BeOne Medicines Ltd. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Cautionary Note Regarding Forward-Looking Statements You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements (unaudited) and related notes included in the section of this Quarterly Report on Form 10-Q (this “Quarterly Report”), titled “Part I – Item 1 – Financial Statements.” We have revised our prior period financial statements to reflect the correction of an error, the impact of which was immaterial to our previously filed financial statements, as described in this Quarterly Report in “Notes to the Condensed Consolidated Financial Statements, Note 1. Description of Business, Basis of Presentation and Consolidation and Significant Accounting Policies” and “Note 2. Revision of Prior Period Financial Statements”. This Quarterly Report contains forward-looking statements t hat involve substantial risks and uncertainties. These forward-looking statements are based on management’s current expectations and projections about future events and trends that may affect the business, financial condition, and operating results. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. Forward-looking statements often include words such as “aim,” “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these terms or other similar expressions. These forward-looking statements, include, but are not limited to, statements regarding: our ability to successfully commercialize our approved medicines and to obtain approvals in additional indications and territories for our medicines; our ability to successfully develop and commercialize our in-licensed medicines and drug candidates and any other medicines and drug candidates we may in-license; our ability to further develop sales and marketing capabilities and launch and commercialize new medicines, if approved; our ability to maintain and expand regulatory approvals for our medicines and drug candidates, if approved; the pricing and reimbursement of our medicines and drug candidates, if approved; the initiation, timing, progress and results of our preclinical studies and clinical trials and our research and development programs; our ability to advance our drug candidates into, and successfully complete, clinical trials and obtain regulatory approvals; our reliance on the success of our clinical stage drug candidates; our plans, expected milestones and the timing or likelihood of regulatory filings and approvals; the implementation of our business model, strategic plans for our business, medicines, drug candidates and technology; the scope of protection we (or our licensors) are able to establish and maintain for intellectual property rights covering our medicines, drug candidates and technology; our ability to operate our business without infringing, misappropriating or otherwise violating the intellectual property rights and proprietary technology of third parties; costs associated with enforcing or defending against intellectual property infringement, misappropriation or violation, product liability and other claims; the regulatory environment and regulatory developments in the United States, China, the United Kingdom (“UK”), Switzerland, EU and other jurisdictions in which we operate; the accuracy of our estimates regarding expenses, revenues, capital requirements and our need for additional financing; the potential benefits of strategic collaboration and licensing agreements and our ability to enter into strategic arrangements; our plans and expectations to build significant technical operations and independent production capabilities for small molecule medicines and large molecule biologics to support the global demand for both commercial and clinical supply; our reliance on third parties to conduct drug development, manufacturing and other services; our ability to manufacture and supply, or have manufactured and supplied, drug candidates for clinical development and medicines for commercial sale; the rate and degree of market access and acceptance of our medicines and drug candidates, if approved; developments relating to our competitors and our industry, including competing therapies; the size of the potential markets for our medicines and drug candidates and our ability to serve those markets; our ability to effectively manage our growth; our ability to attract and retain qualified employees and key personnel; statements regarding future revenue, hiring plans, key milestones, expenses, capital expenditures, capital requirements and share performance; the future trading price of our ADSs, ordinary shares and RMB Shares, and impact of securities analysts’ reports on these prices; and the impact of the COVID-19 pandemic on our clinical development, regulatory, commercial, manufacturing, and other operations. These statements involve risks and uncertainties, including those that are described in “Part II – Item 1A – Risk Factors” of this Quarterly Report, that may cause actual future events or results to differ materially from those expected. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date hereof. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. This Quarterly Report includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third-party research, surveys and studies are reliable, you are cautioned not to give undue weight to this information. Unless the context requires otherwise, in this Quarterly Report, the terms “BeiGene,” the “Company,” “we,” “us” and “our” refer to BeiGene, Ltd., a Cayman Islands holding company with operations conducted by its subsidiaries, and its subsidiaries, on a consolidated basis. 