Zai Lab Ltd

HKEX:9688

Earnings Call Transcript 2022-Q2

[Operator]

Hello, ladies and gentlemen, thank you for standing by and welcome to Zai Lab Second Quarter 2022 Financial Results Conference Call. [Operator Instructions] 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 Zai Lab, who will make introductory comments.

[Ki Chul Cho, executive]

Thank you, operator. Good morning, good evening and welcome, everyone. Zai Lab recently issued a press release providing the details of the company's financial results for the second quarter 2022, as well as product highlights and corporate updates. The press release is available in the Investor Relations section of the company's website at ir.zailaboratory.com.

Today's call will be led by Dr. Samantha Du, Zai Lab's Founder, Chairperson and Chief Executive Officer. She'll be joined by Josh Smiley, Chief Operating Officer, who many of you know and officially started this month and will discuss his priorities and focus areas for the company; Dr. Alan Sandler, President and Head of Global Development, Oncology, who will discuss advances with our oncology product candidate; and Dr. Harald Reinhart, President and Head of Global Development, Neuroscience, Autoimmune and Infectious Diseases, who will speak about the progress we have made in those 3 therapeutic areas. And I will discuss the performance of our market products and conclude with comments on our financial results. Additional executives will be on to answer questions during the Q&A portion of the call.

As a reminder, during today's call, Zai Lab will be making certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including our business plans, objectives, and timing and success of our clinical trials, our sales and revenue forecasts for the product and product candidate, regulatory applications and commercial launches. These forward-looking statements are not guarantees of future performance and therefore, you should not put undue reliance upon them. These statements are subject to numerous risks and uncertainties. Actual results could differ materially from what we expect due to variety of factors, including those discussed in our SEC filings.

At this time, it is my pleasure to turn the call over to Zai Lab's Founder and Chairperson and Chief Executive Officer, Dr. Samantha Du.

[Ying Du, executive]

Thank you, Billy. Hello, everyone. Thank you all for joining us today. I'm happy to report that as we have consistently done in the past, we executed well in the second quarter and delivered strong results. Despite the challenging operating environment, Zai continued to meet all of our corporate goals for 2022, including the BLA acceptance of efgartigimod by China's NMPA.

Earlier this week, KarXT had a positive top line data readout, from its Phase III EMERGENT-2 trial in schizophrenia. We believe KarXT could be very important treatment options as the first new class of medicines in over half a century for the many patients suffering from schizophrenia in China and globally.

In addition, our pipeline continues to mature and demonstrate its first best-in-class potential, adagrasib, CLN-081, repotrectinib, efgartigimod, ZEJULA and tumor treating fields, as each had positive clinical data readouts in the second quarter. For the remainder of the year, we are on track to deliver our remaining 2022 corporate priorities, including an NDA submission to the NMPA, both the Sulbactam-Durlobactam, pending our partners U.S. filing progress, advancing ZL-1102, our innovative IL-17A Humabody program into full global development, as well as seeking NRDL inclusion for QINLOCK and NUZYRA.

We continue to evaluate our pipeline in order to focus our resources on the programs that have the greatest potential for patients, while strengthening our global competitiveness, and providing long term corporate sustainability. Importantly, our commercial team continues to drive growth with our full marketing products in Greater China and remain resilient in the face of the ongoing pandemic situation in certain regions of China.

Before I conclude, I'd like to welcome our Chief Operating Officer, Josh Smiley, to his first of many earnings and conference calls. Josh will make introductory comments and share some thoughts on Zai Lab before turning the call over to a discussion on Zai's overall update.

With that, I would like to turn the call over to Josh for comments. Josh?

[Joshua Smiley, executive]

Thank you, Samantha. I'm thrilled to be joining Zai Lab at such a pivotal time in the company's history. In preparation for my start, I had a chance to meet with many of the company's stakeholders over the summer, and I was consistently asked 3 questions. Why did I choose to join Zai Lab? What will my priorities be? And how will macro and political forces impact Zai Lab's trajectory? I will give a brief summary of my thoughts on these 3 questions before turning it back over to Alan, Harald and Billy to provide more color on Q2 performance.

