to restate our operating results.
As a result of these differences, the trading prices of our ordinary shares on the Hong Kong Stock Exchange and our ADSs on Nasdaq may not be the same, even allowing for currency differences.
As a result of these differences, the trading prices of our ordinary shares on the Hong Kong Stock Exchange and our ADSs on Nasdaq may not be the same, even after allowing for currency differences.
We may experience delays in completing our pre-clinical or clinical trials, and numerous unforeseen events could arise during, or as a result of, future clinical trials, which could delay or prevent us from receiving regulatory approval, including: • regulators or institutional review boards, or IRBs, or ethics committees may not authorize us or our investigators to commence or conduct a clinical trial at a prospective trial site; • we may experience delays in reaching, or may fail to reach, agreement on acceptable terms with prospective trial sites and prospective CROs who conduct clinical trials on our behalf, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites; • clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us or them, to conduct additional clinical trials or we may decide to abandon product development programs; • the number of patients required for clinical trials of our products and product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials or fail to return for post-treatment follow-up at a higher rate than we anticipate; • third-party contractors used in our clinical trials may fail to comply with regulatory requirements or meet their contractual obligations in a timely manner, or at all, or may deviate from the clinical trial protocol or drop out of the trial, which may require that we add new clinical trial sites or investigators; • the ability to conduct a companion diagnostic test to identify patients who are likely to benefit from our products and product candidates; • we may elect to, or regulators, IRBs or ethics committees may require that we or our investigators, suspend or terminate clinical research for various reasons, including non-compliance with regulatory requirements or a finding that participants are being exposed to unacceptable health risks; • the cost of clinical trials of our products and product candidates may be greater than we anticipate; • the supply or quality of our products and product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate; and • our products and product candidates may have undesirable side effects or unexpected characteristics, causing us or our investigators, regulators, IRBs, or ethics committees to suspend or terminate the trials, or reports may arise from pre-clinical or clinical testing of other cancer therapies that raise safety or efficacy concerns about our products and product candidates.
We may experience delays in completing our pre-clinical or clinical trials, and numerous unforeseen events could arise during, or as a result of, such clinical trials, which could delay or prevent us from receiving regulatory approval, including: • regulators or institutional review boards, or IRBs, or ethics committees may not authorize us or our investigators to commence or conduct a clinical trial at a prospective trial site; • we may experience delays in reaching, or may fail to reach, agreement on acceptable terms with prospective trial sites and prospective CROs who conduct clinical trials on our behalf, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites; • clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or we may decide to abandon product development programs; • the number of patients required for clinical trials of our products and product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate, or participants may drop out of these clinical trials or fail to return for post-treatment follow-up at a higher rate than we anticipate; • third-party contractors used in our clinical trials may fail to comply with regulatory requirements or meet their contractual obligations in a timely manner, or at all, or may deviate from the clinical trial protocol or drop out of the trial, which may require that we add new clinical trial sites or investigators; • we may not be able to conduct a companion diagnostic test to identify patients who are likely to benefit from our products and product candidates in a timely manner or at all; • we may elect to, or regulators, IRBs or ethics committees may require that we or our investigators, suspend or terminate clinical research for various reasons, including non-compliance with regulatory requirements or a finding that participants are being exposed to unacceptable health risks; • the cost of clinical trials may be greater than we anticipate; • the supply or quality of our product candidates or other materials necessary to conduct clinical trials may be insufficient or inadequate; and • our products and product candidates may have undesirable side effects or unexpected characteristics, causing us or our investigators, regulators, IRBs, or ethics committees to suspend or terminate the trials, or reports may arise from pre-clinical or clinical testing of other therapies that raise safety or efficacy concerns about our products and product candidates.
Delisting of our ADSs would force holders of our ADSs to sell their ADSs or convert them into our ordinary shares. The foregoing could adversely affect the market price of our ordinary shares and/or ADSs and our ability to raise capital.
Delisting of our ADSs would force holders of our ADSs to sell their ADSs or convert them into our ordinary shares. The foregoing could adversely affect the market price of our securities and our ability to raise capital.
Many of the factors that cause a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.
Many of the factors that could cause a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.
The Hong Kong Stock Exchange and Nasdaq have different trading hours, trading characteristics (including trading volume and liquidity), trading and listing rules, and investor bases (including different levels of retail and institutional participation).
Nasdaq and the Hong Kong Stock Exchange have different listing rules and requirements, trading hours, trading characteristics (including trading volume and liquidity), trading rules, and investor bases (including different levels of retail and institutional participation).
The capital and credit markets are experiencing, and have in the past experienced, extreme volatility and disruption, which leads to uncertainty and liquidity issues for both borrowers and investors.
The capital and credit markets are experiencing, and have in the past experienced, extreme volatility and disruption, which leads to uncertainty and liquidity issues for borrowers and investors.
Although we regularly review our credit exposure to specific distributors and customers that we believe may present credit concerns, default risks may arise from events or circumstances that are difficult to detect or foresee. -115- Also, the carrying amounts of cash and cash equivalents, restricted cash, and short-term investments represent the maximum amount of loss due to credit risk.
Although we regularly review our credit exposure to specific distributors and customers that we believe may present credit concerns, default risks may arise from events or circumstances that are difficult to detect or foresee. The carrying amounts of cash and cash equivalents, restricted cash, and short-term investments represent the maximum amount of loss due to credit risk.
Additionally, any additional regulatory approvals that we receive for our products or product candidates may also be subject to limitations on the approved indications for which the products may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing studies, including Phase IV studies for the surveillance and monitoring the safety and efficacy of the products.
Additionally, any regulatory approvals that we receive for our products or product candidates may be subject to limitations on the approved indications for which the products may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing studies, including Phase IV studies for the surveillance and monitoring the safety and efficacy of the products.
Our commercial success depends significantly on our ability to develop, manufacture, market, and sell our products and product candidates and use our proprietary technologies without infringing, misappropriating or otherwise violating the patents and other proprietary rights of third parties. The biotechnology and pharmaceutical industries are characterized by extensive litigation regarding patents and other intellectual property rights.
Our success depends significantly on our ability to develop, manufacture, market, and sell our commercial products and use our proprietary technologies without infringing, misappropriating, or otherwise violating the patents and other proprietary rights of third parties. The biotechnology and pharmaceutical industries are characterized by extensive litigation regarding patents and other intellectual property rights.
In addition, any administrative and court proceedings in mainland China may be protracted, resulting in substantial costs and diversion of resources and management attention.
In addition, any administrative -27- and court proceedings in mainland China may be protracted, resulting in substantial costs and diversion of resources and management attention.
We expect that healthcare reform measures may result in more rigorous coverage criteria and in additional downward pressure on the reimbursement available for any approved drug which could adversely affect pricing for such a drug. Any reduction in reimbursement from government programs may result in a similar reduction in payments from private payors.
We expect that healthcare reform measures may result in more rigorous coverage criteria and in additional downward pressure on the reimbursement available for any approved product which could adversely affect pricing for such product. Any reduction in reimbursement from government programs may result in a similar reduction in payments from private payors.
We may not be able to initiate or continue clinical trials for our products and product candidates if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the NMPA, FDA, or similar regulatory authorities.
We may not be able to initiate or continue clinical trials for our products and product candidates if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the NMPA, FDA, or applicable regulatory authorities.
Discovery of safety issues with our products could create issues of product liability and create issues of additional regulatory scrutiny and requirements for additional labeling or safety monitoring, withdrawal of products from the market, and the imposition of fines or criminal penalties. Adverse safety events may also damage physician, patient and/or investor confidence in our products and our reputation.
Discovery of safety issues with our products could create issues with respect to product liability, additional regulatory scrutiny and requirements for additional labeling or safety monitoring, withdrawal of products from the market, and the imposition of fines or criminal penalties. Adverse safety events may also damage physician, patient, and/or investor confidence in our products and our reputation.
In addition, the time differences between Hong Kong and New York and unforeseen market circumstances or other factors may delay the deposit of ordinary shares in exchange of ADSs or the withdrawal of ordinary shares underlying the ADSs. Investors will be prevented from settling or effecting the sale of their securities during such periods of delay.
In addition, the time differences between Hong Kong and New York and unforeseen market circumstances or other factors may delay the deposit of ordinary shares in exchange of ADSs or the withdrawal of ordinary shares underlying the ADSs. Investors will be prevented from settling or effectuating the sale of their securities during such periods of delay.
If any of these events were to occur or we otherwise fail to comply with applicable regulations, -134- we could incur liability, face overly restrictive regulatory actions, or incur other harm to our business, including damage to the reputation of our products or Company. Item 1B. Unresolved Staff Comments Not applicable.
If any of these events were to occur or we otherwise fail to comply with applicable regulations, we could incur liability, face restrictive regulatory actions, or incur other harm to our business, including damage to the reputation of our products or Company. Item 1B. Unresolved Staff Comments Not applicable.
Even after a product or product candidate receives regulatory approval, if we, our partners or others identify undesirable side effects caused by such product candidates (or any other similar product candidates) after such approval, a number of potentially significant negative consequences could result, including: • our revenue may be negatively impacted; • the NMPA, FDA or other comparable regulatory authorities may withdraw or limit their approval of such products or product candidates; • the NMPA, FDA or other comparable regulatory authorities may require the addition of labeling statements, such as a “boxed” warning or a contraindication; -102- • we may be required to create a medication guide outlining the risks of such side effects for distribution to patients; • we may be required to change the way such products or product candidates are distributed or administered, conduct additional clinical trials or change the labeling of our products or product candidates; • the NMPA, FDA or other comparable regulatory authorities may require a Risk Evaluation and Mitigation Strategy, or REMS (or analogous requirement), plan to mitigate risks, which could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools; • we may be subject to regulatory investigations and government enforcement actions; • we may decide to remove such products or product candidates from the marketplace; • we could be sued and held liable for injury caused to individuals exposed to or taking our products or product candidates; and • our reputation may suffer.