29 Table of Contents Overview We are a global biotechnology company that is discovering and developing innovative oncology treatments that are more accessible and affordable to cancer patients worldwide. We currently have three approved medicines that were discovered and developed in our own labs, including BRUKINSA ® , a small molecule inhibitor of Bruton’s Tyrosine Kinase (“BTK”) for the treatment of various blood cancers; tislelizumab, an anti-PD-1 antibody immunotherapy for the treatment of various solid tumor and blood cancers; and pamiparib, a selective small molecule inhibitor of PARP1 and PARP2. We have obtained approvals to market BRUKINSA in the United States, China, the European Union (“EU”), the UK, Canada, Australia and additional international markets, and tislelizumab and pamiparib in China. By leveraging our China commercial capabilities, we have in-licensed the rights to distribute 13 approved medicines for the China market. Supported by our global clinical development and commercial capabilities, we have entered into collaborations with world-leading biopharmaceutical companies such as Amgen Inc. (“Amgen”) and Novartis Pharma AG (“Novartis”) to develop and commercialize innovative medicines. We are committed to advancing best and first-in-class clinical candidates internally or with like-minded partners to develop impactful and affordable medicines for patients across the globe. Our internal clinical development capabilities are deep, including a more than 2,700-person global clinical development team that is running more than 80 ongoing or planned clinical trials in over 50 medicines and drug candidates. This includes more than 30 pivotal or potentially registration-enabling trials across our portfolio, including our three internally discovered, approved medicines. We have enrolled in our clinical trials more than 18,000 subjects, of which approximately one-half have been outside of China. We have built, and are expanding, our internal manufacturing capabilities through our state-of-the-art biologic and small molecule manufacturing facilities in China to support current and potential future demand of our medicines, and are building a commercial-stage biologics manufacturing and clinical R&D center in New Jersey. We also work with high quality contract manufacturing organizations (“CMOs”) to manufacture our internally developed clinical and commercial products. Since our inception in 2010, we have become a fully integrated global organization of over 9,400 employees in 30 countries and regions, including the United States, China, Europe, and Australia. Recent Developments Recent Business Developments On April 20, 2023, we announced the global RATIONALE 305 trial met its primary endpoint of overall survival, with tislelizumab in combination with chemotherapy demonstrating superior overall survival (“OS”) compared with chemotherapy in patients with advanced unresectable or metastatic gastric or gastroesophageal junction (“G/GEJ”) adenocarcinoma, regardless of PD-L1 status. No new safety signals were identified for tislelizumab. On March 21, 2023, we announced that the last piece of structural steel was laid at our Hopewell, NJ campus. This new facility will provide state-of-the-art commercial-stage U.S. biologic pharmaceutical manufacturing, late-stage research and clinical development capabilities that complement the company’s existing capabilities around the world. Components of Operating Results Revenue Product Revenue We generate product revenue through the sale of our three internally developed products and our in-licensed medicines from our partners. Revenues from product sales are recognized when there is a transfer of control from the Company to the customer. The Company determines transfer of control based on when the product is delivered, and title passes to the customer. Revenues from product sales are recognized net of variable consideration resulting from rebates, chargebacks, trade discounts and allowances, sales returns allowances and other incentives. Provisions for estimated reductions to revenue are provided for in the same period the related sales are recorded and are based on contractual terms, historical experience and trend analysis. Collaboration Revenue We recognize collaboration revenue for amounts earned under collaborative and out-licensing arrangements. In January 2021, we entered into a collaboration and license agreement with Novartis, granting Novartis rights to develop, manufacture and commercialize tislelizumab in the United States, Canada, Mexico, member countries of the EU, UK, Norway, Switzerland, Table of Contents Iceland, Liechtenstein, Russia, and Japan (the Novartis Territory). There were two performance obligations identified at the outset of the agreement: (1) the exclusive license to develop, manufacture, and commercialize tislelizumab in the Novartis Territory, transfer of know-how and use of the tislelizumab trademark and (2) conducting and completing tislelizumab R&D services. Under this agreement, we received an upfront cash payment, which was allocated between the two performance obligations identified in the agreement based on the relative standalone selling prices of the performance obligations. The portion allocated to the license was recognized upon the delivery of the license right and transfer of know-how. The portion of the upfront payment allocated to the tislelizumab R&D services was deferred and is being recognized as collaboration revenue as the tislelizumab R&D services are performed using a percentage of completion method. Estimated costs to complete are reassessed on a periodic basis and any updates to the revenue earned are recognized on a prospective basis. In December 2021, we expanded our collaboration with Novartis by entering into an option, collaboration and license agreement with Novartis to develop, manufacture and commercialize our investigational TIGIT inhibitor ociperlimab in the Novartis Territory. In addition, we entered into an agreement with Novartis which granted us rights to market, promote and detail five approved Novartis oncology products, TAFINLAR ® (dabrafenib), MEKINIST ® (trametinib), VOTRIENT ® (pazopanib), AFINITOR ® (everolimus), and ZYKADIA ® (ceritinib), across designated regions of China referred to as “broad markets.” There were three performance obligations identified at the outset of the arrangement: (1) a material right for the option to the exclusive product license, (2) the right to access ociperlimab in clinical trials during the option period provided to Novartis, combined with the initial transfer of BeiGene know-how, and (3) conducting ociperlimab R&D services. The market development activities are considered immaterial in the context of the agreements. Under this agreement, we received an upfront cash payment, which was allocated between the three performance obligations identified in the agreement based on the relative standalone selling prices of the performance obligations. The portion allocated to the material right was deferred