First on why I joined Zai Lab. I've had a lot of experience with both R&D and commercial operations in China over the last 15 years in my prior roles. I've been intrigued by the massive opportunity emerging from both the commercial and scientific standpoint in China. I followed and respected Samantha and her leadership over multiple companies. I'm thrilled to have a chance to work with her and the great team at Zai Lab. And I'm excited by the opportunity to partner with other great companies around the world to bring global innovation into China and also to help bring Chinese innovation to Western markets, whether directly from Zai Lab or from China's expanding biotech ecosystem.

From start, Zai Lab is at a global perspective, and I'm looking forward to helping scale the company both in China and the U.S., and the opportunity is significant. This is a strong company today with 4 marketing products in China and a great pipeline of both partners and internal assets.

For the second question, in terms of my priorities, I started with 3 key areas of focus. First, continuing to drive commercial excellence in China. Our 4 product launches are off to a good start and we have a significant growth opportunities ahead in each product, and we have an exciting next set of launches that we need to prepare for and execute on, beginning with efgartigimod next year. Realizing the full value of our existing China portfolio with a high priority, will result in great benefits for patients and substantial revenue growth for the company.

My second priority is to expand our pipeline both in China and on a global basis. We have our first internally developed medicines ZL-1102, anticipated to start a global Phase-2 study in psoriasis later this year. And I will work with our team to bring in more best-in-class and first-in-class medicines. We have obvious expertise and capabilities in China that we will continue to leverage for new regional opportunities. But we're also well positioned now to bring that capability to partnerships and acquisitions in the U.S. and the rest of the world. So you should expect us to be active in business development for both new regional and global programs over the coming months and years.

Finally, I'll be focused on making sure that as we deliver on launches and pipeline opportunities, we also deliver bottom line results. We expect Zai Lab to grow considerably over the next years in sales, number of marketed products and breadth of portfolio. We will need an increasingly global infrastructure to support this growth. We'll build that in a lean, agile and productive way that enables both top line growth and robust profitability.

The third major area of questions I receive revolves around macroeconomic and geopolitical risks facing the company. This includes access to capital and our ability to maintain our U.S. stock listing, U.S. FDA challenges to Chinese data in registrational trials and concerns around drug pricing in China for innovative therapies. I joined Zai Lab with an understanding of these risks and commend the team for the success to-date managing these challenges. Having engaged KPMG a U.S. auditor that is subject to full review and inspection by the PCAOB, we believe that it will be in compliance with the audit requirements of both U.S. and Chinese laws for our fiscal year ending December 31, 2022. As a result, we believe that our NASDAQ listing will continue uninterrupted.

In Q2 we also achieved the primary listing on the Hong Kong stock exchange, enhancing the liquidity of our stock and making it available to more investors in Asia and around the world. These moves in combination with our strong balance sheet with over $1.2 billion in cash, should provide global investors with enhanced confidence in the company.

In terms of clinical data, we do not have any programs that rely on China-only data for global registration. Our core strategy is to participate in global registration trials, where Chinese patients and sites make up a reasonable percentage of the overall submission. We have many years of successful regulatory audits from around the world and are confident that our clinical quality meets the highest global standards. We've not observed any recent reluctance from global innovators to partner with us on their global registration program.

On pricing and access, we are confident that our portfolio of differentiated best-in-class medicines will command good pricing and broad access in China. We continue to see NRDL listing as a significant positive economic opportunity and are also encouraged by the continued growth of supplemental insurance across China.

Finally, of course, we have to navigate the impact of COVID restrictions. While we cannot predict the ultimate course of the virus or the control measures government authorities will take for the remainder of this year and beyond. We're very proud of the way our team had improvised and executed so far this year, as demonstrated, for example, in our increased sales of the ZEJULA and our milestones delivered in the pipeline. At this point, we do not expect significant negative impacts to any of our major pipeline milestones from further COVID restrictions. But do expect we will see some residual revenue impacts in the second half of the year from local restrictions and lockdown measures.

In closing, I'm excited to be at Zai Lab and looking forward to working with our great team and all of you on our very promising future.

Now I'd like to turn the call over to Alan, for comments on our oncology franchise.

[Alan Sandler, executive]

Thank you, Josh, and welcome to the team. Zai Lab's oncology franchise continued to make progress in the second quarter, including key clinical data readouts, as well as clinical trial initiation and regulatory progress. We also expect that a busy and productive remainder of 2022. We'll focus mostly on the clinical data updates from our clinical programs and then touch on what to look for over the rest of 2022.