Even after a product or product candidate receives regulatory approval, if we, our partners, or others identify undesirable side effects caused by such product candidates (or any other similar product candidates) after such approval, a number of significant negative consequences could result, including: • our revenue may be negatively impacted; • our regulatory authorities may withdraw or limit their approval of such products or product candidates; • our regulatory authorities may require the addition of labeling statements, such as a “boxed” warning or a contraindication; -48- • we may be required to create a medication guide outlining the risks of such side effects for distribution to patients; • we may be required to change the way such products or product candidates are distributed or administered, conduct additional clinical trials or change the labeling of our products or product candidates; • our regulatory authorities may require a Risk Evaluation and Mitigation Strategy, or REMS (or analogous requirement), plan to mitigate risks, which could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries, and other risk minimization tools; • we may be subject to regulatory investigations and government enforcement actions; • we may decide to remove such products or product candidates from the marketplace; • we could be sued and held liable for injury caused to individuals exposed to or taking our products or product candidates; and • our reputation may suffer.
Although we believe our cash and cash equivalents and short-term investments as of December 31, 2022 will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months, we could use our capital resources sooner than we currently expect.
Although we believe our cash and cash equivalents and short-term investments as of December 31, 2023 will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months, we could use our capital resources sooner than we currently expect.
As a result, we are unable to predict if or when we will successfully develop or commercialize any product candidates under such programs. Our internal discovery programs are at an early-stage of development and will require significant investment and regulatory approvals prior to commercialization.
As a result, we are unable to predict if or when we will successfully develop or commercialize any product candidates under such programs. Our internal discovery programs are at an early-stage of development and will require significant investment of time and resources and regulatory approvals prior to commercialization.
Consequently, the absence of currently implemented laws and regulations on patent term extension and adjustment and data exclusivity or the cancelation of the previous five-year administrative exclusivity for domestically manufactured new drugs could result in much weaker protection for us against generic competition in mainland China.
Consequently, the absence of currently implemented laws and regulations on patent term extension and adjustment and data exclusivity or the cancellation of the previous five-year administrative exclusivity for domestically manufactured new drugs could result in much weaker protection for us against generic competition in mainland China.
While we maintain liability insurance for certain clinical trials (which covers the patient human clinical trial liabilities including, among others, bodily injury), product liability insurance to cover our product liability claims and general liability and D&O insurance to cover other commercial liability claims, these insurances may not fully cover our potential liabilities.
While we maintain liability insurance for certain clinical trials (which covers the patient human clinical trial liabilities including, among others, bodily injury), product liability insurance to cover our product liability claims and general liability and D&O insurance to cover other commercial liability claims, these insurance policies may not fully cover our potential liabilities.
Expiration of, or changes to, these incentives or policies would have an adverse effect on our results of operations. Local governments within mainland China have granted certain financial incentives from time to time to our Chinese subsidiaries as part of their efforts to encourage the development of local businesses.
Expiration of, or changes to, these incentives or policies would have an adverse effect on our results of operations. Local governments within mainland China have granted certain financial incentives to our Chinese subsidiaries as part of their efforts to encourage the development of local businesses.
In addition, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our ordinary shares.
In addition, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our securities.
Furthermore, the depositary for the ADSs is entitled to charge holders fees for various services including for the issuance of ADSs upon deposit of ordinary shares, cancelation of ADSs, distributions of cash dividends or other cash distributions, distributions of ADSs pursuant to share dividends or other free share distributions, distributions of securities other than ADSs and annual service fees.
Furthermore, the depositary for the ADSs is entitled to charge holders fees for various services including for the issuance of ADSs upon deposit of ordinary shares, cancellation of ADSs, distributions of cash dividends or other cash distributions, distributions of ADSs pursuant to share dividends or other free share distributions, distributions of securities other than ADSs, and annual service fees.
Such reliance on third-party manufacturers entails risks to which we would not be subject to if we manufactured product candidates or products ourselves, including reliance on the third party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing or supply agreement by the third party because of factors beyond our control (including a failure to synthesize and manufacture our product candidates or any products we may eventually commercialize in accordance with our specifications) and the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to us.
Such reliance on third-party manufacturers entails risks to which we would not be subject to if we manufactured product candidates or products ourselves, including reliance on the third party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing or supply agreement by the third party because of factors beyond our control (including a failure to synthesize and manufacture our products or product candidates in accordance with our specifications), and the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to us.
If safety or efficacy issues arise with the therapeutics that we seek to combine with our products and product candidates in the future, we may experience significant regulatory delays and we may be required to redesign or terminate the applicable clinical trials.
If safety or efficacy issues arise with the therapeutics that we seek to combine with our products and product candidates in the future, we may experience significant regulatory delays, and we may be required to redesign or terminate the related clinical trials.
If any of the foregoing occurs with respect to our products, it may result in, among other things: • restrictions on the marketing or manufacturing of the product, withdrawal of the product or drug from the market, or voluntary or mandatory product recalls; • fines, warning letters or holds on clinical trials; • refusal by the NMPA, FDA or comparable regulatory authority to approve pending applications or supplements to approved applications filed by us, or suspension or revocation of product license approvals; • drug seizure, detention, or refusal to permit the import or export of the product; and • injunctions or the imposition of civil, administrative, or criminal penalties.
If any of the foregoing occurs with respect to our products, it may result in, among other things: • restrictions on the marketing or manufacturing of the product, withdrawal of the product or drug from the market, or voluntary or mandatory product recalls; • fines, warning letters or holds on clinical trials; • refusal by the applicable regulatory authority to approve pending applications or supplements to approved applications filed by us, or suspension or revocation of product license approvals; • drug seizure, detention, or refusal to permit the import or export of the product; and • injunctions or the imposition of civil, administrative, or criminal penalties.
In addition, if manufacturing or other issues result in a supply shortage of any combination therapeutic, we may not be able to successfully commercialize our products or product candidates on our current timeline or at all.
In addition, if manufacturing or other issues result in a supply shortage of any combination therapeutic, we may not be able to successfully commercialize our products or product candidates on our anticipated timeline or at all.
Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities.
Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with applicable protocols and legal, regulatory, and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeThe lease for this facility expires in 2024. We believe our current facilities are sufficient to meet our near-term needs. In 2019, we acquired land use rights of 50,851 square meters in Suzhou for the purpose of constructing and operating a research center and biologics manufacturing facility in Suzhou. The terms of the land use rights are 30 years.
Biggest changeWe also lease two manufacturing facilities, including a small molecule and a large molecule facility, in Suzhou to support production of certain of our products and product candidates. In addition, we are constructing a new office and research building in Suzhou. We believe these facilities are sufficient to meet our near-term needs.
Removed
Item 2. Properties We lease all of our facilities. We have 3,632 square meters of administrative and laboratory offices at our headquarters in Shanghai, pursuant to a lease which expires in 2025.
Added
Item 2. Properties We lease our principal executive offices in Shanghai and Cambridge, Massachusetts as well as various administrative offices in Shanghai, Beijing, Guangzhou, Hong Kong, and San Francisco, California and research and development facilities in Shanghai and a small site in San Diego, California.
Removed
We have additional facilities in Shanghai which include a 2,475 square meter commercial office, a 2,569 square meter office, and a 2,001 square meter office, pursuant to leases which expire in 2025, 2024, and 2024, respectively.
Removed
Additionally, we have 2,592 square meter office in Beijing, 774 square meters in Guangzhou, and 445 square meters in Hong Kong, pursuant to leases which expire in 2025, 2024, and 2025, respectively. We also have a 6,766 square foot of corporate office space for our principal executive office in Cambridge, Massachusetts, pursuant to a lease which expires in 2028.
Removed
In early 2017, we built a 4,223 square meter small molecule drug product facility in Suzhou, China, capable of supporting clinical and commercialized production. The lease for this facility expires in 2026. In 2018, we built a 4,223 square meter large molecule facility in Suzhou, China, using Cytiva FlexFactory platform technology capable of supporting clinical production of our drug candidates.
Removed
As of December 31, 2022, we have spent $23.2 million on the construction of an office and research center building on this land. For more information on our purchase commitments related to property, see Part II—Item 8. Financial Statements and Supplementary Data—Note 20. Commitments and Contingencies.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 3. Legal Proceedings We may be, from time to time, subject to claims and suits arising in the ordinary course of business.
Biggest changeItem 3. Legal Proceedings We are, from time to time, subject to various claims, lawsuits, and other legal and administrative proceedings arising in the ordinary course of business. Some of these claims, lawsuits, and other proceedings may involve highly complex issues that are subject to substantial uncertainties, and could result in damages, fines, penalties, non-monetary sanctions, or relief.
Removed
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 results of operations.
Added
However, we do not consider any such claims, lawsuits, or proceedings that are currently pending, individually or in -77- the aggregate, to be material to our business or likely to result in a material adverse effect on our future operating results, financial condition or cash flows. Item 4. Mine Safety Disclosures Not applicable. -78- PART II
Removed
We are not currently a party to, nor is our property the subject of, any actual or threatened material legal or administrative proceedings. Item 4. Mine Safety Disclosures Not applicable. -135- PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeIssuer Purchases of Equity Securities The following table presents acquisitions of the Company’s ADSs to satisfy tax withholding obligations due in connection with exercise of option shares or vesting of restricted shares in 2022: Period Total Number of Shares (or Units) Purchased Average Price Paid per Share (or Unit) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs March 1 – 31, 2022 1,515 $ 44.81 — — April 1 – 30, 2022 120,078 $ 43.94 — — May 1 – 31, 2022 42,156 $ 35.31 — — June 1 – 30, 2022 489 $ 34.68 — — July 1 – 31, 2022 3,959 $ 38.20 — — August 1 – 31, 2022 2,722 $ 42.92 — — September 1 – 30, 2022 1,266 $ 46.29 — — October 1 – 31, 2022 865 $ 34.20 — — November 1 – 30, 2022 5,229 $ 28.92 — — December 1 – 31, 2022 7,056 $ 31.00 — — Total 185,335 $ 40.88 — — -137- In 2022, 185,335 ADSs were withheld by the Company from employees and directors to satisfy certain tax withholding obligations due in connection with the vesting of restricted share awards and the exercise of option shares under the Company’s share-based compensation programs.
