Zai Lab Ltd Q2 FY2022 Earnings Call

Hello, ladies and gentlemen, thank you for standing by and welcome to Zai Lab's Second Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that 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 Zai Lab, who will make introductory comments.

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 will be joined by Josh Smiley, Chief Operating Officer, who many of you know had officially started this month and will discuss the priorities and focus areas of 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 three therapeutic areas; and I will discuss the performance of our marketed products and conclude with comments on our financial results. Additional executives will be available 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 and objectives and timing and success of our clinical trials, our sales and revenue forecasts for our products and product candidates, regulatory applications, and commercial launches. Such 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 various 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, Chairperson, and Chief Executive Officer, Dr. Samantha Du.

Thank you, Billy. Hello, everyone, and 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 for efgartigimod by China’s NMPA. Earlier this week, KarXT had a positive topline data readout from its Phase 3 EMERGENT-2 trial in schizophrenia. We believe KarXT could be a very important treatment option 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 first and best in class potential. Adagrasib, CLN-081, repotrectinib, efgartigimod, ZEJULA, and Tumor Treating Fields have 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 for the NMPA for sulbactam-durlobactam pending our partner's U.S. patent progress, advancing ZL-1102, our innovative anti-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 enhancing our global competitiveness and providing long-term corporate sustainability. Importantly, our commercial team continues to drive growth with our four 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 would like to welcome our Chief Operating Officer, Josh Smiley, to his first earnings and conference call. 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.

Thank you, Samantha. I am 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 three 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 three questions before turning it back over to Alan, Harald, and Billy to provide more context 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 opportunities emerging from both a commercial and scientific perspective in China. I followed and respected Samantha and her leadership over multiple companies and am thrilled to have a chance to work with her and the great team at Zai Lab. I'm excited about 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 the start, Zai Lab has had 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 four marketing products in China, and a great pipeline of both partnered and internal assets. For the second question, in terms of my priorities, I'll start with three key areas of focus. First, continuing to drive commercial excellence in China, our four product launches are off to a good start, and we have significant growth opportunities ahead for each product, with 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. I will work with our teams 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 will 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 coming years in sales, number of marketed products, and breadth of portfolio. We will need an increasingly global infrastructure to support this growth. We will 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've received 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 and registrational trials, and concerns around drug pricing in China for innovative therapies. I joined Zai with an understanding of these risks and commend the team for the success to date in managing these challenges. Having engaged KPMG, a U.S. auditor that is subject to full review and inspection by the PCAOB, we believe that we'll 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 programs. 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 an ordeal 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 are very proud of the way our teams have improvised and executed so far this year, as demonstrated, for example, in our increased sales of ZEJULA and the 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 we 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.

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 initiations and regulatory progress. We also expect to have 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. For KRAS: 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 was 29.4 months for niraparib versus 8.3 months for placebo, and in the 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 this subgroup analysis. Also at ASCO, Zai Lab and Novocure announced the EF-31 Phase 2 pilot study, evaluating the safety and efficacy of TTFields together with standard-of-care chemotherapy alone or in combination with trastuzumab for HER2-positive 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 two clinical data updates. Most recently in June, Mirati presented the full results from the registration-enabling Phase 2 cohort of the KRYSTAL-1 study evaluating adagrasib in patients with previously treated non-small cell lung cancer harboring KRASG12C mutation. The results from this 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 a January 15, 2022, data cutoff, the median OS was 12.6 months. The result of the CNS-specific activity in 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 2 and Phase 1/1b non-small cell lung cancer cohorts. The results of this pooled analysis of the 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 a 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 1b cohort of the KRYSTAL-1 study evaluating intracranial responses of adagrasib in patients with KRASG12C-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, a Phase 2 randomized, double-blind, controlled study evaluating bemarituzumab and modified FOLFOX6 in patients with previously untreated advanced gastric and GEJ cancer was completed. These results continued 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 Five 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 ongoing programs in the second half of the year, top-line data from the TTFields Phase 3 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 are 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.

