Zai Lab Limited

Hello, ladies and gentlemen, thank you for standing by and welcome to XyLab's fourth quarter 2021 financial results conference call. At this time, all participants are in the listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at a time. As a reminder, today's call is being recorded. It is now my pleasure to turn the floor over to Billy Cho, Chief Financial Officer of XyLab. who will make introductory comments.

Thank you, operator. Good morning, good evening, and welcome, everyone. XyLab recently issued a press release providing the details of the company's financial results for the 12-month ended and fourth quarter ended December 31, 2021, as well as product highlights and corporate updates. The press release is available in the investor relations section of the company's corporate website at ir.xylaboratory.com. Today's call will be led by Dr. Samantha Du, Dialogues founder, chairperson, and chief executive officer. She'll be joined by Dr. Alan Sandler, president and head of global development oncology, who will discuss advances with our oncology product candidates. Dr. Harold Reinhart, president and head of global development neuroscience, autoimmune, and infectious diseases, who will speak about progress we've made in those three therapeutic areas. And I will discuss the performance of our market products and conclude with comments on our financial results. Additional executives will also be available to answer questions during the Q&A portion of the call. As a reminder during today's call, Dylab will be making certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including our business plans and objectives and timing and success of our clinical trials, our sales and revenue forecast for our products and product candidates, regulatory applications, and commercial launches. The forward-looking statements are not guarantees of future performance. and therefore we should not put undue reliance upon them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. I refer you to our SEC filings for discussion of risk factors that could cause our actual results to differ materially from those discussed today. At this time, it is my pleasure to turn the call over to Zylus founder, chairperson, and chief executive officer, Dr. Samantha Du.

Thank you, Billy. Hello, everyone, and thank you all for joining us. On this call, I'll discuss highlights from our 2021 and what we expect to accomplish in 2022. 2021 marked another year of strong growth and execution for ZyLife. We significantly expanded our portfolio of potentially first-in-class and the best-in-class assets. we made meaningful advances with our global pipeline of 11 assets, including achieving proof of concept for CL1102, our internally developed anti-L17A human body for chronic plaque psoriasis for global rights. Through business development, we deepened our world-class gastric and lung cancer franchises with four additional promising drug candidates, including Adagrassip. We bolstered our autoimmune franchise with Ascotigamot, a pipeline in the product opportunity. And we expanded into neuroscience with an exciting non-crisis, CAR-XT. We achieved additional regulatory submissions and approvals, including our first non-oncology approval for Neutera. Our commercial execution continues to gain strong momentum for our four marketed products. We're also pleased to have Zuzula included in the NRDL for first-line ovarian cancer maintenance treatment, and we expect it to become the leading PARP inhibitor in ovarian cancer in China, given its unique label for ovarian cancer patients regardless of biomarker species. Last but not least, we further grew our talented global team both in the United States and China, building a solid foundation for continuing growth and execution. We have set clear strategic priorities for 2022 to position ourselves to lead the next wave for biopharma innovation. First, will expedite bringing medicines to patients by accelerating important data results and regulatory filings across our entire portfolio. We plan to file the MDA for eczema tick-moth in China in mid-2022, subject to ongoing discussion with NMPA, and to initiate a China registrational study for vimatizumab in first-line gastric cancer. in Greater China. Second, we'll continue to invest in R&D and advance our internal pipeline with global rights. We plan to move our CL1102 into full global development and submit up to two R&D for internally developed compounds with global rights in 2022. Lastly, we'll leverage our leading position in China to accelerate our growing revenue base and to source innovation internally and externally with potentially transformative assets and partnership opportunities. Our mission is to build a leading global biopharmaceutical company. Looking ahead, we plan to have at least 50 market products approved in more than 30 indications by 2025. We believe that the regulatory environment will continue to be supportive of innovative biopharma companies like Xylab. We are also confident in the long-term market potential of our differentiated world-class portfolio designed to address significant unmet medical needs and to create significant value for all of our constituents, including our shareholders. For example, we are currently forecasting that peak sales of the current assets in our lung and GI cancer franchises could generate up to a combined total of $2.5 to $3 billion through 2030. And now, I'll turn the call over to Dr. Alan Sandler. Alan? Dr. Alan Sandler Thank you, Samantha.