Biggest changeIssuer Purchases of Equity Securities The following table presents acquisitions of the Company’s ADSs from employees by the Company to satisfy tax withholding obligations due in connection with exercise of option shares or vesting of restricted shares during the fourth quarter of 2023: Period Total Number of Shares (or Units) Purchased Average Price Paid per Share (or Unit) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs October 1 – 31, 2023 1,907 $ 24.00 — — November 1 – 30, 2023 — — — — December 1 – 31, 2023 — — — — Total 1,907 Item 6. [Reserved] Not applicable. -80-
Performance Comparison Graph This graph is not “soliciting material,” is not deemed “filed” with the SEC, and is not to be incorporated by reference into any of our filings under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
Performance Graph This graph is not “soliciting material,” is not deemed “filed” with the SEC, and is not to be incorporated by reference into any of our filings under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
Dividend Policy We have never declared or paid dividends on our ordinary shares. We currently expect to retain all future earnings for use in the operation and expansion of our business and do not have any present plan to pay any dividends.
We currently expect to retain all future earnings for use in the operation and expansion of our business and do not have any present plan to pay any dividends.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our ADSs have been listed on the Nasdaq Global Market since September 20, 2017 under the symbol “ZLAB.” Our ordinary shares have been publicly traded on the Hong Kong Stock Exchange since September 28, 2020 under the stock code “9688.” Shareholders As of February 24, 2023, we had approximately 19 holders of record of our ordinary shares.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our ADSs are traded on the Nasdaq Global Market under the symbol “ZLAB.” Our ordinary shares are publicly traded on the Hong Kong Stock Exchange under the stock code “9688.” Shareholders As of February 21, 2024, we had approximately 11 holders of record of our ordinary shares.
Equity Compensation Plan Information Our equity compensation plan information is incorporated by reference in the information in Part III—Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Authorized for Issuance under Equity Compensation Plans Our equity compensation plan information is incorporated by reference in the information in Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .
The following graph compares the cumulative total shareholder return of our ADSs with the cumulative total return of the NASDAQ Composite Index (U.S.) and the NASDAQ Biotechnology Index for the past five years. The performance graph below assumes an investment of $100 at market close on December 31, 2017.
The following graph compares the yearly percentage change in the cumulative total shareholder return of our ADSs with the cumulative total return of the NASDAQ Composite Index (U.S.) and the NASDAQ Biotechnology Index for the past five years.
Citibank, N.A. is the depositary for our ADSs. This disclosure does not include beneficial owners whose ordinary shares or ADSs are held by nominees in street name. Because many ordinary shares and ADSs are held by broker nominees, we are unable to estimate the total number of beneficial holders represented by these record holders.
Citibank, N.A. is the depositary for our ADSs. This disclosure does not include beneficial owners whose ordinary shares or ADSs are held by nominees in street name. Dividends We have incurred losses since inception and never declared or paid dividends on our ordinary shares.
The shareholder return shown on the graph below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future shareholder returns. -136- 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 Zai Lab Limited 100.00 109.37 195.90 637.49 296.04 144.61 Nasdaq Composite Index 100.00 96.12 129.97 186.69 226.63 151.61 Nasdaq Biotechnology Index 100.00 90.68 112.81 141.78 140.88 125.52 Recent Sales of Unregistered Securities None.
The graph assumes an investment of $100 at market close on December 31, 2018 and reinvestment of any dividends. -79- The shareholder return shown on the graph below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future shareholder returns. 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 12/31/23 Zai Lab Limited 100.00 179.11 528.86 270.67 132.21 117.70 Nasdaq Composite Index 100.00 135.23 194.24 235.78 157.74 226.24 Nasdaq Biotechnology Index 100.00 124.41 156.36 155.37 138.42 143.60 Recent Sales of Unregistered Securities None.
Removed
The declaration and payment of any dividends in the future will be determined by our Board of Directors in its discretion, and will depend on a number of factors, including our earnings, capital requirements, overall financial condition, and contractual restrictions.
Removed
Pursuant to applicable SEC rules, all values assume reinvestment of the full amount of any dividends, although no dividends have been declared to date.
Removed
The value of the ADSs withheld was based on the closing price of our ADSs on the applicable settlement dates. These ADSs were not acquired as part of any publicly announced plan or program to purchase ADSs.
Removed
Taxation The following is a discussion of the material Cayman Islands, People’s Republic of China and U.S. federal income tax considerations that may be relevant to an investment decision by a potential investor with respect to our ADSs or ordinary shares.
Removed
This summary should not be considered a comprehensive description of all the tax considerations that may be relevant to the decisions to acquire ADSs or ordinary shares.
Removed
Material Cayman Islands Taxation The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty.
Removed
There are no other taxes likely to be material to us or our shareholders or ADS holders levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands.
Removed
The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by the Company. There are no exchange control regulations or currency restrictions in the Cayman Islands. Material People’s Republic of China Taxation Zai Lab Limited is a holding company incorporated in the Cayman Islands.
Removed
Under the EIT Law and its implementation rules, an enterprise established outside of mainland China with a “de facto management body” within mainland China is considered a “resident enterprise,” and will be subject to the EIT on its global income at the rate of 25%.
Removed
The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise.
Removed
In 2009, the State Administration of Taxation issued SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled enterprise that is incorporated offshore is located in mainland China.
Removed
Although this circular only applies to offshore enterprises controlled by Chinese enterprises or Chinese enterprise groups, not those controlled by Chinese individuals or foreigners, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises.
Removed
According to SAT Circular 82, all offshore enterprises controlled by a Chinese enterprise or a Chinese enterprise will be regarded as a Chinese tax resident by virtue of having its “de facto management body” in mainland China only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in mainland China; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in mainland China; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in mainland China; and (iv) at least 50% of voting board members or senior executives habitually reside in mainland China.
Removed
We believe that none of Zai Lab Limited and its subsidiaries outside of mainland China is a Chinese resident enterprise for Chinese tax purposes. Zai Lab Limited is not controlled by a Chinese enterprise or Chinese enterprise group, and we do not believe that Zai Lab Limited meets all of the conditions above.
Removed
Zai Lab Limited is a company incorporated outside mainland China. As a holding company, some of its key assets are located, and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained, outside mainland China.
Removed
For the same reasons, we believe our other subsidiaries outside of mainland China are also non-Chinese resident enterprises for Chinese tax purpose.
Removed
However, the tax resident status of an enterprise is subject to determination by the Chinese tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” -138- If Chinese tax authorities determine that Zai Lab Limited is a Chinese resident enterprise for EIT purposes, we may be required to withhold tax at a rate of 10% on dividends we pay to our shareholders, including holders of our ADSs that are non-resident enterprises.
Removed
In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to a 10% Chinese withholding tax on gains realized on the sale or other disposition of ADS or ordinary shares, if such income is treated as sourced from within mainland China.
Removed
Furthermore, gains derived by our non-Chinese individual shareholders from the sale of our shares and ADSs may be subject to a 20% Chinese withholding tax.
Removed
It is unclear whether our non-Chinese individual shareholders (including our ADS holders) would be subject to any Chinese tax (including withholding tax) on dividends received by such non-Chinese individual shareholders in the event we are determined to be a Chinese resident enterprise.
Removed
If any Chinese tax were to apply to dividends realized by non-Chinese individuals, it will generally apply at a rate of 20%. The Chinese tax liability may be reduced under applicable tax treaties.
Removed
However, it is unclear whether non-Chinese shareholders of Zai Lab Limited would be able to claim the benefits of any tax treaty between their country of tax residence and mainland China in the event that Zai Lab Limited is treated as a Chinese resident enterprise. See Part I—Item 1A.
Removed
Risk Factors—Risks Related to Doing Business in China—If we are classified as a Chinese resident enterprise for Chinese income tax purposes, such classification could result in unfavorable tax consequences to us and our non-Chinese shareholders or ADS holders.
Removed
Pursuant to the EIT Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment in mainland China or has set up an organization or establishment but the income derived has no actual connection with such organization or establishment, it will be subject to a withholding tax on its Chinese-sourced income at a rate of 10%.
Removed
Pursuant to the Arrangement between mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the tax rate in respect to dividends paid by a Chinese enterprise to a Hong Kong enterprise is reduced to 5% from a standard rate of 10% if the Hong Kong enterprise is deemed the beneficial owner of any dividend paid by a Chinese enterprise by Chinese tax authorities and directly holds at least 25% of the Chinese enterprise.
Removed
Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced tax rate: (i) it must directly own the required percentage of equity interests and voting rights in the Chinese resident enterprise; and (ii) it must have directly owned such percentage in the Chinese resident enterprise throughout the 12 months prior to receiving the dividends.
Removed
Additionally, mainland China has started an anti-tax treaty shopping practice since the issuance of Circular 601 in 2009. On February 3, 2018, the State Administration of Taxation released the Announcement on Issues concerning the “Beneficial Owner” in Tax Treaties, or PN9, which provides guidelines in determining a beneficial owner qualification under dividends, interest, and royalty articles of tax treaties.
Removed
Chinese tax authorities in general often scrutinize fact patterns case-by-case in determining foreign shareholders’ qualifications for a reduced treaty withholding tax rate, especially against foreign companies that are perceived as being conduits or lacking commercial substance.
Removed
Furthermore, according to the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties, which became effective in January 2020, where non-resident enterprises judge by themselves that they meet the conditions for entitlement to reduced tax rate according to tax treaties, they may enjoy such entitlement after reporting required information to competent tax authorities provided that they shall collect and retain relevant documents for future reference and inspections.
Removed
Accordingly, our subsidiary Zai Lab (Hong Kong) Limited may be able to enjoy the 5% tax rate for the dividends it receives from its subsidiaries incorporated in mainland China if they satisfy the conditions prescribed under SAT Circular 81, PN9 and other relevant tax rules and regulations and complete the necessary government formalities.
Removed
However, according to SAT Circular 81, if the relevant tax authorities determine our transactions or arrangements are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable tax rate on dividends in the future.