and will be recognized at the earlier of when Novartis exercises the option and the license is delivered or the expiration of the option period. The portion of the transaction price allocated to Novartis' right to access ociperlimab in its own clinical trials during the option period and the initial transfer of BeiGene know-how was deferred and is being recognized over the expected option period. The portion of the transaction price allocated to the ociperlimab R&D services was deferred and is being recognized as collaboration revenue as the ociperlimab R&D services are performed over the expected option period. The option exercise fee under the ociperlimab agreement is contingent upon Novartis exercising its right, and is considered fully constrained until the option is exercised. The potential milestone payments that we are eligible to receive under both of the Novartis collaborations were excluded from the initial transaction prices, as all milestone amounts are variable consideration and were fully constrained due to uncertainty of achievement. Performance-based milestones will be recognized when the milestone event is achieved or when the risk of revenue reversal is remote. Sales-based milestones and royalties will be recognized when the underlying sales occur. Expenses Cost of Sales Cost of sales includes the costs to manufacture our internally developed commercial products, as well as costs to purchase tislelizumab from Boehringer Ingelheim. Additionally, cost of sales included the cost of in-licensed products purchased for sale in the PRC. Costs to manufacture inventory in preparation for commercial launch of a product incurred prior to regulatory approval are expensed to research and development expense as incurred. Cost of sales for newly launched products will not be recorded until the initial pre-launch inventory is depleted and additional inventory is manufactured. To date, the Company's initial pre-launch inventory for its commercial products has been immaterial and has not had a significant impact on the Company's gross margin. Research and Development Expenses Research and development expenses consist of the costs associated with our research and development activities, conducting preclinical studies and clinical trials, and activities related to regulatory filings. Our research and development expenses consist of: • expenses incurred under agreements with contract research organizations (“CROs”), CMOs, and consultants that conduct and support clinical trials and preclinical studies; • costs of comparator drugs in certain of our clinical trials; • manufacturing costs related to pre-commercial activities; • costs associated with preclinical activities and development activities; • costs associated with regulatory operations; Table of Contents • employee-related expenses, including salaries, benefits, travel and share-based compensation expense for research and development personnel; • in-process research and development costs expensed as part of collaboration agreements entered into; and • other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies used in research and development activities. Our current research and development activities mainly relate to the clinical advancement of our internally developed medicines and drug candidates: • BRUKINSA (zanubrutinib), a small molecule inhibitor of BTK; • tislelizumab, a humanized monoclonal antibody against PD-1; • ociperlimab, an investigational humanized monoclonal antibody against TIGIT; • pamiparib, a selective small molecule inhibitor of PARP1 and PARP2; • BGB-15025, an investigational hematopoietic progenitor kinase 1 inhibitor; • BGB-11417, an investigational small molecular inhibitor of Bcl-2; • BGB-A445, an investigational non-ligand competing OX40 monoclonal antibody; • BGB-16673, an investigational Chimeric Degradation Activating Compound, targeting BTK; • BGB-A425, an investigational humanized monoclonal antibody against TIM-3; • BGB-10188, an investigational PI3Kδ inhibitor; • BGB-23339, a potent, allosteric investigational tyrosine kinase 2 inhibitor; and • LBL-007, a novel investigational antibody targeting the LAG-3 pathway. Research and development activities also include costs associated with in-licensed drug candidates, including: • R&D expense related to the co-development of pipeline assets under the Amgen collaboration agreement. Our total cost share obligation to Amgen is split between R&D expense and a reduction to the R&D cost share liability; • sitravatinib, an investigational, spectrum-selective kinase inhibitor, licensed from Mirati Therapeutics, Inc.; and • ZW25 (zanidatamab), an investigational bispecific antibody-based product candidates targeting HER2, licensed from Zymeworks Inc. We expense research and development costs when incurred. We record costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as subject enrollment, clinical site activations or information our vendors provide to us. We expense the manufacturing costs of our internally developed products that are used in clinical trials as they are incurred as research and development expense. We do not allocate employee‑related costs, depreciation, rental and other indirect costs to specific research and development programs because these costs are deployed across multiple product programs under research and development and, as such, are separately classified as unallocated research and development expenses. At this time, it is difficult to estimate or know for certain, the nature, timing and estimated costs of the efforts that will be necessary to complete the development of our internally developed and in-licensed medicines and drug candidates. This is due to the numerous risks and uncertainties associated with developing such medicines and drug candidates, including the uncertainty of: • successful enrollment in and completion of clinical trials; • establishing an appropriate safety and efficacy profile; • establishing and maintaining commercial manufacturing capabilities or making arrangements with third‑party manufacturers; Table of Contents • receipt of marketing and other required approvals from applicable regulatory authorities; • successfully launching and commercializing our medicines and drug candidates, if and when approved, whether as monotherapies or in combination