PsyLab's oncology franchise continued to make progress on all fronts in the fourth quarter, and we expect to have a busy and productive year in 2022. For Adagracib, the FDA recently accepted the NDA filed by Mirati in second-line non-small-cell lung cancer in the United States with a PDUFA date of December 14, 2022. In January of this year, Muradi announced exciting clinical data from a phase two cohort of the CRYSTAL-1 study in patients with KRAS G12C mutated GI cancers, revealing a 41% objective response rate and 100% disease control rate in the 27 evaluable patients. In addition, at ESMO in September, Muradi reported the top line results of the phase two cohort in the CRYSTAL-1 study. In this study, patients with second-line non-small cell lung cancer harboring the KRAS G12C mutation were treated with adagrassive monotherapy at 600 milligrams BID, revealing a 43% objective response rate and an 80% disease control rate. The safety and tolerability profile was consistent with previously reported findings for adagrassive in patients with advanced non-small cell lung cancer. In addition, Murady reported positive clinical data from a cohort of the Phase I-II CRYSTAL-1 study in patients with heavily pretreated colorectal cancer harboring the KRAS G12C mutation. These results showed that adagracib alone and with cetuximab demonstrated significant clinical activity and broad disease control in these patients. These results are very encouraging and reinforce our view that adagracid has the potential to be a best-in-class compound for patients with KRAS G12C mutation. We plan to join global phase three studies in second-line plus non-small cell lung cancer and second-line colorectal cancer in mid-2022. Moving to bemerituzumab, we plan to initiate a China registrational study in first-line advanced gastric and gastroesophageal junction adenocarcinoma in greater China in 2022. Bemerituzumab is a first-in-class FGFR2B inhibitor with a sizable market opportunity in greater China. There are no approved therapies specifically for these patients in China. For tumor treating fields, XyLAB partner Novacure anticipates top line data from the phase three pivotal lunar clinical trial testing the efficacy of TT fields together with physician's choice immune checkpoint inhibitor or docetaxel for the treatment of patients with stage four non-small cell lung cancer by year end 2022. You will recall that in May 2021, the FDA accepted the IDE supplement submitted by Novacure that incorporated recommended changes from the interim analysis of the lunar trial conducted by an independent data monitoring committee, including reductions in the sample size to 276 patients and in the follow-up period to 12 months. We believe that this protocol change is a reason for optimism. For margituximab, We filed an NDA in HER2-positive breast cancer with the NMPA in December and the filing was accepted. Margenza is an FC-engineered antibody molecule developed by Macrogenics and is an antagonist of a HER2 receptor and has been approved by the FDA to be used in combination with chemotherapy for the treatment of patients with metastatic HER2-positive breast cancer following treatment with two or more anti-HER2 therapies. Zai conducted a bridging study of margituximab in combination with chemotherapy in advanced previously treated HER2-positive breast cancer that met its primary endpoint of median progression-free survival as defined by achievement of at least 50% of the efficacy of margituximab plus chemotherapy in the SOFIA study. The safety profile of margituximab plus chemotherapy was acceptable and consistent with that seen in the SOFIA trial. Moving to our internal research and development program, you will recall from our R&D day last year that we embraced an open innovation model. Our goal is to file at least one IND per year, and in 2022, we plan to submit up to two INDs for compounds with global rights. With an abundance of potentially best-in-class and first-in-class products, we are very excited about our oncology pipeline at XyLab. And now, I will turn the floor over to Harold Reinhart to discuss progress in our neuroscience, autoimmune, and infectious disease therapeutic area. Harold?