Removed
If our Cayman Islands holding company, Zai Lab Limited, is not deemed to be a Chinese resident enterprise, holders of our ADSs and ordinary shares who are non-Chinese residents will not be subject to Chinese income tax on dividends distributed by us or gains realized from the sale or other disposition of our ADSs or ordinary shares.
Removed
Material United States Federal Income Tax Consideration The following discussion, subject to the limitations set forth below, describes the material U.S. federal income tax consequences for a U.S. Holder (as defined below) of the acquisition, ownership and disposition of ADSs or ordinary shares.
Removed
It is not a comprehensive description of all tax considerations that may be relevant to a particular person’s decision to acquire our ADSs or ordinary shares. This discussion is limited to U.S. Holders who hold such ADSs or ordinary shares as capital assets (generally, property held for investment). This discussion is based on the Internal Revenue Code, U.S.
Removed
Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, and the income tax treaty between mainland China and the United States (the “U.S.- China Tax Treaty”), each as available and in effect on the -139- date hereof, all of which are subject to change or differing interpretations, possibly with retroactive effect, which could affect the tax consequences described herein.
Removed
In addition, this summary is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms. For purposes of this summary, a “U.S.
Removed
Holder” is a beneficial owner of an ADS or ordinary share that is for U.S. federal income tax purposes: • a citizen or individual resident of the United States; • a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) organized in or under the laws of the United States or any state thereof, or the District of Columbia; • an estate the income of which is subject to U.S. federal income taxation regardless of its source; or • a trust if (i) it has a valid election in effect to be treated as a U.S. person for U.S. federal income tax purposes or (ii) a U.S. court can exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions.
Removed
Except as explicitly set forth below, this summary does not address all aspects of U.S. federal income taxation that may be applicable to U.S.
Removed
Holders subject to special rules, including: • banks or other financial institutions; • insurance companies; • real estate investment trusts; • regulated investment companies; • grantor trusts; • tax-exempt organizations (including private foundations); • persons holding ADSs or ordinary shares through a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes) or S corporation; • dealers or traders in securities, commodities or currencies (including those who use a mark-to-market method of tax accounting); • persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar; • certain former citizens and former long-term residents of the United States; • persons who acquired our ADSs or ordinary shares pursuant to the exercise of any employee stock option or otherwise as compensation; • persons holding ADSs or ordinary shares as part of a position in a straddle or as part of a hedging, wash sale, constructive sale, conversion or integrated transaction for U.S. federal income tax purposes; or • direct, indirect or constructive owners of 10% or more of our total combined voting power or value.
Removed
In addition, this summary does not address the 3.8% Medicare contribution tax imposed on certain net investment income, the U.S. federal estate and gift tax or the alternative minimum tax consequences of the acquisition, ownership, and disposition of ADSs or ordinary shares. We have not received nor do we expect to seek a ruling from the U.S.
Removed
Internal Revenue Service (“IRS”) regarding any matter discussed herein. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of those set forth below.
Removed
Further, the Biden Administration has proposed a significant number of changes to U.S. tax laws, including an increase in the maximum tax rate applicable to U.S. corporations and certain individuals. The likelihood of any such legislation being enacted is uncertain but could adversely impact us.
Removed
Each prospective investor should consult its own tax advisors with respect to the U.S. federal, state, local and non-U.S. tax consequences of acquiring, owning and disposing of ADSs or ordinary shares.
Removed
If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds ADSs or ordinary shares, the tax treatment of the partnership and a partner in such partnership generally will depend on the status of the partner and the activities of the partnership.
Removed
Such partner or partnership should consult its own tax advisors as to the U.S. federal income tax consequences of acquiring, owning and disposing of ADSs or ordinary shares. -140- PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE PARTICULAR TAX CONSEQUENCES APPLICABLE TO THEIR SITUATIONS AS WELL AS THE APPLICATION OF ANY U.S. FEDERAL, STATE, LOCAL, NON-U.S.
Removed
OR OTHER TAX LAWS, INCLUDING GIFT AND ESTATE TAX LAWS. ADSs A U.S. Holder of ADSs will generally be treated, for U.S. federal income tax purposes, as the owner of the underlying ordinary shares that such ADSs represent. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying shares represented by those ADSs.
Removed
The U.S. Treasury has expressed concern that parties to whom ADSs are released before shares are delivered to the depositary or intermediaries in the chain of ownership between holders and the issuer of the security underlying the ADSs, may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs.
Removed
These actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate U.S. Holders. Accordingly, the creditability of non-U.S. withholding taxes (if any), and the availability of the reduced tax rate for dividends received by certain non-corporate U.S.
Removed
Holders, each described below, could be affected by actions taken by such parties or intermediaries. Taxation of Dividends We do not currently anticipate paying any distributions on our ADSs or ordinary shares in the foreseeable future.
Removed
However, subject to the discussion below in “—Passive Foreign Investment Company Considerations,” to the extent there are any distributions made with respect to our ADSs or ordinary shares, the gross amount of any distribution on the ADSs or ordinary shares (including withheld taxes, if any) made out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) will generally be taxable to a U.S.
Removed
Holder as ordinary dividend income on the date such distribution is actually or constructively received. Distributions in excess of our current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of the U.S. Holder’s adjusted tax basis in the ADSs or ordinary shares and thereafter as capital gain.
Removed
However, because we do not maintain calculations of our earnings and profits in accordance with U.S. federal income tax accounting principles, U.S. Holders should expect to treat distributions paid with respect to the ADSs or ordinary shares as dividends. Dividends paid to corporate U.S.
Removed
Holders generally will not qualify for the dividends received deduction that may otherwise be allowed under the Code. This discussion assumes that distributions on the ADSs or ordinary shares, if any, will be paid in U.S. dollars. Dividends paid to a non-corporate U.S.
Removed
Holder by a “qualified foreign corporation” may be subject to reduced rates of U.S. federal income taxation if certain holding period and other requirements are met.
Removed
A qualified foreign corporation generally includes a foreign corporation (other than one that is a PFIC in the taxable year or the preceding taxable year in which such dividends are paid) if (i) its ordinary shares (or ADSs backed by ordinary shares) are readily tradable on an established securities market in the United States or (ii) it is eligible for benefits under a comprehensive U.S. income tax treaty that includes an exchange of information program and which the U.S.
Removed
Treasury Department has determined is satisfactory for these purposes. Our ADSs are listed on the Nasdaq Global Market, which is an established securities market in the United States. IRS guidance indicates that the ADSs will be readily tradable for these purposes. The United States does not have a comprehensive income tax treaty with the Cayman Islands.
Removed
However, in the event that we were deemed to be a Chinese resident enterprise under the EIT Law (see “—Material People’s Republic of China Taxation” above), although no assurance can be given, we might be considered eligible for the benefits of the U.S.-China Tax Treaty, and if we were eligible for such benefits, dividends paid on the ADSs or ordinary shares, regardless of whether the ADSs or ordinary shares are readily tradable on an established securities market in the United States, would be eligible for the reduced rates of U.S. federal income taxation, subject to applicable limitations.
Removed
U.S. Holders should consult their own tax advisors regarding the availability of the reduced tax rates on dividends in light of their particular circumstances. Non-corporate U.S.
Removed
Holders will not be eligible for reduced rates of U.S. federal income taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year.
Removed
In the event that we were deemed to be a Chinese resident enterprise under the EIT Law (see “—Material People’s Republic of China Taxation” above), holders of ADSs or ordinary shares might be subject to Chinese withholding taxes on dividends paid with respect to ADSs or ordinary shares.
Removed
In that case, subject to certain conditions and limitations, such -141- Chinese withholding tax may be treated as a foreign tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability under the U.S. foreign tax credit rules.
Removed
For purposes of calculating the U.S. foreign tax credit, dividends paid on the ADSs or ordinary shares will be treated as income from sources outside the United States and will generally constitute passive category income. If a U.S. Holder is eligible for U.S.-China Tax Treaty benefits, any China taxes on dividends will not be creditable against such U.S.
Removed
Holder’s U.S. federal income tax liability to the extent such tax is withheld at a rate exceeding the applicable U.S.-China Tax Treaty rate. An eligible U.S.
Removed
Holder who does not elect to claim a foreign tax credit for Chinese tax withheld may instead be eligible to claim a deduction, for U.S. federal income tax purposes, in respect of such withholding but only for the year in which such U.S. Holder elects to do so for all creditable foreign income taxes.
Removed
The U.S. foreign tax credit rules are complex. U.S. Holders should consult their own tax advisors regarding the foreign tax credit or deduction rules in light of their particular circumstances.
Removed
Taxation of Capital Gains Subject to the discussion below in “—Passive Foreign Investment Company Considerations” below, upon the sale, exchange, or other taxable disposition of ADSs or ordinary shares, a U.S.
Removed
Holder generally will recognize gain or loss on the taxable sale or exchange in an amount equal to the difference between the amount realized on such sale or exchange and the U.S. Holder’s adjusted tax basis in the ADSs or ordinary shares. The initial tax basis of ADSs or ordinary shares to a U.S. Holder will generally be the U.S.
Removed
Holder’s U.S. dollar purchase price for the ADS or ordinary shares. Subject to the discussion below in “—Passive Foreign Investment Company Considerations” below, such gain or loss will be capital gain or loss. Under current law, capital gains of non-corporate U.S.
Removed
Holders derived with respect to capital assets held for more than one year are generally eligible for reduced rates of taxation. The deductibility of capital losses may be subject to limitations. Capital gain or loss, if any, recognized by a U.S. Holder generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. U.S.
Removed
Holders are encouraged to consult their own tax advisors regarding the availability of the U.S. foreign tax credit in consideration of their particular circumstances. If we were treated as a Chinese resident enterprise for EIT Law purposes and Chinese tax were imposed on any gain (see “—Material People’s Republic of China Taxation” above), and if a U.S.
Removed
Holder is eligible for the benefits of the U.S.-China Tax Treaty, the U.S. Holder may be able to treat such gain as Chinese source gain under the treaty for U.S. foreign tax credit purposes. A U.S. Holder will be eligible for U.S.-China Tax Treaty benefits if (for purposes of the treaty) such U.S.