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 alfa injection for the treatment of adult patients with generalized myasthenia gravis in China, and that efgartigimod was introduced through the Hainan International Medical Tourism Pilot Zone. 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'll 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 in late-stage clinical trials for the treatment of schizophrenia and psychosis in Alzheimer's disease. Just this Monday, our partner Karuna reported positive top-line results from its Phase 3 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 met key secondary endpoints demonstrating statistically significant reductions in both positive symptoms, i.e., hallucinations or delusions, and negative symptoms, for instance, difficulty enjoying life or withdrawal from others, as measured by the PANSS positive, PANSS negative, and PANSS Marder negative subscales. KarXT was generally well tolerated, with a side effect profile substantially consistent with prior trials of KarXT in schizophrenia. We are thrilled that these top-line results from the pivotal Phase 3 EMERGENT-2 trial confirm what we have seen in the Phase 2 EMERGENT-1 trial. These data will be able to 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 eight 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 new drug application with USFDA in mid-2023. Regarding the China development plan, the design 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 with the FDA and we continue to work with the FDA on the proposed global Phase 2 program. We are on track to start a dose-finding Phase 2 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.

Thank you, Harald. Zai Lab continues to execute well with strong results delivered in the second quarter. For the three months ended June 30, 2022, total revenues were $48.2 million, compared to $36.9 million for the same period in 2021, representing 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 of 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. 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 three months ended June 30, 2022. R&D expenses were $56.1 million for the three months ended June 30, 2022, compared to $142.2 million in the same period of 2021. The decrease in R&D expenses was primarily due to no upfront payment for new licensing agreements, partially offset by increased expenses related to the ongoing ZEJULA initiatives and those clinical trials and higher payroll-related expenses with increased R&D headcount. Excluding upfront payments for new licensing agreements, core R&D expenses were $51.7 million for the same period of 2021. SG&A expenses were $63.4 million for the three 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 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. The net loss was $137.9 million for the three 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 licensing agreements, partially offset by an increase in foreign exchange loss of $42.2 million, which is a non-cash adjustment. Net loss per ordinary share during the three months ended June 30, 2022, was $0.14 compared to $0.18 for the same period of 2021. Net loss per ADS during the three 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.

Our first question comes from Michael Yee from Jefferies. Please go ahead.

Hi, good morning. This is Dennis on for Mike. Thanks for taking our questions. 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 that the SEC would be on board with this? Have you engaged with them specifically on this? Thank you.

Hey Josh, do you want to take this one?

Yes, sure. Hi, 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 KPMG's 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 their audit. We're very confident that given the control practices, 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. Between now and then, the work 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.

Thank you for the questions.

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

Hi, guys, thanks very much for taking the question. So you've made the statement that you believe that you can become the market leader first of July in the park space in China. Could you 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? Thank you.

Hey, Yigal. I'll take this one. Thanks for your question. Broadly, I would say that we will continue to see awareness and penetration of the park asset class increased, particularly since we came into the picture. And then as that park continues to grow, our market share has just continued to grow, really starting last year. Even despite the recent COVID situation, it hasn't stopped that trend. So it was really a unidirectional thing. Are you asking about other metrics? There's a lot; we publically state the number of possible listings, and we're up to about 1,700, around 1,672 to be exact, possible listings for ZEJULA as of June 2022. That number will continue to climb. We're tracking market share data, published by IQVIA, which is a good reference. Kind of the awareness usage, first-line, second-line, we check a lot of things, and it's all pointing toward the initial statement I mentioned. That 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. Thank you for the question.

Next question comes from the line of Anupam Rama of J.P. Morgan. Please go ahead.

Hey, guys, hope you're all well and thanks so much for taking the question. There was a comment on the call about doing a bridging study in China for KarXT in schizophrenia. Why is there no regulatory path on ex-China data for KarXT similar to what you had with ZEJULA, QINLOCK? Yes, thanks so much.

Take that, Harald, yes Harald please.

Yes, hello. 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 Asian data at least. This is not the case for the KarXT program. 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.

Thanks so much for taking our question.

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

Hi guys, thanks for taking my questions. On KarXT can you discuss the schizophrenia treatment landscape in China and the similarities and differences versus the U.S.?