Yeah, thank you, Alan. The fourth quarter brought several very encouraging new developments, clinical and regulatory, in our autoimmune and infectious diseases franchise and added a new therapeutic franchise neuroscience. I'll start with autoimmune diseases and F-Gyte TG-MOD. We had a positive meeting with the NMPA on F-Gyte TG-MOD that suggests the potential for an accelerated regulatory approval for generalized myasthenia gravis in China. Subject to further discussion with the NMPA, we expect to file the BLA in mid-2022. ZEISS partner, Argenix, received approval for F-card tigimod in GMG in the United States in December 2021, and we initiated clinical trials for F-card tigimod in China for other indications, primary immune thrombocytopenia, ITP, chronic inflammatory demyelinating polyneuropathy, CIDP, and pemphigus, as well as a pharmacokinetic study. Next, I'll talk about ZL1102, Xylabs internally developed novel human VH antibody fragment. ZL1102 is potentially the first IL-17 targeting topical treatment for patients with mild to moderate plaque psoriasis. Last fall, CL1102 achieved proof of concept in a phase 1B study and is now advancing into global clinical development. We believe this is the first study to ever demonstrate penetration of a protein biological through psoriatic skin, resulting in a clinical response. Skin penetration was demonstrated by changes in transcriptome for inflammatory markers. With regards to efficacy, topical ZL1102 resulted in a 45% relative clinical improvement in local palsy score, an improvement in erythema and scaling, in target lesion size, and improved responder rates. Clinically, we observed an early onset of action and consistent improvement over time. CL1102 had a benign safety profile comparable to placebo, with treatment emerging adverse events that were few in number and mild. Pharmacokinetic studies confirmed lack of systemic absorptions. Psoriasis affects approximately 125 million people worldwide, of which 80 to 90% suffer from chronic plaque psoriasis. As 70 to 80% of these patients have mild to moderately severe disease, there's a strong rationale and patient need to develop a topical formulation with IL-17 directed therapy that works directly on the lesion and avoids systemic exposure. Current topical therapies provide limited efficacy or have safety issues with long-term use. Moving on to infectious diseases, our partner, Entasis, announced positive top-line results for Sulbactem duralobactem, known as SULDUR, from the Global Phase III Registrational ATT&CK trial. This trial evaluated the safety and efficacy of Suldur versus Colistin in patients with serious infections caused by Acinetobacter baumannii. Suldur achieved the primary endpoint of statistical non-inferiority in 28-day all-cause mortality. Most patients had pulmonary infections with carbapenem-resistant Acinetobacter baumannii, known as CRAB. In addition, Soldor met the primary safety objective of the study, achieving a statistically significant reduction in nephrotoxicity over colistin. Soldor is the first investigational drug to demonstrate efficacy against Crab in a prospective, well-controlled clinical trial. Crab infections are among the worst bacterial infections. Safe and effective treatment options are almost nonexistent. As a narrow-spectrum antibiotic, Soldur targets crab bacteria preferentially, thus potentially avoiding the collateral damage associated with broad-spectrum antibiotics. We look forward to bring this drug to China and Asia Pacific, where severe crab infections are quite frequently seen in ICUs and associated with high mortality. We expect to file Soldur with regulators in China, in the fourth quarter of 2022. As Samantha mentioned, we received approval for Omada Cycling Nosira for CAP, or community-acquired pneumonia and APSE skin infections, and launched the product in December. Billy Joe will have more to say about Nosira in a minute in his discussion of our commercial products. And finally, in the fourth quarter, we entered into the neuroscience area with our agreement with Corona Therapeutics for rights to CAR-XT in Greater China. CAR-XT is an oral investigational drug combination consisting of xenomaline, a muscarinic agonist that stimulates M1, M4 receptors in the central nervous system, and traspium, an approved muscarinic antagonist that reduces the incidence of peripheral GI side effects. CAR-XT has already demonstrated clinical benefits in Phase II studies in schizophrenia and Alzheimer's disease. In the Phase II EMERGENT I trial, CAR-XT demonstrated clinically meaningful and statistically significant improvement in PANS total score. which is the total positive and negative syndrome scale, and also in key secondary endpoints, including PANS positive subscore and PANS negative subscore. CAR-XT was well-tolerated, much better than Xenomalin alone. Karuna is evaluating CAR-XT in late-stage clinical trials for the treatment of schizophrenia and psychosis in Alzheimer's disease. Recently, Corona also initiated the Phase III ARISE trial, evaluating CARXT as an adjunctive treatment for schizophrenia in adults who inadequately respond to atypical antipsychotics. Additionally, Corona plans to initiate a Phase III study in Alzheimer's patients with psychosis in mid-2022. Results from a Phase 1b trial in healthy elderly volunteers indicate that standard doses of CAR XT can be administered to elderly adults while maintaining a favorable tolerability profile. Xilab will work with Corona to design the optimal strategy to accelerate the development and regulatory timeline of CAR XT in China. Billy will speak about progress with our commercial products and financial results. Billy.