From a clinical data perspective, we saw important updates from adagrasib, a highly selective and potent oral small molecule inhibitor of KRAS G12C; ZEJULA, a PARP inhibitor; and TTFields, the electric fields device that disrupts cancer cell division. At ASCO this year, Zai Lab presented a new pre-specified subgroup analysis from the Phase-3 PRIME study for niraparib in women in China with ovarian cancer. This analysis examined 384 newly diagnosed stage 3 or 4 ovarian cancer patients enrolled in the PRIME study who experienced either a complete response or partial response to the first line platinum-based chemotherapy. Results revealed a significant extension of progression free survival when compared with placebo, regardless of the response status to prior platinum-based chemotherapy.

Specifically, in the complete response group, the median PFS, 29.4 months for niraparib versus 8.3 months for placebo. And as a partial response group, the median PFS was 19.3 months for niraparib versus 8.3 months for placebo. The safety profile of niraparib was consistent with previous clinical trials with no new safety issues identified in the subgroup analysis.

Also at ASCO, Zai Lab and Novocure announced the EF-31 Phase II pilot study, evaluating the safety and efficacy of TTFields together with standard of care chemotherapy alone or in combination with trastuzumab for HER2+ patients as a first-line treatment in patients with advanced gastric cancer. This trial met its primary overall response rate endpoint with supportive signals across secondary endpoints.

For adagrasib, our partner Mirati announced 2 clinical data updates. Most recently in June, Mirati presented the full results from the registration-enabling Phase II cohort of the KRYSTAL-1 study, evaluating adagrasib in patients with previously treated non-small cell lung cancer, harboring a KRAS G12C mutation. The results from the study revealed an overall response rate of 43% with a disease control rate of 80% and a median duration of response of 8.5 months. The median PFS was 6.5 months and with the January 15, 2022 data cutoff, the median OS was 12.6 months. The results of the CNS-specific activity is stable, previously treated CNS metastases revealed an intracranial overall response rate of 33%.

In addition to these results, Mirati reported updated findings from a pooled analysis from the KRYSTAL-1 study, including the registrational Phase II and Phase I and 1b non-small cell lung cancer cohorts. The results of this pooled analysis of non-small cell lung cancer cohort revealed an overall response rate of 44% with a disease control rate of 81%. The median duration of response was 12.5 months and the median PFS was 6.9 months. With January 15, 2022 data cutoff, the median OS was 14.1 months.

Also in June, Mirati announced the results of a prospective analysis from the Phase Ib cohort of the KRYSTAL-1 study evaluating intracranial responses of Adagrasib in patients with KRAS G12C mutated advanced non-small cell lung cancer with active and untreated CNS metastases. The results of the CNS specific activity in these patients revealed an intracranial overall response rate of 32%.

For bemarituzumab, our partner, Amgen, reported that the final analysis of the FIGHT study, Phase II randomized, double-blind controlled study evaluating bemarituzumab and modified FOLFOX6 in patients with previously untreated advanced gastric and GEJ cancer completed. These results continue to demonstrate that bemarituzumab plus modified FOLFOX6 improves the clinical outcome of patients with FGFR2b expressing tumors with no new safety concerns. A greater survival benefit was observed with increasing FGFR2b expression levels. Zai Lab collaborated with 5 Prime, which was later acquired by Amgen on the FIGHT study in Greater China.

Throughout the year, our oncology pipeline will continue to be productive, including regulatory and clinical data updates from the adagrasib program in the second half of the year, top line data from the TTFields Phase III pivotal LUNAR study in early first quarter of 2023, as well as numerous regulatory submissions and clinical trial initiations from across the franchise. With a number of potentially best-in-class and first-in-class products, we're very excited about our oncology pipeline at Zai Lab.

And now I will turn the floor over to Dr. Harald Reinhart to discuss progress in our autoimmune and neuroscience therapeutic areas. Harald?