Removed
Holder is a resident of the United States and satisfies the other requirements specified in the U.S.-China Tax Treaty. Because the determination of treaty benefit eligibility is fact-intensive and depends upon a U.S. Holder’s particular circumstances, U.S. Holders should consult their tax advisors regarding U.S.-China Tax Treaty benefit eligibility. U.S.

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Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeKey Components of Results of Operations The following table presents our results of operations ($ in thousands): Year Ended December 31 Change 2022 2021 $ % Revenues Product revenue, net 212,672 144,105 68,567 48 % Collaboration revenue 2,368 207 2,161 1044 % Total revenues 215,040 144,312 70,728 49 % Expenses Cost of sales (74,018) (52,239) (21,779) 42 % Research and development (286,408) (573,306) 286,898 (50) % Selling, general and administrative (258,971) (218,831) (40,140) 18 % Loss from operations (404,357) (700,064) 295,707 (42) % Interest income 14,582 2,190 12,392 566 % Foreign currency (loss) gain (56,403) 4,661 (61,064) (1310) % Other income (expenses), net 3,113 (10,201) 13,314 (131) % Loss before income tax and share of loss from equity method investment (443,065) (703,414) 260,349 (37) % Income tax expense — — — — % Share of loss from equity method investment (221) (1,057) 836 (79) % Net loss (443,286) (704,471) 261,185 (37) % Net loss attributable to ordinary shareholders (443,286) (704,471) 261,185 (37) % -149- Revenues Product Revenue, Net The following table presents the components of the Company’s product revenue, net ($ in thousands): Year Ended December 31 Change 2022 2021 $ % Product revenue — gross 234,009 190,180 43,829 23 % Less: Rebates and sales returns (21,337) (46,075) 24,738 (54) % Product revenue — net 212,672 144,105 68,567 48 % Our product revenue is primarily derived from the sales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainland China and Hong Kong, net of sales returns and rebates to distributors in mainland China with respect to the sales of these products.
Biggest changeResults of Operations The following table presents our results of operations ($ in thousands): Year Ended December 31 Change 2023 2022 $ % Revenues Product revenue, net 266,719 212,672 54,047 25 % Collaboration revenue — 2,368 (2,368) (100) % Total revenues 266,719 215,040 51,679 24 % Expenses Cost of sales (95,816) (74,018) (21,798) 29 % Research and development (265,868) (286,408) 20,540 (7) % Selling, general and administrative (281,608) (258,971) (22,637) 9 % Gain on sale of intellectual property 10,000 — 10,000 NM Loss from operations (366,573) (404,357) 37,784 (9) % Interest income 39,797 14,582 25,215 173 % Foreign currency loss (14,850) (56,403) 41,553 (74) % Other income, net 7,006 3,113 3,893 125 % Loss before income tax and share of loss from equity method investment (334,620) (443,065) 108,445 (24) % Income tax expense — — — — % Share of loss from equity method investment — (221) 221 (100) % Net loss (334,620) (443,286) 108,666 (25) % Net loss attributable to ordinary shareholders (334,620) (443,286) 108,666 (25) % NM - Not Meaningful Product Revenue The following table presents the components of the Company’s product revenue ($ in thousands): Year Ended December 31 Change 2023 2022 $ % Product revenue — gross 298,911 234,009 64,902 28 % Less: Rebates and sales returns (32,192) (21,337) (10,855) 51 % Product revenue — net 266,719 212,672 54,047 25 % Our product revenue is derived from the sales our commercial products primarily in mainland China, net of sales returns and rebates to distributors with respect to the sales of these products. -84- Our net product revenue increased by $54.0 million in 2023 primarily driven by increased sales volumes, the launch of VYVGART, and decreased negative effects from the COVID-19 pandemic, partially offset by an increase in sales rebates to distributors resulting from price reductions in connection with NRDL listings for certain products and the effects on hospital and physician practices from the recent industry-wide anti-corruption enforcement efforts in China in the second half of 2023.
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.
Other selling, general, and administrative expenses include product distribution and promotion costs, and 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 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.
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 the expiration of the applicable statute of limitations.
We are focused on discovering, developing, and commercializing products that address medical conditions with significant unmet needs in the areas of oncology, autoimmune disorders, infectious diseases, and neuroscience. We intend to leverage our competencies and resources to positively impact human health in Greater China and worldwide.
We are focused on discovering, developing, and commercializing products that address medical conditions with significant unmet needs in the areas of oncology, autoimmune disorders, infectious disease, and neuroscience. We intend to leverage our competencies and resources to positively impact human health in Greater China and worldwide.
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. Judgments and Uncertainties We consider positive and negative evidence when determining whether some portion or all of our deferred tax assets will not be realized.
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 or all of our deferred tax assets will not be realized.
Certain of our product candidates may require additional pre-clinical and/or clinical development, regulatory approvals 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.
Certain of our product candidates may require additional pre-clinical and/or clinical development, regulatory approvals in multiple jurisdictions, manufacturing supply, substantial investment, and significant marketing efforts before we generate any revenue from product sales. License and Collaboration Arrangements Our results of operations have been, and will continue to be, affected by our license and collaboration agreements.
To date, we have financed our activities primarily through private placements, our September 2017 initial public offering and various follow-on offerings on Nasdaq, and our September 2020 secondary listing and initial public offering on the Hong Kong Stock Exchange.
Liquidity and Capital Resources To date, we have financed our activities primarily through private placements, our September 2017 initial public offering and various follow-on offerings on Nasdaq, and our September 2020 secondary listing and initial public offering on the Hong Kong Stock Exchange.
In 2023, we seek to continue advancing our mission of becoming a leading global biopharmaceutical company, driving innovation in treatment options for patients in China and beyond, by focusing on the following corporate strategic goals: accelerating medicines to patients through our R&D activities; further expanding our product pipeline through regional and global collaborations and corporate development activities; and continuing our commercial excellence and execution, including by delivering strong financial performance and preparing for the launch of eight new products and obtaining overall corporate profitability by the end of 2025.
In 2024, we seek to continue advancing our mission of becoming a leading global biopharmaceutical company, driving innovation in treatment options for patients in China and beyond, by focusing on the following corporate strategic goals: accelerating medicines to patients through our R&D activities, including internal discovery; further expanding our product pipeline through synergistic regional and global collaborations and corporate development activities; and continuing our commercial excellence and execution, including by delivering strong financial performance and preparing for the launch of multiple new products and obtaining overall corporate profitability by the end of 2025.
For a discussion of year-over-year changes in our financial condition and results of operations between 2021 and 2020, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed on March 1, 2022.
For a discussion of year-over-year changes in our financial condition and results of operations between 2022 and 2021, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on March 1, 2023.
Through December 31, 2022, we have raised approximately $164.6 million in private equity financing and approximately $2,462.7 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us in our initial public offering and subsequent follow-on offerings on Nasdaq and our initial public offering on the Hong Kong Stock Exchange.
In addition, we have raised approximately $164.6 million in private equity financing and approximately $2,462.7 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us in our initial public offering and subsequent follow-on offerings on Nasdaq and our initial public offering on the Hong Kong Stock Exchange.
We further discuss in the MD&A below key factors affecting our results of operations, key components and primary drivers of changes in our results of operations in 2022, and our liquidity and capital resources.
We further discuss in MD&A below key factors affecting our results of operations, key components and primary drivers of changes in our results of operations in 2023, and our liquidity and capital resources.
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 research and development.
Developing high quality product candidates requires significant investment in 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 positive cash flow from operations over the next several years depends upon our ability to successfully market our four commercial products—ZEJULA, Optune, QINLOCK, and NUZYRA—and to successfully expand the indications for these products and develop and commercialize our other product candidates.
Our ability to generate profits and positive cash flow from operations over the next several years depends upon our ability to successfully market our commercial products and to successfully expand the indications for these products and develop and commercialize our other product candidates.
We also intend to continue building and maintaining the trust of our stakeholders by further developing and integrating our ESG Trust for Life strategy into our business and operations. For additional information on our Mission and Corporate Strategic Goals, see Part I—Item 1. Business—Our Mission and Corporate Strategic Goals.
We also intend to continue building and maintaining the trust of our stakeholders by further developing and integrating our Trust for Life strategy into our business and operations. For additional information on our Mission and Corporate Strategic Goals, see Business – Our Mission and Corporate Strategic Goals .
Based on our current operating plan, we expect that our cash, cash equivalents, restricted cash, and short-term investments as of March 1, 2023, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months.
Based on our current operating plan, we expect that our cash, cash equivalents, restricted cash, and short-term investments will enable us to meet our cash requirements and fund our operating expenses and capital expenditure requirements for at least the next 12 months.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the accompanying notes in this Annual Report on Form 10-K. This section generally discusses year-over-year comparisons between 2022 and 2021.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the accompanying notes in this report. This section generally discusses year-over-year comparisons between 2023 and 2022.
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.
This assessment considers various factors, including 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.
As the Company does not have sufficient historical information since its IPO to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior, the expected term of options granted is derived from the average midpoint between the weighted average vesting and the contractual term, also known as the simplified method.
Since we do not have sufficient historical information since to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior, the expected term is derived from the average midpoint between the weighted average vesting and the contractual term, also known as the simplified method.
Recently Issued Accounting Standards For more information regarding recently issued accounting standards, see Part II—Item 8. Financial Statements and Supplementary Data—Recent Accounting Pronouncements.
Recently Issued Accounting Standards For more information regarding recently issued accounting standards, see Financial Statements and Supplementary Data – Recent Accounting Pronouncements .
We discuss factors that we believe could cause or contribute to these differences elsewhere in this Annual Report on Form 10-K, including in Forward-Looking Statements and Market Data and Part I—Item 1A. Risk Factors. Overview We are a patient-focused, innovative, commercial-stage, global biopharmaceutical company with a substantial presence in both Greater China and the United States.
We discuss factors that we believe could cause or contribute to these differences elsewhere in this report, including in Forward-Looking Statements and Risk Factors . Overview We are a patient-focused, innovative, commercial-stage, global biopharmaceutical company with a substantial presence in both Greater China and the United States.