Thank you, Harold. In December, the NMPA approved the NDA for Nuzira, a novel antibiotic with both oral and intravenous formulations for the treatment of community-acquired bacterial pneumonia and acute bacterial skin and skin-scriptural infection. The product was launched in December. Zyro was approved as a category one innovative drug and is locally manufactured in China. It is the fourth Zylab product approved over the last 24 months. Our three other marketed products, Dejula, Optune, and Kinloch, continue to achieve robust revenue growth, driven by strong demand and commercial execution. Dejula continues to perform well, building on the news from the last quarter when the first line of varying cancer indication was included in the NRDL. This is important. as the first-line ovarian cancer maintenance treatment is the largest indication for PARP inhibitors in China. With this favorable reimbursement decision and Zijula's unique label for ovarian cancer patients regardless of biomarker status, we expect Zijula to gain strong momentum this year and to achieve market share leadership no later than next year. In addition, as of December 31, 2021, Zijula was listed in nearly 1,300 hospitals in China. providing a strong foundation for further NRBO 90. Similarly, the launch of Optune is going well and will achieve solid growth. During the fourth quarter, our team focused on continuing to improve market access by expanding commercial insurance and supplemental insurance coverage for Optune and educating target physicians about its significant clinical benefits, including survival benefits. Currently, Optune is covered by 33 municipal or provincial supplemental insurance plans and has become one of the top treatments reimbursed in 2021. As we noted last year, or last quarter, I should say, we successfully launched Kinloch for fourth-line GIST in China starting last summer. The key focus of our launch is increasing physician awareness, market access, and the number of patients treated by leveraging Invictus trial data and Kinloch status as the only fourth-line GIST treatment regardless of the mutation status. as well as a guideline recommendation by the Chinese Society of Clinical Oncology. Currently, Kinloch has been covered by 52 supplemental insurance plans since launch. We're still assessing the impact of the intrigued results. However, we note that the fourth-line GIST indication has over 7,000 new patients every year in China and growing, and we are committed to establishing Kinloch as a standard treatment for this indication. Now, I'll discuss our financial results. Product revenues for the fourth quarter and full year 2021 were $44 million and $144.1 million respectively. Over the same period last year, product revenues were $15.1 million and $49 million respectively. We just completed our first calendar year of commercialization and are very pleased with the successful launches and the sales trajectory of our market products. With many more product launches to come, Our commercial platform over time is expected to generate strong, continued growth and considerable operating leverage. The jewel of sales for fourth quarter and full year 2021 were $29.4 million and $93.6 million, respectively. Over the same period last year, the jewel of sales were $9.9 million and $32.2 million, respectively. Note that there was a negative $7.5 million non-recurring adjustment to revenue in fourth quarter 2021. This was due to one-time compensation to distributors for state doulas sold at the 2021 price that remained in the distribution channel before the NRDO implementation. Option sales for fourth quarter and full year 2021 were $11.6 million and $38.9 million, respectively. And over the same period last year, option sales were $5 million and $16.4 million, respectively. Kinloch sales for fourth quarter and full year 2021 were $2.9 million and $11.6 million respectively. And over the same period last year, Kinloch sales were $0.2 million and $0.4 million respectively. R&D expenses were $573.3 million for 2021 compared to $222.7 million for the same period in 2020. The increase in R&D expenses was primarily attributable to $321.3 million in upfront payments for eight new licensing agreements compared to $83.5 million in 2020, expenses related to ongoing and newly initiated late-stage clinical trials, and payroll and payroll-related expenses from increased R&D headcount. Excluding upfront payments for new licensing agreements, the core R&D expenses were $252 million in 2021 compared to $139.2 million in 2020. Selling general and administrative expenses were $218.8 million in 2021, compared to $111.3 million for the same period in 2020. The increase was primarily due to payroll and payroll net expenses from increased commercial headcount and expanded commercial activities, as ZyLab continued to expand its commercial operations throughout Greater China. ZyLab reported a net loss of $704.5 million for the full year of 2021, or a loss per share attributable to common stockholders of $7.58, compared to a net loss of $268.9 million, or a loss per share attributable to common stockholders of $3.46, the same period in 2020. Excluding upfront payments for new licensing agreements, our cash used in operating activity and purchase of property and equipment and intangible assets was $309.2 million in 2021, compared to $143.2 million in 2020. As of December 31, 2021, cash and cash equivalents, short-term investments, and restricted cash totaled $1.41 billion, compared to $1.19 billion as of December 31, 2020. We would now like to turn the call back over to the operator to open up the line for questions. Operator?

Thank you. We would now like to open the lines for questions. If you have a question, please press star 1 at this time. And to withdraw your request, please press the pound or hash key. Please try to limit to one question each time. Once again, the star 1 full questions. Our fifth question comes from the line of Michael E. from Jefferies. Please ask your question.

Hey, good morning, everyone. Thank you very much for the question. Our question was around Zejulia and thinking about the growth trajectory in 2022 and 23 and 24 as it relates to obviously getting expanded NRDL, but also as Billy noted, there was some price adjustments in the fourth quarter. So how should we think about the growth in the future coming years, but appreciating that we might expect price cuts every couple of years? So talk about that in the outlook for Zejula. Thank you very much.

Hey, Mike. This is Billy. I'll take your question. So, yeah, we're pretty excited to see the momentum, early momentum in Zejula. And, of course, looking forward to implementing now the NRDL, you know, inclusion for first line for all-comer patients, which, as we noted in the press release and the current call, it is the largest market opportunities for PARP inhibitors in China. I believe that AstraZeneca released in their earnings that the emerging market sales for the parcel was around $400 million and more than 50% of that came from China. And what we could share with you in terms of what we see so far based on the data that we are following is that with our entry, we've seen that the size of the pie So the penetration of the PARP asset class in China. And at the same time, our market share within that growing pie has both been increasing very nicely. We expect that to continue for the foreseeable future this year, next year, and even beyond. And that's part of the reason why we had made the comment on this call that no later than next year, We actually also expect to be the market share leader in the park, you know, as a class in space. So hopefully that gives you a sense of, you know, the answer that you're looking for to your question as well as the confidence that we have in both the opportunity.

May I ask? May I ask? May I ask a little follow-up on the second part of that question, which was related to the price adjustment in the fourth quarter? We saw this with another major drug as well in China, and so I'm not sure that Wall Street analysts may appreciate this adjustment every couple of years and how we need to think about that. What is your opinion?