[Harald Reinhart, executive]

Thank you, Alan. I'll start with autoimmune diseases and efgartigimod or its marketed name, VYVGART. In July 2022, Zai Lab announced the NMPA accepted the BLA for efgartigimod alpha injection for the treatment of adult patients with generalized myasthenia gravis in China, and that efgartigimod was introduced to the Hainan International Medical Tourism Pilot Zone. And in July 2022, the first Chinese patient was treated with efgartigimod. These important milestones bring us closer to delivering a truly novel treatment for the many myasthenia gravis patients who face challenges living with this complex and difficult to control autoimmune disease.

Moving to the neuroscience area. As you recall, last November, we entered into an agreement with Karuna Therapeutics for exclusive rights to KarXT in Greater China. KarXT is an oral investigational M1, M4 preferring muscarinic agonist that stimulates receptors in the central nervous system implicated in various psychiatric conditions. It is a late-stage clinical trials for the treatment of schizophrenia and psychosis in Alzheimer's disease.

And just this Monday, our partner Karuna reported positive top line results from its Phase III EMERGENT-2 trial, evaluating the efficacy, safety and tolerability of KarXT in adults with schizophrenia. The trial met its primary endpoint with KarXT demonstrating a statistically significant and clinically meaningful 9.6 point reduction in the positive and negative syndrome scale, total score compared to placebo at week 5 with a p-value of less than 0.0001.

KarXT also demonstrated an early and sustained statistically significant reduction of symptoms as assessed by PANSS total score starting at week 2 and maintained such reduction through all time points in the trial. KarXT also made key secondary endpoints, demonstrating a statistically significant reduction in both positive symptoms, i.e., hallucinations or delusions and negative symptoms for instance, difficulty enjoying life or withdrawal from others or schizophrenia as measured by the PANSS positive, PANSS negative and PANSS Marder negative subscales.

KarXT was generally well tolerated with the side effect profile substantially consistent with prior trials of KarXT in schizophrenia. We are thrilled that these top line results from the pivotal Phase III EMERGENT-2 trial confirm what we have seen in the Phase II EMERGENT-1 trial. These data build on the growing body of clinical evidence supporting the potential of KarXT as a new and differentiated approach for schizophrenia demonstrating notable improvements across both positive and negative symptoms, while not being associated with common problematic side effects of current therapies such as weight gain, sedation and movement disorders.

With more than 8 million people in Greater China living with schizophrenia, we believe KarXT has the potential to become a new standard of care for treating schizophrenia and other psychotic disorders. Our partner plans to submit a drug application with the U.S. FDA in mid-2023.

With regards to the China development plan, the Zai team is in discussion with the CDE and getting ready to submit the clinical trial application for a bridging program in China.

Moving to ZL-1102, our topical IL-17 monoclonal antibody fragment program. Last year, we reported that we were very excited to show skin penetration and early clinical benefit in a proof-of-concept trial in patients with chronic plaque psoriasis. In the second quarter of this year, we filed a protocol to the FDA, and we continue to work with the FDA on the proposed global Phase II program. We are on track to start a dose finding Phase II trial of ZL-1102 in the second half of this year.

And now Billy will speak about progress with our commercial products and financial results. Billy?

[Ki Chul Cho, executive]

Thank you, Harald. Zai Lab continues to execute well with strong results delivered in the second quarter. For 3 months ended June 30, 2022, total revenues were $48.2 million compared to $36.9 million for the same period in 2021, representing a 30% year-over-year growth.

Product revenues for the period were $34.1 million for ZEJULA compared to $23.4 million for the same period in 2021, representing a 46% year-over-year growth, $11.6 million for Optune compared to $9.5 million for the same period in 2021, representing a 22% year-over-year growth. $0.6 million for QINLOCK compared to $4 million for the same period in 2021 and $1.3 million for NUZYRA compared to nil for the same period last year.

QINLOCK and NUZYRA are scheduled to enter negotiations with the NMPA regarding potential inclusion in the NRDL. And in June 2022, the company lowered the selling price for these products. As a common practice in China, we accrued sales rebates as compensation to distributors for those products previously sold at the price prior to the reduction of $2.7 million for QINLOCK and $0.2 million for NUZYRA, respectively, during the 3 months ended June 30, 2022.

R&D expenses were $66.1 million for the 3 months ended June 30, 2022, compared to $142.2 million for the same period in 2021. The decrease in R&D expenses was primarily due to lower upfront payment for new licensing agreements, partially offset by increased expenses related to the ongoing newly initiated late-stage clinical trials and higher payroll and payroll-related expenses from increased R&D headcount. Excluding upfront payments for new licensing agreements, core R&D expenses were $51.7 million for the same period in 2021.