with our medicines and drug candidates or third‑party products; • market acceptance, pricing and reimbursement; • obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our medicines and drug candidates; • continued acceptable safety and efficacy profiles of the products following approval; • sufficient supply of the products following approval; • competition from competing products; and • retention of key personnel. A change in the outcome of any of these variables with respect to the development of any of our medicines and drug candidates would significantly change the costs, timing and viability associated with the commercialization or development of that medicine or drug candidate. Research and development activities are central to our business model. We expect continued substantial investment in research and development for the foreseeable future as our discovery and development programs progress, as we continue to support the clinical trials of our medicines and drug candidates as treatments for various cancers and as we move these medicines and drug candidates into additional clinical trials, including potential pivotal trials. There are numerous factors associated with the successful commercialization of any of our medicines and drug candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control may impact our clinical development and commercial programs and plans. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of product promotion costs, distribution costs, salaries and related benefit costs, including share-based compensation for selling, general and administrative personnel. Other selling, general and administrative expenses include professional fees for legal, consulting, auditing and tax services as well as other direct and allocated expenses for rent and maintenance of facilities, travel costs, insurance and other supplies used in selling, general and administrative activities. We anticipate that our selling, general and administrative expenses will increase in future periods to support planned increases in commercialization activities for our approved medicines, and the preparation for potential launch and commercialization of additional in-licensed products from our collaborations and internally developed products, if approved. We also incur significant legal, compliance, accounting, insurance and investor and public relations expenses associated with being a public company with our ADSs, ordinary shares and RMB Shares listed for trading on The Nasdaq Global Select Market, The Hong Kong Stock Exchange and The STAR Market of the Shanghai Stock Exchange, respectively. Interest Income (Expense), Net Interest Income Interest income consists primarily of interest generated from our RMB-denominated cash deposits and short-term investments in money market funds, time deposits, U.S. Treasury securities and U.S. agency securities. Interest Expense Interest expense consists primarily of interest on our bank loans and related party loan. Other Income (Expense), Net Other income (expense), net consists primarily of gains and losses recognized related to fluctuations in foreign currency exchange rates, gains and losses on equity investments, government grants and subsidies received that involve no conditions or continuing performance obligations by us, unrealized gains and losses on equity securities, and realized gains and losses on the sale of investments. We hold significant cash in the form of RMB-denominated deposits at U.S. functional currency entities, Table of Contents including a large portion of the cash generated from the STAR Market offering in December 2021. Other income (expense), net includes the revaluation gains and losses of these cash deposits based on foreign currency exchange rates. Table of Contents Results of Operations The following table summarizes our results of operations for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, Change 2023 2022 1 $ % (dollars in thousands) Revenues Product revenue, net $ 410,291 $ 261,573 $ 148,718 56.9 % Collaboration revenue 37,510 45,053 (7,543) (16.7) % Total revenues 447,801 306,626 141,175 46.0 % Expenses Cost of sales - product 81,789 65,237 16,552 25.4 % Research and development 408,584 389,915 18,669 4.8 % Selling, general and administrative 328,499 294,573 33,926 11.5 % Amortization of intangible assets 187 188 (1) (0.5) % Total expenses 819,059 749,913 69,146 9.2 % Loss from operations (371,258) (443,287) 72,029 (16.2) % Interest income, net 16,016 10,071 5,945 59.0 % Other income, net 18,303 11,967 6,336 52.9 % Loss before income taxes (336,939) (421,249) 84,310 (20.0) % Income tax expense 11,492 13,949 (2,457) (17.6) % Net loss $ (348,431) $ (435,198) $ 86,767 (19.9) % 1 We revised certain prior period financial statements for an error related to the valuation of net deferred tax assets, the impact of which was immaterial to our previously filed financial statements in the first quarter of 2022 (see “Notes to the Condensed Consolidated Financial Statements, Note 1. Description of Business, Basis of Presentation and Consolidation and Significant Accounting Policies” and “Note 2. Revision of Prior Period Financial Statements” included in this Quarterly Report on Form 10-Q). Comparison of the Three Months Ended March 31, 2023 and 2022 Revenue Total revenue increased to $447.8 million for the three months ended March 31, 2023, from $306.6 million for the three months ended March 31, 2022, primarily due to an increase in sales of BRUKINSA and tislelizumab, as well as increased sales of our in-licensed products from Amgen, sales of POBEVCY ® from Bio-Thera, and additional collaboration revenue from our agreements with Novartis. The following table summarizes the components of revenue for the three months ended March 31, 2023 and 2022, respectively: Three Months Ended March 31, Changes 2023 2022 $ % (dollars in thousands) Product revenue $ 410,291 $ 261,573 $ 148,718 56.9 % Collaboration revenue: Research and development service revenue 6,817 13,427 (6,610) (49.2) % Right to access intellectual property revenue 26,249 26,249 — — % Other 4,444 5,377 (933) (17.4) % Total collaboration revenue 37,510 45,053 (7,543) (16.7) % Total Revenue $ 447,801 $ 306,626 $ 141,175 46.0 % Table of Contents Net product revenues consisted of the following: Three Months Ended March 