We are required to make upfront payments upon our entry into such agreements and milestone payments upon the achievement of certain development, regulatory, and sales-based milestones for the relevant products under these agreements as well as certain royalties at tiered percentage rates based on annual net sales of the licensed products in the licensed territories.
In accordance with these agreements, we may be required to make upfront payments and milestone payments upon the achievement of certain development, regulatory, and sales-based milestones for the relevant products as well as certain royalties at tiered percentage rates based on annual net sales of the licensed products in the licensed territories.
Share of Loss from Equity Method Investment Share of loss from equity method investment decreased by $0.8 million to $0.2 million in 2022, due to increased losses from our investment in JING Medicine Technology (Shanghai) Ltd., an entity that provides services for drug discovery and development, consultation, and transfer of pharmaceutical technology.
Share of Loss from Equity Method Investment Share of loss from equity method investment was $0.2 million in 2022 due to losses from our investment in JING Medicine Technology (Shanghai) Ltd., an entity that provides services for drug discovery and development, consultation, and transfer of pharmaceutical technology. There was no change on the equity method investment in 2023.
As we pursue our strategy of growth and development, we anticipate that our financial results will fluctuate from quarter to quarter and year to year depending in part on the balance between the success of our commercial products and the level of our research and development expenses.
As we pursue our corporate strategic goals, we anticipate that our financial results will fluctuate from quarter to quarter and year to year depending in part on the balance between the success of our commercial products and the level of our research and development expenses. We cannot predict whether or when our product candidates will receive regulatory approval.
Using this model, fair value is calculated based on assumptions with respect to (i) the expected volatility of our ADS price, (ii) the periods of time over which grantees are expected to hold their options prior to exercise (expected lives), (iii) the expected dividend yield on our ADSs, and (iv) risk-free interest rates, which are based on quoted U.S.
These assumptions include: (i) the expected volatility of our ADS price, (ii) the periods of time over which grantees are expected to hold their options prior to exercise (expected term), (iii) the expected dividend yield on our ADSs, and (iv) risk-free interest rates.
Basis of Presentation Our consolidated statement of operations data for the years ended December 31, 2022 and 2021 and our consolidated statement of financial position data as of December 31, 2022 and 2021 have been derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Basis of Presentation Our consolidated statement of operations data for the years ended December 31, 2023 and 2022 and our consolidated balance sheet data as of December 31, 2023 and 2022 have been derived from our audited consolidated financial statements included in Financial Statements and Supplementary Data .
We expect to continue to incur substantial expenses related to our research and development activities.
As discussed further below, we expect to continue to incur substantial costs related to our research and development and commercialization activities.
However, in order to bring to fruition our research and development objectives, we may ultimately need additional funding sources, and there can be no assurances that such funding will be made available to us on acceptable terms or at all. -154- The following table presents information regarding our cash flows (in thousands): Year Ended December 31, Change 2022 2021 $ Net cash used in operating activities (367,642) (549,231) 181,589 Net cash provided by investing activities 420,016 249,957 170,059 Net cash (used in) provided by financing activities (1,730) 820,202 (821,932) Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash (6,274) 1,116 (7,390) Net increase in cash, cash equivalents and restricted cash 44,370 522,044 (477,674) Net Cash Used in Operating Activities Net cash used in operating activities decreased by $181.6 million in 2022, primarily due to a decrease of $261.2 million in net loss and an increase of $20.4 million in adjustments to reconcile net loss to net cash used in operating activities, partially offset by a decrease of $100.0 million in net changes in operating assets and liabilities.
Although we do not currently anticipate entering into additional debt arrangements, we may consider, or we may ultimately need, additional funding sources to bring to fruition or research and development objectives or otherwise, and there can be no assurances that such funding will be made available to us on acceptable terms or at all. -89- The following table presents information regarding our cash flows ($ in thousands): Year Ended December 31, Change 2023 2022 $ Net cash used in operating activities (198,178) (367,642) 169,464 Net cash (used in) provided by investing activities (10,776) 420,016 (430,792) Net cash used in financing activities (6,433) (1,730) (4,703) Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash (2,622) (6,274) 3,652 Net (decrease) increase in cash, cash equivalents and restricted cash (218,009) 44,370 (262,379) Net Cash Used in Operating Activities Net cash used in operating activities decreased by $169.5 million in 2023, primarily due to a decrease of $108.7 million in net loss and an increase of $105.9 million in net changes in operating assets and liabilities, partially offset by a decrease of $45.1 million in adjustments to reconcile net loss to net cash used in operating activities.
Expenses related to pre-clinical and clinical trials are accrued based on our estimates of the actual services performed by the third parties for the respective period.
Expenses related to pre-clinical and clinical trial activities are accrued based on the Company’s estimates of the actual services performed by the third parties, such as CROs and CMOs. Significant judgments are required in estimating the actual services performed by the third parties for the respective period and the related expense accruals.
The net cash used in our operating activities was $367.6 million and $549.2 million in 2022 and 2021, respectively.
Our operations have consumed substantial amounts of cash since inception. The net cash used in our operating activities was $198.2 million and $367.6 million in 2023 and 2022, respectively.
Our ability to generate revenue from our product candidates is dependent on our receipt of regulatory approvals for and successful commercialization of such products, which may not occur.
Our Ability to Commercialize Our Product Candidates We have multiple product candidates in late-stage clinical development and various others in clinical and pre-clinical development in Greater China and the United States. Our ability to generate revenue from our product candidates is dependent on our receipt of regulatory approvals for and successful commercialization of such product candidates, which may not occur.
Research and Development Expenses The following table presents the components of our research and development expenses ($ in thousands): Year Ended December 31 Change 2022 2021 $ % Personnel compensation and related costs 105,561 77,227 28,334 37 % Licensing fees 53,441 384,104 (330,663) (86) % CROs/CMOs/Investigators expenses 100,544 82,571 17,973 22 % Other costs 26,862 29,404 (2,542) (9) % Total 286,408 573,306 (286,898) (50) % -150- Research and development expenses decreased by $286.9 million in 2022 primarily due to: • a decrease of $330.7 million in licensing fees in connection with decreased upfront and milestone payments for our license and collaboration agreements; partially offset by • an increase of $28.3 million in personnel compensation and related costs primarily due to headcount growth and grants of share options and restricted shares and the continued vesting of option and restricted share awards; and • an increase of $18.0 million in CROs/CMOs/Investigators expenses related to ongoing and newly initiated clinical trials.
Research and Development Expenses The following table presents the components of our research and development expenses ($ in thousands): Year Ended December 31 Change 2023 2022 $ % Personnel compensation and related costs 115,749 105,561 10,188 10 % Licensing fees 19,291 53,441 (34,150) (64) % CROs/CMOs/Investigators expenses 103,333 100,544 2,789 3 % Other costs 27,495 26,862 633 2 % Total 265,868 286,408 (20,540) (7) % -85- Research and development expenses decreased by $20.5 million in 2023 primarily due to: • a decrease of $34.2 million in licensing fees as a result of decreased upfront and milestone payments for our license and collaboration agreements; partially offset by • an increase of $10.2 million in personnel compensation and related costs primarily due to grants of share options and restricted shares and the continued vesting of option and restricted share awards. • an increase of $2.8 million in in CROs/CMOs/Investigators expenses related to newly initiated studies and progress of existing studies.
Pre-clinical and clinical trial costs are a significant component of our research and development expenses. We have a history of contracting with third parties that perform various pre-clinical and clinical trial activities on our behalf in the ongoing development of our product candidates.
Such costs are expensed as incurred when they have no alternative future uses. We contract with third parties to perform various pre-clinical and clinical trial activities on our behalf in the ongoing development of our product candidates.
Net Cash (Used in) Provided by Financing Activities Net cash used in financing activities was $1.7 million in 2022, compared to net cash provided by financing activities of $820.2 million in 2021.
Net Cash (Used in) Provided by Investing Activities Net cash used in investing activities was $10.8 million in 2023, compared to net cash provided by investing activities of $420.0 million in 2022.
If actual results vary from our estimates, we also adjust these estimates accordingly, which would affect net product revenue and earnings in the period such variances become expected or known. -152- Research and Development Expenses Description Research and development expenses are charged to expense as incurred when these expenditures relate to our research and development services and have no alternative future uses.
If actual results vary from our estimates or our expectations change, we will adjust these estimates accordingly, which would affect net product revenue and earnings in the period such variances become expected or known. Research and Development Expenses We have a significant amount of research and development expenses, including with respect to pre-clinical and clinical trials for our product candidates.
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.
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. Our estimates 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.
We cannot predict whether or when products in our pipeline, including new indications for our current commercial products, will receive regulatory approval. Further, if we receive such regulatory approval, we cannot predict whether or when we may be able to successfully commercialize such product or whether or when such product may become profitable.
Further, if we receive such regulatory approval, we cannot predict whether or when we may be able to successfully commercialize such product or whether or when such product may become profitable. Business Developments and Corporate Strategic Goals In 2023, we were excited to launch a fifth commercial product, VYVGART, for gMG in China.
If factors change or different assumptions are used, our share-based compensation expenses could be materially different for any period. -153- Income Taxes Description 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.
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.
For example, the pandemic has adversely affected patient access to our products, such as through reduced hospital access during periods of lockdown or high infection rates, fewer newly diagnosed oncology patients, and delayed or interrupted treatments. The pandemic has also adversely affected our manufacturing and supply chain and our research and development, sales, marketing, and clinical trial activities.
The effects of the COVID-19 pandemic had an adverse impact on our sales volumes for 2022 and the first quarter in 2023, due to decreased patient access to our products, such as through reduced hospital access during periods of lockdown or high infection rates, fewer newly diagnosed oncology patients, and delayed or interrupted treatments.