SG&A expenses were $63.4 million for 3 months ended June 30, 2022 compared to $54.4 million for the same period of 2021. The increase was primarily due to payroll and payroll-related expenses from increased commercial and general and administrative headcount as Zai Lab continues to expand and invest in its commercial operations in China in anticipation of strong top line growth over the next few years.

Net loss was $137.9 million for the 3 months ended June 30, 2022, compared to $152.3 million for the same period in 2021. The decrease in net loss was primarily due to no upfront payments for new license agreements, partially offset by increase in foreign exchange loss of $42.2 million, which is a noncash adjustment. Net loss per ordinary share during the 3 months ended June 30, 2022, was $0.14 compared to $0.18 for the same period in 2021. Net loss per ADS during the 3 months ended June 30, 2022, was $1.44 compared to $1.76 for the same period last year.

As of June 30, 2022, cash and cash equivalents, short-term investments and restricted cash totaled $1.26 billion compared to $1.31 billion as of March 31, 2022.

We would now like to turn the call back over to the operator to open up the line for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Mike from Jefferies.

[Yuchen Ding, analyst]

This is Dennis Ding on for Mike. Can you just briefly talk about your views around the HFCAA and your comment that Zai Lab can be audited in the U.S. versus having to be audited in China. How confident are you the FCC would be on board with this? Have you engaged with them specifically on this?

[Ki Chul Cho, executive]

Josh, do you want to take this one?

[Joshua Smiley, executive]

Sure. It's Josh. Thanks for the question. As we've said, we appointed KPMG in the U.S. as our auditor for 2022, in the second quarter. And as such, the PCAOB will have full access to KPMGs, work papers and they'll do the audit for 2022. So from that standpoint, we're compliant with the Holding Foreign Companies Accountable Act and the next time you'll see any movement on this would be when we file our 10-K and KPMG completes our audit.

We're very confident that given the control practices and reporting and things we have here that, that audit will go well, and we will not be on the list once we file the 10-K. I think between now and then, really, the work is to -- is for KPMG to prepare for the year-end audit and ultimately sign off on our 2022 financials. So again, we're quite confident that we've met the requirements of the law.

[Operator]

Our next question comes from the line of Yigal Nochomovitz from Citi.

[Yigal Nochomovitz, analyst]

So you made the statement that you believe that you can become the market leader for ZEJULA in the PARP space in China. So if you could perhaps just drill down a little bit more into that statement in terms of the metrics, data and/or internal projections that you're making that will make you confident in making that statement?

[Ki Chul Cho, executive]

Yigal, I'll take this one. Thanks for your question. So we track many things. I think broadly, I'll say that we continue to see the awareness and penetration of, first of all, the PARP asset class continue to increase, particularly since we came into the picture. And as the size of the pipe been growing, our market share has just continued to grow really kind of starting last year. And even despite the recent sort of COVID situation, it didn't stop from that trend. So it was really kind of a unidirectional evaluation.

You're asking about other metrics. There's a lot. So we publicly sort of state the number of hospital listings and we're up to about 1,700 as of June -- 1,672 to be exact, hospital listings for ZEJULA as of June '22, and that's going to continue to climb. We're tracking, of course, market share data, as I mentioned earlier. It's dampening what is published by IQVIA. It gives a good reference, kind of the awareness usage, the first line and the second line. So we track a lot of things. And it's all pointing towards the initial statement I mentioned. And that's what gives us the confidence that should this hold, and we expect it to, we have an internal goal to be the market share leader, no later than next year.

[Operator]

Next question comes from the line of Anupam Rama of JPMorgan.

[Anupam Rama, analyst]

There was a comment on the call about doing a bridging study in China for KarXT in schizophrenia. So why is there no regulatory path on X China data for KarXT similar to what you had with ZEJULA, QINLOCK?

[Ki Chul Cho, executive]

Harald, please.