31, Changes 2023 2022 $ % (dollars in thousands) BRUKINSA ® $ 211,382 $ 104,325 $ 107,057 102.6 % Tislelizumab 114,850 87,643 27,207 31.0 % REVLIMID ® 23,158 21,660 1,498 6.9 % XGEVA ® 20,197 13,499 6,698 49.6 % POBEVCY ® 14,326 6,815 7,511 110.2 % BLINCYTO ® 10,946 11,866 (920) (7.8) % KYPROLIS ® 4,943 4,313 630 14.6 % VIDAZA ® 3,189 5,512 (2,323) (42.1) % Pamiparib 1,806 2,555 (749) (29.3) % Other 5,494 3,385 2,109 62.3 % Total product revenue $ 410,291 $ 261,573 $ 148,718 56.9 % Net product revenue increased 56.9% to $410.3 million for the three months ended March 31, 2023, compared to $261.6 million in the prior-year period, primarily due to continued increases in sales of BRUKINSA in the United States and China and tislelizumab in China. In addition, product revenues in the first quarter of 2023 were positively impacted by sales of Bio-Thera's POBEVCY, as well as Amgen's XGEVA in China. During the quarter ended March 31, 2023, we continued to see increased patient demand in China for tislelizumab and BRUKINSA due to the inclusion on the National Reimbursement Drug List (NRDL), and this demand more than offset the effect of the related price reductions. Global sales of BRUKINSA totaled $211.4 million in the first quarter, representing a 102.6% increase compared to the prior-year period; U.S. sales of BRUKINSA totaled $138.8 million in the first quarter, compared to $67.9 million in the prior-year period, representing growth of 104.4%. U.S. sales continued to accelerate in the quarter, driven by continued uptake in all approved indications. BRUKINSA sales in China totaled $48.1 million in the first quarter, representing growth of 43.5% compared to the prior-year period, driven by a significant increase in all approved indications, including chronic lymphocytic leukemia (CLL) and small lymphocytic lymphoma (SLL). Sales of tislelizumab in China totaled $114.9 million in the first quarter, compared to $87.6 million in the prior-year period, representing a 31.0% increase. In the first quarter, new patient demand from broader reimbursement and hospital listings continued to drive increased market penetration and market share for tislelizumab. We believe that our strategy of expanding our salesforce and hospital listings and continuing to seek expanded labels in broad indications will allow us to increase our market share. Collaboration revenue totaled $37.5 million for the three months ended March 31, 2023, of which $6.8 million was recognized from deferred revenue for R&D services performed during the three months ended March 31, 2023 under both the tislelizumab and ociperlimab collaborations, $26.2 million was recognized from deferred revenue for Novartis' right to access ociperlimab over the option period and $4.4 million was recognized related to the sale of tislelizumab and ociperlimab clinical supply to Novartis. Collaboration revenue totaled $45.1 million for the three months ended March 31, 2022, of which $13.4 million was recognized from deferred revenue for R&D services performed during the three months ended March 31, 2022 under both the tislelizumab and ociperlimab collaborations, $26.2 million was recognized from deferred revenue for Novartis' right to access ociperlimab over the option period and $5.4 million was recognized related to the sale of tislelizumab clinical supply to Novartis (see Note 4 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). Cost of Sales Cost of sales increased to $81.8 million for the three months ended March 31, 2023 from $65.2 million for the three months ended March 31, 2022, primarily due to increased product sales of BRUKINSA and tislelizumab, as well as sales of XGEVA and POBEVCY. Table of Contents Gross Margin Gross margin on global product sales increased to $328.5 million for the three months ended March 31, 2023, compared to $196.3 million in the prior-year period, primarily due to increased product revenue in the current year period. Gross margin as a percentage of product sales increased to 80.1% for the three months ended March 31, 2023, from 75.1% in the comparable period of the prior year. The increase is primarily due lower costs per unit for both BRUKINSA and tislelizumab, as well as a proportionally higher sales mix of global BRUKINSA compared to lower margin sales of in-licensed products. Research and Development Expense Research and development expense increased by $18.7 million, or 4.8%, to $408.6 million for the three months ended March 31, 2023 from $389.9 million for the three months ended March 31, 2022. The following table summarizes external clinical, external non-clinical and internal research and development expense for the three months ended March 31, 2023 and 2022, respectively: Three Months Ended March 31, Changes 2023 2022 $ % (dollars in thousands) External research and development expense: Cost of development programs $ 128,596 $ 125,898 $ 2,698 2.1 % Upfront license fees — — — NM Amgen co-development expense 1 17,817 22,396 (4,579) (20.4) % Total external research and development expenses 146,413 148,294 (1,881) (1.3) % Internal research and development expenses 262,171 241,621 20,550 8.5 % Total research and development expenses $ 408,584 $ 389,915 $ 18,669 4.8 % 1 Our co-funding obligation for the development of the pipeline assets under the Amgen collaboration for the three months ended March 31, 2023 totaled $35.2 million, of which $17.8 million was recorded as R&D expense. The remaining $17.4 million was recorded as a reduction of the R&D cost share liability . The decrease in external research and development expenses in the first quarter was primarily attributable to a decrease in Amgen co-development expense, partially offset by increases in external clinical and preclinical trial costs for certain assets in our portfolio. Internal research and development expense increased $20.6 million, or 8.5%, to $262.2 million, and was primarily attributable to the expansion of our global development organization and our clinical and preclinical drug candidates, as well as our continued efforts to internalize research and clinical trial activities, and included the following: • $16.8 million increase of employee salary and benefits, primarily attributable to hiring more research and development personnel to support our expanding research and development activities; • $7.1 