Yes, thank you for the question, Jonathan. This is a world united when it comes to psychosis treatment. Indeed, the second-generation antipsychotics are used in China as they are used elsewhere. There is a movement away from first-generation antipsychotics because of their side effect profile. The side effect profile of the second-generation antipsychotics, atypical antipsychotics, which are all serotonin-active or dopamine-active agents, is well known and understood. It leads to the discontinuation of the treatment over a longer period. The treatment paradigm in China is based on the same treatment paradigm and similar drugs that you would see elsewhere in the world, in the U.S. or in Europe. There is no other drug like KarXT; it really stands out by its mode of action. This is our opportunity to show differentiation. We are delighted to see the results of the EMERGENT-2 trial, which showed that this assumption was correct. Thank you for the question.

Thank you for the question.

Got it, thanks for taking the question.

Next questions will come from the line of Ziyi Chen of Goldman Sachs. Please go ahead.

Thank you for taking my questions. I have two questions. The first is about Optune sales in the second quarter, because we feel like the sales receded in the second quarter. However, we do notice that because of the lockdown, there were very limited hospital visits and surgeries in the second quarter, particularly in some of the large cities. Could you elaborate a bit more on this, what kind of efforts you've made by the sales team to achieve that recede in sales? And also the second question on QINLOCK is, this is a very small indication first line. Why does Zai Lab choose to prepare for an NRDL negotiation given there is definitely going to be a price cut? At this point, you already get into probably 70 plus supplementary insurance plans covering QINLOCK. How do you evaluate the potential savings on the SG&A side by getting into NRDL and how much uptake you should be expecting for such a small indication? Thank you.

Hi Ziyi, thanks for your questions. I'll take these questions. So yes, Optune, we had year-over-year growth that was resilient, despite the fact that it is not an NRDL-listed treatment option. There's more of a concentrated market access strategy clustered around tier one and tier two cities. We've experienced market access challenges in the second quarter but we've continued to progress well. Our institution has been operating in a COVID world for the past two plus years. There have been flare-ups throughout China during that time, and nothing has been as structurally challenging as Shanghai recently. We've discussed on the first quarter call the things that we've deployed, such as technology-enabled solutions to overcome challenges. The credit goes to our commercial team. Additionally, we've now listed on 50 supplemental insurance plans for Optune and will continue to grow that. It's already the second most reimbursed program in the supplemental insurance program after Keytruda, and that's why we expect continued growth. Your second question was about QINLOCK and our decision to pursue NRDL this year. QINLOCK has been established as a standard of care for advanced GIST. It is recommended right now in the treatment guidelines, being the only therapy with 1A level evidence for advanced GIST patients in all comers settings. We hope to expand that treatment guideline into an earlier life setting. If we can achieve that, you'll see that in the public domain. There are around 7,000 patients in China alone, and we think we can reach more patients in that population, and even beyond. This is part of our strategy to pursue NRDL this year, considering last year we were waiting for second-line data, which reveals a favorable safety profile compared to other treatments.

Thank you for the questions. Next questions will be from the line of Seamus Fernandez from Guggenheim. Please go ahead.

Great, thanks for the question. My question is actually on KarXT. Can you give us a sense of where penetration of antipsychotics actually fits into the 8 million patients that you guys cite? Given where we stand in the development of that market, where do you feel KarXT could go relative to other markets? The U.S. market has lots and lots of products available, but here, it seems like there's a more limited number of products that are likely available in China. 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. Secondarily, just broadly, your thoughts on the adagrasib opportunity in China would be helpful as we think about the opportunity for combination with PD-1 versus just a standalone opportunity in the KRAS patient population? Thanks.

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

Yes, I can start and you can…

Or Harald, do you want to take it?

Yes, let me take the first stab at the answer here. With KarXT and the market in China, it's an underserved market. It is recognized by the government as being underserved because little effort has been made to address services related to psychiatric diseases. There is a government program acknowledging the need to expand access to antipsychotics, both personnel wise and treatment wise, in the Chinese population. You're correct; there is a more limited spectrum of treatments currently available. However, a drug like KarXT, which is differentiated, has great potential in both the U.S. and China once approved. The main differentiating features make this drug useful as a standalone or as an add-on treatment. The current program is intended as a standalone, and we hope to eventually gain approval. The side effect profile is not overlapping; thus, you have greater options with more tolerable drugs. I would leave it at that. Perhaps someone else on our team can speak to the market aspects in China.