[Harald Reinhart, executive]

Yes, thanks for the question. Bridging is the standard way of doing things when you don't have data in China per se. We had a different situation, for instance, for efgartigimod and for some of the other programs you mentioned, where we had some easy Asiatic data at least. This is not the case for the KarXT program. So we are now in discussions with the CDE on a bridging program, which will allow us then to expeditiously move forward in China as well.

[Operator]

The next question comes from the line of Jonathan Chang from Leerink.

[Jonathan Chang, analyst]

On KarXT, can you discuss the schizophrenia treatment landscape in China, and the similarities and differences versus the U.S.?

[Harald Reinhart, executive]

Yes. Thank you for the question, Jonathan. This is a world united when it comes to psychosis treatment. And indeed, the second-generation antipsychotics are used in China as they are in use elsewhere, there is a movement away from first-generation antipsychotics because of their side effect profile. But as you probably know, the side effect profile of the second-generation antipsychotics -- antipsychotics, which are all serotonin active or dopamine active agents is quite well known and understood. And it's really a part of some side effect, and it has led to the discontinuation of the treatment over -- that shouldn't probably be much longer in a given patient than it currently is.

So the treatment paradigm in China is based on the safe treatment paradigm and similar drugs, as you would see elsewhere in the world, in the U.S. or in Europe. There is no other drug that is like the KarXT drug. It really stands out by its mode of action. So this is our opportunity to show differentiation. And we are really delighted to see the results of the EMERGENT-2 trial, which showed that this assumption was correct. So thanks for the question.

[Operator]

Next question will come from the line of Ziyi Chen of Goldman Sachs.

[Ziyi Chen, analyst]

Actually 2 questions. First is about Optune sales in second quarter because we feel like the sales were pretty receded in the second quarter. However, we do notice that because of the lockdown, very limited hospital visits and surgery in the second quarter, particularly in some of the large cities. Could you elaborate a bit more on what kind of efforts you have done -- by the sales team to achieve that recede in sales?

And also second question on QINLOCK, this is a very small indication fourth-line GIST. And why does Zai Lab now choose to prepare for another negotiation given there will definitely going to be a price cut. And at this time point, you already get into probably 70-plus since the insurance plans is covering QINLOCK. So actually evaluate the potential savings on the SG&A side by getting to an NRDL and how much volume uptick you should be expecting for such a small indication?

[Ki Chul Cho, executive]

Thanks for your questions. I'll take these questions. So yes, Optune, we had year-over-year growth, it was $1 billion despite the fact that it's not an NRDL listed treatment option. So there's more of a concentrated market action strategy, clustered around sort of Tier 1, Tier 2 cities. And of course, we all know about the market access challenges in the second quarter. But we've continued to progress well.

First of all, our team as an institution, we've been under a kind of a COVID world and been operating within it for the past 2-plus years. So there's been flare-ups throughout China, as you know, during that time nothing as kind of structural as kind of Shanghai recently. But we've discussed on the first quarter call, the things that we deployed a lot of -- kind of technology-enabled solutions, kind of, of course, resilience and hard work goes into that. And I think just a good -- a big credit goes down for our commercial team. But also, in addition to that, we've now listed on 50 supplemental insurance plans for Optune, and we're going to continue to grow that. And it's already the second most reimbursed program in the supplemental insurance program after KEYTRUDA, and that's when you're going to continue to grow.

So I think these are the 2 factors. So I hope that gives you a little bit of color around resilience. And of course, it's really owning class treatment and these GBM patients really do need access to additional treatment option innovation.

And your second question was around QINLOCK, our decision to go into NRDL this year. And first of all, I would say that QINLOCK is -- we believe they're strongly benefitting established as a standard of care for fourth-line GIST. It's recommended right now as in the treatment guideline as really the only therapy with 1A-level evidence for advanced GIST patients, in all-comer setting.

We hope to actually kind of expand that treatment guideline into an earlier line setting. And if we can get that accomplished, you'll see that in the public domain. But that really is about building awareness and there's still 7,000 roughly patients in fourth-line GIST alone, and we think we can really try and treat many more patients just in that population and hopefully even beyond.

So this is always part of our strategy to pursue NRBs this year, given, of course, last year, we're waiting for the second-line data, which, in some respects, the entry study has some interesting favorable safety profile compared to sunitinib. So we've done everything we can to leverage that and started to treat as many patients, GIST patients we can.