Yeah, so it is correct that this is universal, pretty commonplace in our industry in China, where every time you are included in the NRDL, right before you're going to have a non-recurring adjustment. So if your question, Mike, is for DeJula in particular, you know, what do you need to factor in, you know, every couple of years? You know, could there be a possibility that we have to renegotiate with, you know, for NRDL? That would be a case-by-case decision. As you know, we also have additional indications that we have time for place. But what I can tell you is that, you know, for renegotiating the current indication is a lot more modest than, you know, a lot of the headline numbers that you've seen. So, for example, we had a 23.6% discount, right, to get the first-line indication, which is, you know, again, a very significant piece of the PARP asset class. You know, a couple of years later on, if we were to renegotiate, it'd be a lot more modest compared to, you know, the precedent that we've seen.

Thank you.

Yeah, and Mike, maybe just to add, sorry, it's Jonathan here. I was in a negotiation with the NIDL late last year, so maybe you can provide a bit more color. Look, I think it's an important addition for us first to include the first front line. That gives us a very strong competitive advantage, you know, given we're the only all-comer product in that front line setting. So we are really going to expect to get a lot of volume in exchange for a modest discount. You know, this discount would not come if we didn't add this indication. So every two years when we do renew, we do not expect, although, you know, things would change, right? Things could change for the better too. We don't know. But, you know, if we didn't have to add that new indication this time, we would not have to, you know, be subject to that, you know, discount. But I think, you know, given our competitive product profile and given the volume exchange, I think we're already seeing that, you know, in Q1 that, you know, we're getting very good traction in terms of market share growth.

Thank you. That makes sense related to the expanded label. Thank you.

Thank you. Our next question comes from Igor Novovovich from Citigroup. Please go ahead.

Hi, Samantha, Billy, and team. Thanks for taking the questions. You made some interesting comments in the opening remarks regarding the lung and GI cancer franchises that could generate up to $2.5 to $3 billion through 2030. So I was just wondering if you could just drill down a bit into that projection. Which products are you referring to in lung and GI? Can you talk a little bit about the assumptions you're using to get into that $2.5 to $3 billion range and what the ramp may look like to get there? And, of course, how confident are you that you can hit that 2.5 to 3 billion window by 2030? Thank you. Hey, you all.

This is Billy. I'll initiate and others can chime in. So, yeah, we could provide some more color, but before I do that, I'll just kind of recall that, you know, we just wrapped up our first calendar year of commercialization. So we're off to the races and we have great momentum that we're going to build upon. And, you know, I think we have a lot of new products launching, as you know, a pretty intense launch schedule over the next three, four years. So we need to make sure that goes well. So we're still making investments. But we felt as a team at Dyleb that it was, you know, it may be useful to, you know, both the, you know, buy side, sell side for us to offer up, you know, kind of a framework on how to think about the commercial opportunity. And so, you know, we made those comments and you saw it on the release. So you go, I mean, additional call that I can provide that we can provide on, you know, the peak year revenue, you know, number of two and a half to $3 billion is that first of all, it only includes our current portfolio. The, a lot of the FB data, et cetera, were based on already statistics we've already publicly disclosed and that you guys have. The portfolio in terms of, you know, revenue mix is very diversified. And, you know, we're not giving specific numbers and, you know, just yet, but it's nice to see that it's a pretty diverse, you know, revenue portfolio. And, you know, because of the fact that we have so many products launching, you've got the waterfall effect as well. So over the next three, four years, you've got products launching and building, launching and building sort of at the same time. So the growth curve, uh actually accelerates uh in the you know the mid to later years uh but um but you go i think that's the extent of you know kind of additional color that we provide at this time but hopefully you find it helpful yeah no that's definitely a helpful anchor for our for our modeling thanks um and then just one one follow-up just on the broader the broader portfolio strategy obviously you have

A very nice mix of therapeutic areas, oncology and infectives, autoimmune, and now Karuna with neuroscience. So just wondering about how much broader you'd be willing to go therapeutically. As you know, there are many novel mechanisms in other areas, for instance, cardiovascular nephrology, bone disease, even platform approaches in gene and cell therapy are very interesting to potentially extend the portfolio. So just could you talk in broad brushstrokes about how you're thinking about broadening the therapeutics therapeutic reach with respect to your BD opportunities?

Yeah, I mean, we just broke into neuroscience, and we're going to stay awfully busy with the four that we have. But maybe, you know, Samantha, I don't know if you have any additional comments on additional TA strategy.