million increase of materials and reagent expenses, primarily in connection with the in-house manufacturing of drug candidates used for clinical purposes; • $3.2 million increase of share-based compensation expense, primarily attributable to our increased headcount of research and development employees, resulting in more awards being expensed; • $4.3 million decrease of facilities, depreciation, office expense, rental fees, and other expenses; and • $2.2 million decrease of consulting fees, which was mainly attributable to decreased meeting expense related to scientific, regulatory and development consulting activities, in connection with the advancement of our drug candidates. Table of Contents Selling, General and Administrative Expense Selling, general and administrative expense increased by $33.9 million, or 11.5%, to $328.5 million for the three months ended March 31, 2023, from $294.6 million for the three months ended March 31, 2022. The increase was primarily attributable to the following: • $17.5 million increase of external commercial-related expenses, including market research, sales and marketing, consulting and conference related expenses, related to the growth of our global commercial organization, as we continue to build our worldwide footprint and capabilities; • $9.8 million increase of professional fees, consulting, recruiting, information technology, tax, accounting and audit services, and facility expenses, rental fees, office expenses, and other administrative expenses, primarily attributable to the global expansion of our business, including the expansion of our commercial operations in China, the United States and Europe; and • $6.6 million increase of share-based compensation expense, primarily attributable to our increased headcount of sales and administrative employees, resulting in more awards being expensed. Interest Income, Net Interest income, net increased by $5.9 million, or 59.0%, to $16.0 million of net interest income for the three months ended March 31, 2023, from $10.1 million of net interest income for three months ended March 31, 2022. The increase in interest income, net, was primarily attributable to increased interest income resulting from higher interest rates on our cash and short-term investment balances. Other Income, Net Other income, net was $18.3 million for the three months ended March 31, 2023, primarily due to government subsidy income in China. For the three months ended March 31, 2022, other income, net, was $12.0 million, which was due to government subsidy income and foreign exchange gains resulting from the strengthening of RMB in the period and the revaluation impact of foreign currencies held in U.S. functional currency subsidiaries, partially offset by unrealized losses on our equity investments. Income Tax Expense Income tax expense was $11.5 million for the three months ended March 31, 2023 as compared to $13.9 million for the three months ended March 31, 2022. The income tax expense for the three months ended March 31, 2023 and 2022 was primarily attributable to current China tax expense for certain subsidiaries determined after certain non-deductible expenses and current U.S. tax expense determined after other special tax deductions and research and development tax credits. Liquidity and Capital Resources The following table represents our cash, short-term investments, and debt balances as of March 31, 2023 and December 31, 2022: As of March 31, December 31, 2023 2022 (dollars in thousands) Cash, cash equivalents and restricted cash $ 3,543,766 $ 3,875,037 Short-term investments $ 294,057 $ 665,251 Total debt $ 488,106 $ 538,117 With the exception of the periods in which we received upfront payments from out-licensing rights to tislelizumab to Novartis, and prior to that BMS, we have incurred net losses and negative cash flows from operations since inception, resulting from the funding of our research and development programs and selling, general and administrative expenses associated with our operations, as well as to support the commercialization of our products globally. We recognized net losses of $348.4 million and $435.2 million for the three months ended March 31, 2023 and March 31, 2022, respectively. As of March 31, 2023, we had an accumulated deficit of $7.4 billion. Table of Contents To date, we have financed our operations principally through proceeds from public and private offerings of our securities and proceeds from our collaborations, together with product sales since September 2017. Based on our current operating plan, we expect that our existing cash, cash equivalents and short-term investments as of March 31, 2023 will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months after the date that the financial statements included in this report are issued. In January 2021, we entered into a collaboration and license agreement with Novartis, granting Novartis rights to develop, manufacture and commercialize tislelizumab in North America, Europe, and Japan. Under the agreement, we received an upfront cash payment of $650 million from Novartis. In December 2021, we expanded our collaboration with Novartis by entering into an option, collaboration and license agreement with Novartis to develop, manufacture and commercialize our investigational TIGIT inhibitor ociperlimab in the Novartis Territory. In addition, we and Novartis entered into an agreement granting us rights to market, promote and detail five approved Novartis oncology products. Under the terms of the agreement, we received an upfront cash payment of $300 million in January 2022. The following table provides information regarding our cash flows for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 (dollars in thousands) Cash, cash equivalents and restricted cash at beginning of period $ 3,875,037 $ 4,382,887 Net cash used in operating activities (563,777) (236,563) Net cash provided by investing activities 241,063 210,393 Net cash used in financing activities (19,868) (11,267) Net effect of foreign exchange rate changes 11,311 9,000 Net decrease in cash, cash equivalents, and restricted cash (331,271) (28,437) Cash, cash equivalents and restricted cash at end of period $ 3,543,766 $ 4,354,450 Operating Activities Cash flows from operating activities is net loss adjusted for certain non-cash