[Operator]

Next questions are from the line of Seamus Fernandez from Guggenheim.

[Seamus Fernandez, analyst]

So my question is actually on KarXT. Can you guys just give us a sense of where penetration of antipsychotics actually steps in the 8 million patients that you guys cite. And just given where we stand in the development of that market, where do you feel KarXT could go relative to other markets? Obviously, the U.S. market has lots and lots of product available. But here, it seems like there's a more limited number of products that are likely available in China, and there's quite a bit of opportunity to really take substantial market share once the product becomes available. So just interested to know how you guys are thinking about that?

And then secondarily, just broadly your thoughts on the adagrasib opportunity in China would be helpful. Just as we kind of think about the opportunity for combination with PD-1 versus just the stand-alone opportunity in the KRAS patient population?

[Ki Chul Cho, executive]

Josh, do you want to take the first one on KarXT?

[Joshua Smiley, executive]

Yes, I can start on...

[Ki Chul Cho, executive]

Or Harald do you want to take it?

[Joshua Smiley, executive]

Please go ahead.

[Harald Reinhart, executive]

Yes. Let me take a first stab at the answer here with KarXT in the market in China. It's an underserved market. Let me just start up by saying it's a large market, but it's also underserved and it's been recognized by the government has been underserved because there is no effort to really address the services that relate to psychiatric diseases, as a government program and a recognition that there is a need to widen the access to antipsychotics and treatment options, both personalized as well as treatment wise in the Chinese population.

You're correct, there is a more limited spectrum of other treatments currently available. But clearly, a drug, which is differentiated like KarXT will have a -- leave a mark, both in the U.S. and in China once its approved. The main differentiation features are really what makes this drug either useful as a stand-alone or as an add-on treatment. The current program is as a stand-alone. And as such, we hope to get the approval eventually. But clearly, the side effect profile is not overlapping. And as such, you have greater options here to use a drug which is more -- better tolerated. So I leave it at that. Maybe somebody else from our team can speak to the other market aspects in China.

[Ki Chul Cho, executive]

Yes. Maybe Josh, feel free to chime in, but I'll also -- just piggybacking off Harald, I'll just mention that there are over 8 million schizophrenia patients in China today. And the number to really think about TAM in China is how many of these patients are actually diagnosed. And you can look at it from 2 ways. One is we do know right off the bat that around 4.3 million schizophrenia patients are in the registered cases with the national severe mental illness department.

Another way to think about that is the reason -- another way to triangulate is that around half of all schizophrenia patients are being treated today. And that gets you to around the same number, around $4.2 million, $4.3 million. So that's a pretty good, I think, a solid number to start with. And if you even think about a decent penetration with potentially a brand-new class of drug in 5-plus decades, I think the opportunity here is quite compelling, and we can't be more excited.

The part 2 question, yes, the second question, adagrasib. So Alan feel free to chime in and others. But I think the question was around for the recent -- probably the WCLC data, that's probably what Processing's inquiry. And Seamus, you hit on the nail. I think for adagrasib for KRAS, it's really the battle in frontline, not with lung cancer, right? It's a key area of how you're going to differentiate and have the 2 programs here, sort of duke it out, if you will.

This is pretty significant for us in China, and there's going to be another data update later this year. So well, stay tuned for that. But you're talking about 700,000 new nonperforming test patients every year in China. And there's not a lot of good publication on the mutation rate for G12C. The only thing that's out there is, I think, a publication out of, I think, Hong Kong that has something like 35%. So that's what we're using for now. But we believe that can only go up as we've already initiated trials for the first time in KRAS G12C in China, a few trials. And we think that as the awareness grows in actual patients are being treated with KRAS treatment options, we're going to have much better data because, as you know, kind of in the U.S. or globally, it's kind of at around 13% plus. And let's see if we can inch towards that. But -- so it's a pretty significant opportunity.

[Alan Sandler, executive]

Billy, let me -- maybe I'll add a little more color as well to that and just maybe broaden the question just a bit. So as Billy mentioned, we're very excited about this from a scientific perspective to be able to participate in the first attempt -- successful attempt of treating KRAS12C mutation. So very excited about that opportunity. And the U.S., the upcoming U.S. approval is going to be very important to help accelerate that pathway for regulatory approval in China, and we're in discussions with the CDE. Moving forward we've already started participating in global studies, the KRYSTAL-10 in second-line, CRC and KRYSTAL-12 in the second line plus non-small cell lung cancer global studies.