Yeah, hi, Billy. Maybe I'll just chime in. Jonathan here. Jonathan, yeah. So I think for us, you know, I certainly want to – continue to strengthen those therapeutic areas which we have built leadership positions in. I think just in oncology alone, we're seeing really a lot of opportunities. But I think last year, you know, in autoimmune neuroscience, we have expanded with two, you know, pipeline of product anchor opportunities in FCAR and in CARXT. And I think we see a lot of these opportunities. I think what we're really building at Zai is a world-class you know, company with truly innovative best-in-class or first-in-class assets. So if there are assets that are synergistic to what we have, if there are assets which could, you know, help with a very large unmet medical need, we certainly continue to pursue those opportunities. You know, we've seen a lot of these opportunities today, actually. You know, these pipeline of product opportunities and You know, I think you can expect, continue, you know, quantities of deal flow, you know, this year. So, you know, I think especially in these areas where we have significant presence, you can expect us to do what we've been doing good at and potentially expand in other areas, you know, as we pursue global opportunities or maybe other transformative opportunities as well.

Great. Thanks very much.

Thank you. Our next question comes from Anupam Rama from JP Morgan. Please ask your question.

Hey, guys. Thanks so much for taking the question. Just a quick specific question on Adagrassive. With the U.S. PDUFA and second line set for later this year, are there plans to speak to regional regulators on an approval on China data for second line lung for Adagrassive? Thanks so much.

Alan, do you want to take this one?

Yeah, sure, Billy. Yeah. Thanks for the question. So, um, yeah, so as you of course know that Maradi has, uh, announced the, uh, accepting the filing with that PDUFA date that we mentioned earlier in December. Um, and, um, we believe that, uh, we, um, we are already in contact with, um, China. And that will continue with our path forward. That should not change any of the timelines that we're looking for moving forward. And also, I know our partners, Maradi, are optimistic that, as you know, in the U.S., sometimes with COVID, data that's very encouraging, those announcements can come before, decisions can come before the PDUFA date. So we're looking forward to continue to work with our partner, Miradi, on this exciting and potential first-in-class and best-in-class agent in China.

Thanks so much for taking our questions.

Thank you. Our next question comes from Jonathan Chang from SVB Learing. Please go ahead.

Hi, guys. Thanks for taking my question. On B. marituzumab, to clarify, are you planning to initiate a registrational frontline gastric study in China in 4Q as a separate study from the Amgen Phase III studies? And if so, can you discuss the rationale for this? Thank you.

Alan, back to you.

Yes, sure. Thanks for the question. This is something that we're in discussion with our partners Amgen as the best method to move forward to get this exciting agent into patients in China. As you know, there's a significant number of patients that express FGFR2B. And so this is something that we're, again, very excited about. We're still working on details as to how that is going to play out. And we'll, of course, be releasing more information as we get closer to that date.

But, Jonathan, I think you are correct in assuming that it will be a registrational trial for Frontline.

Got it. But is there a reason why it would be like a separate study from the Amgen studies versus, you know, participating in the Amgen studies?

Yeah, as Alan noted, I think right now we're prepared to say that it's going to be, in one way or another, an efficient registration or trial pathway. So we're still, you know, working closely with Amgen.

We're still working out the Yeah, still working out the details is the best way to move forward with the option. I'm sorry, that can't be more specific.

Got it. Thanks for taking the question. Thank you.

Thank you. Our next question comes from Lee Chan from Goldman Sachs. Please ask your question.

Hey, thank you for taking my question. This is from Goldman. I think I got two questions on the financials. Number one is on the gross margin in the fourth quarter, it's looked relatively lower compared to previous quarters, 51% compared to 72% in third quarter 2021. So I'm trying to understand a bit more about the reason behind what's the impact from the sales milestones and also what's the impact from the rebates to the channel inventory in fourth quarter 2021. And if we, you know, average out or back it out, what will be the reasonable wash margin assumptions we should be assuming for the portfolio going forward in 2022. And secondly, given the current funding environment in China and also globally for biotech, last year, I think we still, companies still spend a decent amount of money on BD deals, licensing fees up to about getting very close to 400 million US dollars. But now getting into 2022, when we are facing the challenge in the funding side, how should we think about the budgeting for those BD deals? Are we going to spend still a lot of money on the BD deals this year, or we're going to be more focusing on budget control, refocusing on the clinical trials instead of a BD? Thank you.