Selling, General and Administrative Expenses The following table presents our selling, general and administrative expenses by program ($ in thousands): Year Ended December 31 Change 2022 2021 $ % Personnel compensation and related costs 162,045 124,675 37,370 30 % Professional service fees 35,414 22,901 12,513 55 % Other costs 61,512 71,255 (9,743) (14) % Total 258,971 218,831 40,140 18 % Selling, general and administrative expenses increased by $40.1 million in 2022, primarily due to: • an increase of $37.4 million in personnel compensation and related costs which was primarily driven by headcount growth, particularly in commercial and administrative personnel, and grants of share options and restricted shares and the continued vesting of option and restricted share awards; and • an increase of $12.5 million in professional service fee mainly attributable to our increased legal, compliance, accounting, and investor and public relations expenses associated with being a public company and in connection with sales of ZEJULA, Optune, QINLOCK, and NUZYRA in mainland China and Hong Kong after our commercial launch of these four commercialized products; partially offset by • a decrease of $9.7 million in other costs mainly related to selling, rental, and administrative expenses for commercial operations in mainland China, Hong Kong, and Taiwan.
Selling, General, and Administrative Expenses The following table presents our selling, general and administrative expenses by program ($ in thousands): Year Ended December 31 Change 2023 2022 $ % Personnel compensation and related costs 173,389 162,045 11,344 7 % Professional service fees 22,507 35,414 (12,907) (36) % Other costs 85,712 61,512 24,200 39 % Total 281,608 258,971 22,637 9 % Selling, general , and administrative expenses increased by $22.6 million in 2023 primarily due to: • an increase of $24.2 million in other costs mainly related to selling, rental, and administrative expenses for commercial operations in mainland China, Hong Kong, and Taiwan; • an increase of $11.3 million in personnel compensation and related costs which was primarily driven by grants of share options and restricted shares and the continued vesting of option and restricted share awards; partially offset by • a decrease of $12.9 million in professional service fees primarily related to legal and other administrative expenses. -86- Gain on Sale of Intellectual Property We had a gain on sale of intellectual property of $10.0 million in connection with our sale of certain patent rights and related know-how to a third party in the second quarter of 2023.
Our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K have been prepared in accordance with U.S. GAAP. Factors Affecting Our Results of Operations Research and Development Expenses We believe our ability to successfully develop product candidates will be the primary factor affecting our long-term competitiveness, as well as our future growth and development.
We expect our cost of sales to increase as the volume of products sold increases. Research and Development Expenses We believe our ability to successfully develop product candidates will be the primary factor affecting our long-term competitiveness, as well as our future growth and development.
And, we increased our pipeline assets through our business development activities with our strategic collaboration with Seagen for the license of TIVDAK, which further deepened our women’s cancer franchise. For more information on our commercial products and product pipeline, including status and developments in 2022, see Part I—Item 1. Business—Our Commercial Products and Part I—Item 1.
And, we increased our pipeline assets through our business development activities with our strategic collaboration with MediLink for the license of a next generation DLL3 ADC program, which further deepened our lung cancer franchise.
The following table presents our research and development expenses by program ($ in thousands): Year Ended December 31 Change 2022 2021 $ % Clinical programs 155,792 433,021 (277,229) (64) % Pre-clinical programs 6,644 47,768 (41,124) (86) % Unallocated research and development expenses 123,972 92,517 31,455 34 % Total 286,408 573,306 (286,898) (50) % Research and development expenses attributable to clinical programs decreased by $277.2 million and research and development expenses attributable to pre-clinical programs decreased by $41.1 million in 2022, both decreases driven by decreased license fees.
The following table presents our research and development expenses by program ($ in thousands): Year Ended December 31 Change 2023 2022 $ % Clinical programs 112,158 155,792 (43,634) (28) % Pre-clinical programs 17,356 6,644 10,712 161 % Unallocated research and development expenses 136,354 123,972 12,382 10 % Total 265,868 286,408 (20,540) (7) % Research and development expenses attributable to clinical programs decreased by $43.6 million in 2023 primarily driven by a decrease in licensing fees of $45.2 million.
The estimated amount of unpaid or unbilled rebates, if any, is recorded as a reduction of revenue. We estimate rebates based on contracted rates, sales volumes, and level of distributor inventories. Sensitivity of Estimate to Change Actual amounts of rebates paid or billed may differ from our estimates.
The estimated amount of rebates, if any, is recorded as a reduction of revenue. Significant judgments are required in making these estimates. In determining the appropriate accrual amount, we consider our contracted rates, sales volumes, levels of distributor inventories, and historical experiences and trends.
We currently have four commercial products that have received marketing approval in one or more territories in Greater China and thirteen programs in late-stage product development. For more information on our business, products, pipeline, and operations, see Part I—Item 1. Business. Since our inception, we have incurred net losses and negative cash flows from our operations.
For more information on our business, products and product candidates, and operations, see Business . 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 selling, general and administrative costs associated with our operations.
We expect our sales for these products to further increase in 2023, in part because of ZEJULA’s continued gain of share of hospital sales for ovarian cancer in China, the new NRDL listings for QINLOCK and NUZYRA, and the increased number of supplemental insurance plan listings for Optune. We also continued to make progress across our product pipeline.
In 2024, we expect our product revenues to continue to increase, such as from the new NRDL listings for VYVGART and NUZYRA. We also continued to make progress across our product pipeline.
The shift from other expense, net to other income, net is primarily due to an increase of $7.4 million in government grant income and a decrease of $5.7 million in loss on equity investments with readily determinable fair value.
Other Income, Net Other income, net increased by $3.9 million to $7.0 million in 2023 primarily due to an increase of gain on equity investments of $11.7 million, driven by the shift from a loss of $9.0 million in 2022 to a gain of $2.8 million in 2023 for our investment in MacroGenics as a result of changes in its stock price, partially offset by a decrease of $9.0 million in government grant income.
Net Cash Provided by Investing Activities Net cash provided by investing activities increased by $170.1 million in 2022, primarily due to a decrease of $184.7 million in purchases of short-term investments and a decrease of $30.0 million in payments for investment in equity investee, partially offset by a decrease of $38.6 million in proceeds from maturity of short-term investments and an increase of $6.3 million in purchases of property and equipment.
This shift was primarily due to a decrease of $587.6 million in proceeds from maturity of short-term investments, partially offset by a decrease of $126.3 million in purchases of short-term investments, a decrease of $17.4 million in purchases of property and equipment, and proceeds of $13.9 million from a sale of intellectual property and a disposal of land use rights in 2023.
Business—Our Pipeline of Product Candidates. -146- We also continued to strengthen our business in 2022 through corporate developments, including key additions to our global leadership team, enhancements to our corporate governance practices, and our voluntary conversion to primary listing status on the Hong Kong Stock Exchange and the subsequent inclusion of our ordinary shares in the Shanghai and Shenzhen Stock Connect Programs.
For more information on our commercial products and product pipeline, including status and developments in 2023, see Business – Our Commercial Products and Operations and Business – Our Pipeline of Product Candidates and R&D Activities . We also continued to strengthen our business in 2023 through key new additions to our global leadership team. For example, we promoted Dr.
We recorded $53.4 million of research and development expense related to upfront license fees and development milestones in 2022. In addition, we expect to incur substantial costs related to the commercialization of our product candidates, in particular during the early launch phase.
We had $19.3 million and $53.4 million of research and development expenses in 2023 and 2022, respectively, related to upfront -83- fees and development milestones.
Revenue Recognition Description In mainland China, we sell our products to distributors, who ultimately sell the products to healthcare providers. Based on the nature of the arrangements, the performance obligations are satisfied upon the product’s delivery to distributors. Judgments and Uncertainties Rebates are offered to distributors, consistent with pharmaceutical industry practices.
We recognize revenue when the performance obligations are satisfied upon the product’s delivery to distributors. We offer rebates to our distributors to compensate the distributors consistent with pharmaceutical industry practices. We are required to establish a provision for rebates in the same period the related product sales are recognized.
The expected dividend yield is zero as we have never paid dividends and do not currently anticipate paying any in the foreseeable future. Sensitivity of Estimate to Change The assumptions used in this method to determine the fair value of our option shares consider historical trends, macroeconomic conditions, and projections consistent with the Company’s operating strategy.
The expected dividend yield is zero as we have never paid dividends and do not currently anticipate paying any in the foreseeable future, and risk-free interest rates are based on quoted U.S. Treasury rates for securities with maturities approximating the expected term.
The following table presents net revenue by product ($ in thousands): Year Ended December 31 Change 2022 2021 $ % ZEJULA 145,194 93,579 51,615 55 % Optune 47,321 38,903 8,418 22 % QINLOCK 14,957 11,620 3,337 29 % NUZYRA 5,200 3 5,197 173233 % Total 212,672 144,105 68,567 48 % Collaboration Revenue Collaboration revenue was $2.4 million in 2022 compared to $0.2 million in 2021 due to increased revenue from our exclusive promotion agreement with Huizheng.
The following table presents net revenue by product ($ in thousands): Year Ended December 31 Change 2023 2022 $ % ZEJULA 168,843 145,194 23,649 16 % OPTUNE 46,969 47,321 (352) (1) % QINLOCK 19,240 14,957 4,283 29 % NUZYRA 21,656 5,200 16,456 316 % VYVGART 10,011 — 10,011 NM Total 266,719 212,672 54,047 25 % NM - Not Meaningful Cost of Sales Cost of sales increased by $21.8 million to $95.8 million in 2023 primarily due to increasing sales volumes.
To the extent the required vesting conditions are not met resulting in forfeiture of the share-based awards, previously recognized compensation expense relating to those awards are reversed. Judgments and Uncertainties We determine the fair value of stock options granted to employees using the Black-Scholes option valuation model.
Significant assumptions are required in determining the fair value of share options, which we estimate using the Black-Scholes option valuation model.
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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 significant investment in 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.
Added
We currently have five commercial products – ZEJULA, OPTUNE, QINLOCK, NUZYRA, and VYVGART – that have received marketing approval and that we have commercially launched in one or more territories in Greater China. We also have multiple programs in late-stage product development and a number of ongoing pivotal trials across our portfolio.
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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 sales-based milestones as well as certain royalties at tiered percentage rates based on annual net sales of the licensed products in the licensed territories.