Importantly, we believe in the non-small cell lung cancer studies, we're using the tablet formulation, which believe cannot improve the GI tolerability. And lastly, just want to close with, we do also believe, along with our partners, of course, and Mirati, adagrasib, has a differentiated profile over LUMAKRAS, and we believe can be first-in-class and best-in-class, along with other opportunities as well, such as frontline small cell lung cancer in combination with checkpoint inhibitors. So again, very excited and looking forward to this moving forward.

[Operator]

We have another question from the line of Yang Huang from Credit Suisse.

[Yang Huang, analyst]

I have 2 quick questions. The first one is ZEJULA. So we know that the ZEJULA approval has been 5-years since it's approved in the U.S. However, as indication expansion is still kind of in the process and it only has one cancer indication. So can you talk about the future indication expansion opportunity in China for the ZEJULA?

[Ki Chul Cho, executive]

Alan, I think that's for you.

[Alan Sandler, executive]

Yes. Yes, sure. Thanks for the question. So I will mention, and I think you alluded to this as well, that there are lung cancer in terms of non-small cell lung cancer and also breast cancer, global registrational trials are ongoing. There's also an early Phase 0 clinical study along with the IV brain tumor center looking for GBM patients. We are constantly working with our partners at GSK and the ZEJULA life cycle management and will be scouring for potential opportunities, both either locally or with GSK and global projects. But -- and thank you for the question.

[Yang Huang, analyst]

Just a quick follow-up. My second question is on our gross margin. So in this quarter compared to the same quarter last year, the gross margin for our product seems to be down. Is there a particular reason for that?

[Ki Chul Cho, executive]

Yang, I'll take this one. I mean, so you -- so the nonrecurring adjustment that you saw of around $30 million that drops straight to the bottom line, right, on gross margin, so that would probably explain it. But I'd also sort of guide towards our evolving gross margin as it's really a function of product mix and revenue ramp with new products. So hopefully that helps.

[Operator]

We have time for one follow-up questions from the line of Ding from Jefferies.

[Yuchen Ding, analyst]

In your prepared remarks, you talked a little bit more about expanding globally and the need for global infrastructure to support our growth and the fact that you guys will be more active in the coming months and year. So to us, it seems like you're emphasizing it a little bit more than you have in the past around globalization and things like that. So given you haven't really done many deals this year, is there a possibility we could see a larger announcement sooner rather than later?

[Ki Chul Cho, executive]

Josh, you want to take that?

[Joshua Smiley, executive]

Sure. Yes. And I think, first, as we mentioned in the quarter, we're advancing our internal asset ZL-1102 into a Phase II study. So that's -- we've got global rights there, and of course, are thinking about the opportunity for that potential product. I think as it relates to business development, from the beginning, Zai Lab has been geared towards global innovation. We built a great portfolio of regional opportunities in China and certainly are now looking to take advantage of opportunities on a global scale. The team has done a fabulous job of picking great products and winners.

And I think we certainly can use that capability to not just select potential partners for China, but on a broader basis. So I think that these deals come when they come, and we're not going to do a deal just to have a global product. It's going to be -- we use the same kind of evaluation process we use for all of our partnerships. So I think predicting if and when a global acquisition or license comes is -- would be very speculative. But we're certainly interested. And again, I think our capabilities of working closely with some of the best partners in the world gives us, I think, a really good insight into good opportunities and we'll be selective, of course. But when we see something that makes sense on not just a China basis, but on a broader global basis, we're going to -- we'll act.

[Ying Du, executive]

Yes. Also, Michael, that's a good question. And Zai Lab has been -- since inception, we have spent the last 5-years focused on internal discovery. So as we're moving forward, we will see those programs gradually enter into clinical stages as well. So thank you.

[Operator]

Thank you. I'm showing no further question at this time. I will now turn the call back over to Zai Lab's CEO, Samantha Du, for closing remarks.

[Ying Du, executive]

Thank you, operator. I want to thank everyone for taking the time to join us on this call today. We appreciate your support and look forward to update you again after the third quarter. Operator, you may now disconnect this call.

[Operator]

Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.