Hey, Vy. Thanks for your two questions. So in terms of gross margin, fourth quarter 2021, if you were to add back the non-recurring items, the $7.5 million NRDL negative adjustment, as well as, which was in the press release and in our 10K, it was also disclosed that in the cost of goods sold line item, there was also a one-time payment to GSK for hitting a certain revenue threshold of $8 million U.S. dollars. And so without those one-time adjustments, gross margin would have actually increased quarter per quarter. So from 72% in third quarter to about 73% in fourth quarter. So for the year 2021, if you made those same adjustments, you would have also seen an increase as well. So gross margin in 2020 was 66 million, sorry, 66%. And 2021 normalized, it would have been around 70.9%. In terms of going forward, Ghost Market for 2022 and even beyond, as you know, it's really driven by the product mix and what launch trajectories of each product at their particular point in time. We'll need some time to find a steady state because we have such an intense launch schedule. hopefully you see that, you know, we're already seeing some, you know, some certain productivity gains, right? Even in the gross margin level. So, and then with that said, that segues into your second question. So yes, 2021 was, you know, our most active BD year. Eight new, you know, partnerships and assets, which we're quite excited about. Um, and we were very confident that it could create a lot of value, but you do hit on the point as well that, you know, the current capital market environment is a little bit different than in the previous years. Now we believe that, um, you know, it kind of felt tells nicely with where we are in our life cycle, you know, so our revenue momentum will continue this year and beyond. We're already going into productivity drive. So for example, in terms of our sales and marketing, team size and spend, we don't expect to see a notable increase this year. The investments we made last year and even the prior years, we're going to enjoy some of the benefits while not sacrificing any growth and also with a mind towards preparing for additional launches in the coming years. But we will and expect to do additional deals. And I'll let Jonathan and other colleagues chime in. We are very selective, as you know, But if there are opportunities, especially in this market where there's a little bit of a dislocation, if there are very value-creating opportunities that meet our very high threshold and criteria, we have the balance sheet to do it. And we are at the point in time of our company's lifecycle where we have that flexibility to manage growth and productivity.

All right. Thank you. Our next question comes from Seamus Fernandez from Guggenheim Securities. Please ask your question.

Great. Thanks for the question. So just one quick question. You know, your next big catalyst, I think, really will be tied to Car XT. Just love to get a sense for, you know, the key attributes that you think are likely to be most impactful. You know, is it You know, does it relate to both negative and positive symptoms? And then just in terms of the overall environment in China for what I think is, you know, largely a nascent opportunity but one supported by the Chinese government now, can you just walk us through how to think about the opportunity for CAR-XT in schizophrenia but then perhaps more broadly in Alzheimer's disease? Do you really view these as two unique potential indications? Thanks.

Thanks, Seamus. Harold, do you want to take the first part of the question, and maybe Jon could chime in on the second?

Yeah, thank you. Thanks for the question. It's really a new opportunity for us. It's an anchor asset, as you already heard from others, and we see this really differentiated. product for us and in the market here in general, and especially meeting an unmet need in China. So having said that, you already hinted at the efficacy side in the schizophrenia symptom scores on the negative symptom side, which is something that is not well taken care of by current second generation inter-psychotics. But it's not, by the way, it's also efficacious on the positive symptom side, so we're covering very broadly with this drug combination, the most important symptoms that you see in schizophrenia patients. The second point, which should really not be forgotten, is safety. And the safety of this drug, it has a totally different safety profile from all the other antipsychotics with their EPS, their extrapyramidal symptoms, and so on and so forth, which are a class effect seen regularly weight gain commonly seen, other side effects, all related to the serotonin and dopamine-ergic effects of this drug class. We are obviously different here, and this is one of the differentiating features. What we believe is that schizophrenia is not well covered on the symptom score, the negative symptom score, and that's a worldwide phenomenon, and we see ourselves differentiated here because There are no other drugs that really cover that area as well as Claruna XT. So having said that, the overall market size is considerable. It's considerable in general because schizophrenia is such a common indication, such a common affliction. But it's also something which the government in China is trying to address. Now, there is still a deficit here in the coverage and in the... in the clinical care setting in China for this indication. It was recognized by the government in recent years, and they will act accordingly. This is already a well-known thing. Schizophrenia is a very common affliction, as I said, in China with what we assume is at least 8 million patients that are currently diagnosed as such. And we know that this doesn't cover everybody. This is not a very hard statistic. also a very concentrated market, I should say, because unlike the U.S. or Europe, you don't see the treatment really initiated in a thousand small places, but it's much more concentrated in the medical centers. So we see this as a way to address rather quickly a high unmet medical need in China. Does that sort of answer your question, or should I go into any details?

No, that's very helpful. Thank you.

Thank you. Our next question comes from Yang Huang from Credit Suisse. Please ask a question.

Thanks for the question. So I got a quick one, too. So for 4Q, we saw Optune sales is about 11.5%. in 11.6, and then chain lock sales is about 2.9 something. And so chain lock sales, Q over Q, is actually declining. And the growth for opportune sales in 4Q seems also a little bit slowed down if we look at Q over Q. Just want to get some colors. Is there a particular reason for what we have seen for these two truck sales in 4Q? and what could we look forward for these two trucks commercial performance of the year?