Added
Sales increased for each of our commercial products, ZEJULA continued to lead PARP inhibitor sales for ovarian cancer in the hospital setting, and we were able to increase patient access for QINLOCK and NUZYRA from their new NRDL listings and for OPTUNE as a result of increased supplemental insurance coverage in the private-pay market.
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Business Developments and Corporate Strategic Goals In 2022, despite challenges from the COVID-19 pandemic in China, sales for our four commercial products continued to increase.
Added
For example, the NMPA accepted NDAs for SC efgartigimod for the treatment of gMG, SUL-DUR for infections caused by Acinetobacter baumannii , including MDR and CRAB strains, and repotrectinib for locally advanced or metastatic ROS1+ NSCLC.
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For example, we had several positive data readouts during the year, including for adagrasib in non-small cell lung cancer, efgartigimod in primary immune thrombocytopenia and generalized myasthenia gravis, and KarXT in schizophrenia. We contributed to successful registrational studies, including the LUNAR study for Tumor Treating Fields and the TRIDENT-1 study for repotrectinib.
Added
We also had several positive data readouts during the year, including for TTFields therapy in 2L NSCLC, TIVDAK in 2L+ cervical cancer, SC efgartigimod -81- in CIDP, and KarXT in schizophrenia. We also advanced our global pipeline, initiating Phase I studies for our DLL3 ADC program and for ZL-1218, a humanized, IgG1 monoclonal antibody that binds to human CCR8.
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For example, with respect to our global leadership team, we appointed Rafael G. Amado, M.D. as President, Head of Global Oncology Research and Development in December 2022. Dr. Amado joined us from Allogene Therapeutics and brings deep expertise in the field of oncology and significant global biopharmaceutical R&D leadership.
Added
Yajing Chen to Chief Financial Officer on July 7, 2023. Dr. Chen previously served as our Senior Vice President and Deputy Chief Financial Officer, helping to oversee finance, planning and forecasting, accounting, tax, treasury, and procurement matters since joining the Company in September 2021.
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And, as we have previously disclosed, we made other key additions to our global leadership team in 2022, including in August when Josh Smiley became Chief Operating Officer and in November when Dr. Peter Huang became Chief Scientific Officer.
Added
She is a seasoned finance executive with more than 20 years of experience in the life sciences industry as well as a Ph.D. trained scientist. Dr. Chen succeeded Billy Cho, who stepped down from his role and left the Company on July 7, 2023. In addition, the Company appointed Dr.
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With respect to corporate governance, in April, we appointed KPMG LLP, a U.S.-based auditor, to be our independent registered public accounting firm and auditor, and in July, our Board of Directors established a lead independent director role, appointing Dr. John Diekman to serve in this important position.
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Robert Brown as Chief Medical Officer, Oncology in September 2023 to help accelerate the growth and development for our global oncology pipeline. Dr. Brown is an oncology drug development leader, with more than 16 years of translational, research, and clinical development expertise in the areas of oncology, immunology, and neurology. Dr. Brown reports to Dr.
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In addition, in January 2023, Michel Vounatsos was appointed to our Board of Directors. Mr. Vounatsos brings to the Board extensive global leadership and management experience in the biopharmaceutical industry, including more than 25 years of service at leading companies. His expertise includes significant commercial experience in China and worldwide.
Added
Rafael Amado, President, Head of Global Oncology Research and Development at Zai Lab, and provides strategic leadership and support with respect to the clinical development of our oncology pipeline.
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Finally, our transition to primary listing status on the Hong Kong Stock Exchange and participation in the Stock Connect programs should help us increase access to our business by investors in Greater China.
Added
Our consolidated financial statements appearing elsewhere in this report have been prepared in accordance with U.S. GAAP. Factors Affecting Our Results of Operations Our Commercial Products We generate product revenue through the sale of our commercial products in Greater China, net of any related sales returns and rebates to distributors.
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As a result of this commitment, our pipeline of product candidates has been advancing and expanding, with thirteen late-stage clinical product candidates being investigated as of December 31, 2022.
Added
Our cost of sales mainly consists of the costs of manufacturing ZEJULA and NUZYRA, costs of purchasing OPTUNE, QINLOCK, and VYVGART from our collaboration partners, any royalty fees incurred as a result of sales of our commercial products under our license and collaboration agreements, and amortization of any sales-based milestone payments incurred under our license and collaboration agreements.
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For more information on the nature of the efforts and steps necessary to develop our product candidates, see “Business” and “Regulation.” -147- We have financed our activities primarily through private placements, our initial public offering in September 2017 and multiple follow-on offerings on Nasdaq and our secondary listing and initial public offering on the Hong Kong Stock Exchange in September 2020.
Added
We expect our revenue to increase in coming years as we continue to focus on increasing patient access to our existing commercial products, such as through NRDL listing or increased supplemental insurance coverage in the private-pay market.
Removed
Through December 31, 2022, we have raised approximately $164.6 million from private equity financing and approximately $2,462.7 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us from our initial public offerings and follow-on offerings. Our operations have consumed substantial amounts of cash since inception.
Added
For example, in the first quarter of 2023, QINLOCK was added to the NRDL for fourth-line GIST and NUZYRA for the IV treatment of adult patients with CABP and ABSSSI.
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We expect our expenditures to increase significantly in connection with our ongoing activities, particularly as we advance the clinical development of our thirteen late-stage clinical product candidates, research and develop 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.
Added
In the first quarter of 2024, VYVGART (efgartigimod alfa injection) was added to the NRDL for -82- gMG and NUZYRA for the oral treatment of adult patients with CABP and ABSSSI. We also expect revenue to increase in coming years as a result of our launch of additional commercial products, if and when we obtain required regulatory approvals.
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We review such expenditures for prioritization and efficiency purposes.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeItem 7A. 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. -155- Foreign Exchange Risk Renminbi, or RMB, is not a freely convertible currency.
Biggest changeItem 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk including foreign exchange risk, credit risk, and inflation 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.
These notes receivable were used to collect the receivables based on an administrative convenience, given these notes are readily convertible to known amounts of cash. In accordance with the sales agreements, whether to use cash or bank acceptance promissory notes to settle the receivables is at our discretion, and this selection does not impact the agreed contractual purchase prices.
These notes receivable were used to collect the receivables based on an administrative convenience, given these notes are readily convertible to known amounts of cash. In accordance with the sales agreements, whether to use cash or bank acceptance promissory notes to settle the receivables is at our discretion, and this selection does not impact the agreed contractual purchase prices. -91-
Our business mainly operates in mainland 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 significant direct foreign exchange risk and have not used derivative financial instruments to hedge our exposure to such risk.
While our financial statements are presented in U.S. dollars, our business mainly operates in mainland China with a significant portion of our transactions settled in RMB, and as such, we do not believe that we currently have significant -90- direct foreign exchange risk and have not used 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 ADSs will be traded in U.S. dollars.
Although, in general, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs and ordinary shares will be affected by the exchange rate between the U.S. dollar and the RMB and between the HK dollar and the RMB, respectively, because the value of our business is effectively denominated in RMB, while ADSs and ordinary shares are traded in U.S. dollars and HK dollars, respectively.
We manage credit risk related to our accounts receivable through ongoing monitoring of outstanding balances and limiting the amount of credit extended based upon payment history and credit worthiness. Historically, we have collected receivables from customers within the credit terms with no significant credit losses incurred.
Accounts receivable are typically unsecured and are derived from product sales and collaborative arrangements. We manage credit risk related to our accounts receivable through ongoing monitoring of outstanding balances and limiting the amount of credit extended based upon payment history and credit worthiness. Historically, we have collected receivables from customers within the credit terms with no significant credit losses incurred.
As of December 31, 2022, our two largest customers accounted for approximately 28% of our total accounts receivable collectively. During the year ended December 31, 2022, certain accounts receivable balances were settled in the form of notes receivable. As of December 31, 2022, such notes receivable included bank acceptance promissory notes that are non-interest bearing and due within six months.
As of December 31, 2023, our two largest customers accounted for approximately 18% of our total accounts receivable collectively. Certain accounts receivable balances are settled in the form of notes receivable. As of December 31, 2023, such notes receivable included bank acceptance promissory notes that are non-interest bearing and due within six months.
As of December 31, 2022 and 2021, all of our cash and cash equivalents and short-term investments were held by major financial institutions located in mainland China and international financial institutions outside of mainland China which we believe are of high credit quality and for which we monitor continued credit worthiness. -156- Accounts receivable are typically unsecured and are derived from product sales and collaborative arrangements.
As of December 31, 2023 and 2022, all of our cash and cash equivalents and short-term investments were held by major financial institutions located in mainland China and international financial institutions outside of mainland China which we believe are of high credit quality and for which we monitor continued credit worthiness.
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 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.
As of December 31, 2022 and 2021, we had cash and cash equivalents of $1,008.5 million and $964.1 million and short-term investments of nil and $445.0 million, respectively.
As of December 31, 2023 and 2022, we had cash and cash equivalents of $790.2 million and $1,008.5 million and short-term investments of $16.3 million and nil, respectively.
The cash and cash equivalents of the Company included aggregated amounts of RMB316.8 million and RMB151.7 million, which were denominated in RMB, as of December 31, 2022 and 2021, respectively, representing 5% and 2% of the cash and cash equivalents as of December 31, 2022 and 2021, respectively.
The cash and cash equivalents of the Company included aggregated amounts of $25.1 million and $45.5 million, which were denominated in RMB, as of December 31, 2023 and 2022, respectively, representing 3% and 5% of the cash and cash equivalents as of December 31, 2023 and 2022, respectively.
Removed
On July 21, 2005, the Chinese government 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.
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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.
Removed
In June 2010, the PBOC announced that the Chinese 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.
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Inflation In recent years, mainland China has not experienced significant inflation.
Removed
Although the global economy, including the U.S. economy, has experienced rising inflation in recent quarters, which can increase the costs of our products and product candidates purchased from third parties and, as a result, adversely affect our results of operations, inflation has not had a material impact on our results of operations.
Removed
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 mainland China or in other countries in which our third-party partners operate.

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