Yes, maybe Jonathan, feel free to chime in. Also, to add on, there are over 8 million schizophrenia patients in China today. To consider the pan-China situation, it’s essential to determine how many of these patients are actually diagnosed. We know that around 3 million schizophrenia patients are in the registered cases with the national severe mental illness department. Another triangulation method reveals that around half of schizophrenia patients are currently treated, which gives approximately 4.2 million to 4.3 million patients. Considering decent penetration with a brand new class of drugs in over five decades, the opportunity is compelling, and we couldn't be more excited. Regarding the second question on adagrasib, Alan, feel free to chime in and others. I believe the recent WCLC data prompted the inquiry, and you hit the nail on the head. For adagrasib, it's really the battle in frontline non-small cell lung cancer, and how you will differentiate and engage with two programs here. This opportunity is significant for us in China, and another data update will be released later this year, so stay tuned for that. Annually, around 700,000 new non-small cell lung cancer patients appear in China, and research studies show that the mutation rate for G12C is about 35%. However, we believe that rate can increase. We have already initiated trials for KRASG12C in China, and as awareness grows, we expect to gather better data. In the U.S. or globally, the mutation rate is around 13%, and we aim to inch toward that.

Billy, let me add a little more color on this topic. We are very excited about the scientific potential of this first successful attempt at treating KRASG12C. The upcoming U.S. approval will accelerate that pathway for regulatory approval in China, and we’re in discussions with the CDE. We've already begun participating in global studies, KRYSTAL-10 in second line treatment of CRC and KRYSTAL-12 in non-small cell lung cancer. Importantly, in the non-small cell lung cancer studies, we are using the tablet formulation, which should improve the GI tolerability. Lastly, we believe along with our partners that adagrasib has a differentiated profile and can be both first-in-class and best-in-class, while also being effective in combination with checkpoint inhibitors. Again, we’re excited and looking forward to what lies ahead. Thank you for the question.

Thank you. We have another question from the line of Yang Huang from Credit Suisse. Please go ahead.

Thank you. I have two quick questions. First, about ZEJULA, we know that ZEJULA's approval has taken five years since its approval in the U.S., and the indication expansion is still in process. Can you talk about future indication expansion opportunities in China for ZEJULA?

Alan, I think that's for you, yes?

Yes, yes, sure. Thanks for the question. I will mention that there are ongoing clinical trials for lung cancer and also breast cancer. We are working with our partners at GSK on ZEJULA lifecycle management and exploring all potential local and global opportunities.

Okay, I've got a quick follow-up on my second question: our gross margins. This quarter compared to the same quarter last year, the gross margin for our product has seemed to be down. Is there a particular reason for that?

Hi, Yang, I'll take this one. So you saw the nonrecurring adjustment around $30 million that drops straight to the bottom line, right on gross margin. That would probably explain it. Also, our evolving gross margin is really a function of product mix and revenue from new products. So hopefully that helps.

We have time for one follow-up question from the line of Michael Yee from Jefferies. Please go ahead.

Hi, thanks for putting me in queue again. In your prepared remarks, you talked a little bit more about expanding globally and the need for global infrastructure to support your growth, noting that you will be more active in the coming months and years in globalization. Given you haven't really done many deals this year, is there a possibility we could see a larger announcement sooner rather than later? Thank you.

Josh, do you want to take that?

Sure, yes. Thanks for the question. As we've mentioned in the quarter, we're advancing our internal asset ZL-1102 into a Phase 2 study. So that's a global opportunity. In terms of business development, Zai Lab has always been geared towards global innovation. We built a great portfolio of regional opportunities in China, and are now looking to take advantage of global scale opportunities. The team has done a fantastic job of selecting great products. These deals come when they come, and we're not going to pursue a global product just to have one. We are committed to the same evaluation processes we use for all our partnerships. Predicting the timing of a global acquisition or partnership is speculative, but we are certainly interested, and our capabilities will give us insights into good opportunities, enabling us to act when the right moment arises.

Yes, also Michael, that's a good question. Zai Lab has spent the last five years focused on internal discovery. As we move forward, we will see those programs quietly entering clinical stages as well. Thank you.

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

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 updating you again after this call. You may now disconnect this call.

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