Hey, Yang. Let me chime in here. Thanks for your question. So there are reasons. But at the same time, I think, you know, at the moment, you know, so kind of in a nutshell, let me just walk you through those two questions then. So Optune fourth quarter sales is $11.6 million. And so for the year, $38.9 million. So, you know, we've always said that the launch trajectory is not going to be as same as, let's say, you know, a drug like the Jula, et cetera. But having said so, you know, we expect a very durable growth curve over time. And we know this because we're also benchmarking because if you visit such a unique product, we're also looking at how opportunity is done, you know, sold throughout the world. including even Asia. And so, you know, we feel pretty, you know, as months go by, as quarters go by, you know, we see the progress continuing well. We see that one of our focus areas, execution is doing well. So, for example, the supplemental insurance plan, we signed up 33 plans, and it's, you know, one of the top assets that can be reimbursed. and is the only non-drug treatment option. So it really speaks volumes about how much value opportunity tumor treatment fields can have in the marketplace. Now, we're not here to make excuses, but I will also note that there were some restrictions in large hospitals in the northern region of China due to COVID. But again, we're not going to sit here and complain about that. We're going to really just focus on making sure that the long-term trajectory remains robust. So the 9% quarter-per-quarter from third quarter to fourth quarter, one could say that it was lower than 12% from second quarter to third quarter, but I also want to make that small remark. But, you know, 2022, we're pretty keen on the supplemental insurance strategy. We see nice, robust volume uptake coming from, you know, major plans like Shanghai, like Hangzhou. And it's great to see patients, you know, getting access to this technology. Kinloch, you know, fourth quarter was 2.9 million, 11.6 million for the year. You know, significant growth year over year. but it was down from third quarter. But it's not due to demand. We had some channel inventory build, and I think that it was impacted also from the intrigue outcome. And I think that's all we'll kind of say at this moment. But the more important point is that we see strong hospital demand in fourth quarter. which was, you know, which allowed us to absorb the inventory build. And so I think, you know, kind of reset our 2022 path.

Okay. Yes, that's helpful. Thank you very much.

Thank you. Our next question comes from David Lee from Bank of America. Please ask your question.

Great. Thank you, management, for giving me the chance to ask questions. So some of our questions have been covered by the previous Q&A. So basically, now I have two questions. Number one is, so what's your NRDL plan for your newly approved assets, for example, like Ching Log and New Zara? How shall we think about zero revenue ramp-up? So this is my first question. My second question is, currently you have $1.4 billion cash on your balance sheet. So how do you spend this money? What about this? burning wheat and the cash round wheat now. That's my second question. Thank you.

Thank you, David. So I'll try to quickly address your two questions. The first part on NRDL plan. So you are kind of right, you know, calling out a new Zyra in particular, a drug like that would require, you know, antibiotic in China, even though it's next generation, you know, innovative petrosecond class. it would require NRDL for volume, and it will be eligible for this year's negotiation. And then I think you were mentioning about the doula, but maybe you're talking about Kinloch as well. So yeah, Kinloch is also eligible. It was eligible last year, and it will be eligible this year for NRDL negotiation for a fourth line. So we'll make the right strategic decision based on the outcomes. of those negotiations. Now, to your second question about the cash burn or how to allocate our capital uses, we do have a strong balance sheet. We ended the year with a little over $1.4 billion, and you will see that in terms of core cash spend outside of the upfront BD activities, it was just shy of $310 million. So it gives us a lot of flexibility and buffer, as I mentioned before. However, we're not going to rest on our laurels there. You know, we are still in growth stage. There's no doubt about that. But we're also entering into productivity stage at the same time. So I made comments earlier about the, you know, some operating leverage and productivity drive in the commercial investments we made so far. You know, our R&D Core R&D spend did increase 80% year over year from 2020 to 2021. Our R&D, quite frankly, has been very efficient given the size of our portfolio. It will increase this year given the progress we're making with many new assets we brought in last year as well. But you can expect us to maintain the same level of productivity efficiency in the R&D side. So again, you know, it gives us, you know, a lot of flexibility on how to manage growth and productivity from here on out.

All right. Thank you, Billy. That's very helpful. I have no further questions. Thanks, David.

Thank you. Our next question comes from Wilford Yuen from Macquarie. Please ask a question.

Thank you for taking my question. I've got a quick one on TTF tumor-treating field. What is our expectation for gastric cancer as we have Alan Li, We will have the stuff you have the pilot trial data later this year. So how should we Alan Li, How should we be think of the bar to efficacy that will lead us to design to move further to a larger clinical trial. Thanks.

Alan Li, Alan, do you want to take this last question.

Yeah. Yeah, sure. Thanks for the question. You know, as you point out, what we'll be doing is we'll be analyzing the data, looking at, in particular, response rates, progression pre-survival, to see how that matches up with historical controls, to see whether, you know, that data is exciting enough to move forward in a next registrational-type randomized study. So we're excited and looking forward to the data readout moving forward. So stay tuned, and hopefully that addressed your question. Got it.

All right, thank you. I am showing no further question at this time. I'll now turn the call back to Zyla, CEO, Samantha Dew, for closing remarks.

Thank you, Operator. I want to thank everyone for taking the time to join us on the call today. We appreciate your support and looking forward to updating you again after the fourth quarter. Operator, you may now discontinue the call. Thank you.

Thank you. Well, that does conclude our conference for today. Thank you for participating.