items and changes in assets and liabilities. Operating activities used $563.8 million of cash in the three months ended March 31, 2023, principally from our net loss of $348.4 million and an increase in our net operating assets and liabilities of $294.1 million, partially offset by non-cash charges of $78.7 million. The increase in working capital was driven largely by the seasonality of receivables and compensation-related payments. The non-cash charges were primarily driven by share-based compensation expense, depreciation and amortization expense, offset by amortization of the research and development cost share liability. Operating activities used $236.6 million of cash in the three months ended March 31, 2022, which resulted principally from our net loss of $435.2 million, partially offset by a decrease in our net operating assets and liabilities of $117.7 million and by non-cash charges of $80.9 million. The decrease in working capital was driven largely by the collection of the $300 million upfront fee from Novartis for ociperlimab, partially offset by seasonality of working capital due to compensation-related payments. The non-cash charges were primarily driven by share-based compensation expense, depreciation and amortization expense, and unrealized loss on our Leap investment, offset by amortization of the research and development cost share liability and deferred income tax benefits. Investing Activities Cash flows from investing activities consist primarily of capital expenditures, investment purchases, sales, maturities, and disposals, and upfront payments related to our collaboration agreements. Investing activities provided $241.1 million of cash in the three months ended March 31, 2023, consisting of sales and maturities of investment securities of $377.0 million, partially offset by capital expenditures of $125.6 million, $9.3 million in purchases of long-term investments, and $1.1 million in purchases of investment securities. Investing activities provided $210.4 million of cash in the three months ended March 31, 2022, consisting of sales and maturities of investment securities of $331.0 million, offset by $0.5 million in purchases of investment securities, capital expenditures of $45.1 million, and $75.0 million of acquired in-process research and development. Table of Contents Financing Activities Cash flows from financing activities consist primarily of sale of ordinary shares, RMB Shares and ADSs through equity offerings, issuance and repayment of short-term and long-term debt, and proceeds from the sale of ordinary shares and ADSs through employee equity compensation plans. Financing activities used $19.9 million of cash in the three months ended March 31, 2023, consisting primarily of $1.5 million of repayment of long-term bank loans and $50.0 million of repayment of short-term bank loan, which were partially offset by $31.6 million from the exercise of employee share options and proceeds from the issuance of shares through our employee share purchase plan. Financing activities used $11.3 million of cash in the three months ended March 31, 2022, consisting primarily of $73.1 million repayment of short-term bank loans, which were partially offset by $50.0 million of proceeds from short-term bank loans and $11.9 million from the exercise of employee share options and proceeds from the issuance of shares through our employee share purchase plan. Effects of Exchange Rates on Cash We have substantial operations in the PRC, which generate a significant amount of RMB-denominated cash from product sales and require a significant amount of RMB-denominated cash to pay our obligations. We hold a significant amount of RMB-denominated deposits at our China subsidiaries. Since the reporting currency of the Company is the U.S. dollar, periods of volatility in exchange rates may have a significant impact on our consolidated cash balances as they are translated into U.S. dollars. The impact of foreign currency deposits being translated into the U.S. dollar positively impacted ending cash by $11.3 million in the three months ended March 31, 2023, compared to a positive impact of $9.0 million in the prior-year period. Future Liquidity and Material Cash Requirements Until such time, if ever, as we can generate substantial product revenue sufficient to cover our costs and capital investments, we may be required to finance our cash needs through a combination of equity offerings, debt financings, collaboration agreements, strategic alliances, licensing arrangements, government grants, and other available sources. Under the rules of the SEC, we currently qualify as a “well-known seasoned issuer,” which allows us to file shelf registration statements to register an unspecified amount of securities that are effective upon filing. In May 2020, we filed such a shelf registration statement with the SEC for the issuance of an unspecified amount of ordinary shares (including in the form of ADSs), preferred shares, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, from time to time at prices and on terms to be determined at the time of any such offering. This registration statement was effective upon filing and will remain in effect for up to three years from filing, prior to which time we may file another shelf registration statement that will be effective for up to three years from filing. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a holder of ADSs, ordinary shares, or RMB Shares. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends, and may require the issuance of warrants, which could potentially dilute your ownership interest. If we raise additional funds through collaboration agreements, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our medicines or drug candidates, future revenue streams or research programs, or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings, collaborations or other sources when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market products or drug candidates that we would otherwise prefer to develop and market ourselves. Our material cash requirements in the short- and long-term consist of the following operational, capital, and manufacturing expenditures, a portion of which contain contractual or other obligations. We plan to fund our material cash requirements with our current financial resources together with our anticipated receipts of accounts receivable, product sales and royalty revenues, and reimbursements we expect to receive under our existing collaboration and license agreements. Table of Contents Contractual and Other Obligations The following table summarizes our significant contractual obligations as of the payment due date by period as of March 31, 2023: Payments Due by Period Total Short Term Long Term (dollars in thousands) Contractual obligations Operating lease commitments $ 61,797 $ 20,228 $ 41,569 Purchase commitments 76,097 33,917 42,180 Debt obligations 488,106 281,808 206,298 Interest on debt 41,725 14,181 27,544 Co-development funding commitment 560,488 140,861 419,627 Funding commitment 11,307 2,813 8,494 Research and development commitment 20,878 5,872 15,006 Pension plan 7,840 2,553 5,287 Capital commitments 407,031 407,031 — Total $ 1,675,269 $ 909,264 $ 766,005 Operating Lease Commitments We lease office or manufacturing facilities in Beijing, Shanghai, Suzhou and Guangzhou in China; office facilities in California, Massachusetts, Maryland, and New Jersey in the United States; and office facilities in Basel, Switzerland under non-cancelable operating leases expiring on various dates. Payments under operating leases are expensed on a straight-line basis over the respective lease terms. The aggregate future minimum payments under these non-cancelable operating leases are summarized in the table above. Purchase Commitments As of March 31, 2023, purchase commitments amounted to $76.1 million, of which $45.4 million related to minimum purchase requirements for supply purchased from contract manufacturers and $30.7 million related to binding purchase obligations of inventory from BMS and Amgen. We do not have any minimum purchase requirements for inventory from BMS or Amgen. Debt Obligations and Interest Total debt obligations coming due in the next twelve months is $281.8 million. Total long-term debt obligations are $206.3 million. See Note 11 in the Notes to the Financial Statements for further detail of our debt obligations. Interest on bank loans is paid quarterly until the respective loans are fully settled. For the purpose of contractual obligations calculation, current interest rates on floating rate obligations were used for the remainder contractual life of the outstanding borrowings. Co-Development Funding Commitment Under the Amgen collaboration, we are responsible for co-funding global development costs for the licensed Amgen oncology pipeline assets up to a total cap of $1.25 billion. We are funding our portion of the co-development costs by contributing cash and development services. As of March 31, 2023, our remaining co-development funding commitment was $560.5 million. Funding Commitment Funding commitment represents our committed capital related to two equity method investments. As of March 31, 2023, our remaining capital commitment was $11.3 million and is expected to be paid from time to time over the investment period. Table of Contents Research and Development Commitment We entered into a long-term research and development agreement in June 2021, which includes obligations to make fixed quarterly payments over the next four years. As of March 31, 2023, the total research and development commitment amounted to $20.9 million. Pension Plan We maintain a defined benefit pension plan in Switzerland. Funding obligations under the defined benefit pension plan are equivalent to $2.6 million per year based on annual funding contributions in effect as of March 31, 2023 to achieve fully funded status where the market value of plan assets equals the projected benefit obligations. Future funding requirements will be subject to change as a result of future changes in staffing and compensation levels, various actuarial assumptions and actual investment returns on plan assets. Capital Commitments We had capital commitments amounting to $407.0 million for the acquisition of property, plant and equipment as of March 31, 2023, which were mainly for our manufacturing and clinical R&D campus in Hopewell, NJ, additional capacity at the Guangzhou and Suzhou manufacturing facilities, and new building for Beijing Innerway Bio-tech Co., Ltd. Other Business Agreements We expect to make a significant investment in our future manufacturing and clinical R&D center in the United States, a 42-acre site that will be constructed in Hopewell, NJ. We purchased this site for $75.2 million and announced its groundbreaking on April 29, 2022. We expect significant capital expenditures as we build out the Hopewell facility over the next several years. We also enter into agreements in the ordinary course of business with contract research organizations to provide research and development services. These contracts are generally cancellable at any time by us with prior written notice. We also enter into collaboration agreements with institutions and companies to license intellectual property. We may be obligated to make future development, regulatory and commercial milestone payments and royalty payments on future sales of specified products associated with these agreements. Payments under these agreements generally become due and payable upon achievement of such milestones or sales. These commitments are not recorded on our balance sheet because the achievement and timing of these milestones are not fixed and determinable. When the achievement of these milestones or sales have occurred, the corresponding amounts are recognized in our financial statements. Critical Accounting Policies and Significant Judgments and Estimates Our discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues, costs and expenses. We evaluate our estimates and judgments on an ongoing basis, and our actual results may differ from these estimates. These include, but are not limited to, estimating the useful lives of long-lived assets, estimating variable consideration in product sales and collaboration revenue arrangements, estimating the incremental borrowing rate for operating lease liabilities, identifying separate accounting units and the standalone selling price of each performance obligation in the Company's revenue arrangements, assessing the impairment of long-lived assets, valuation and recognition of share-based compensation expenses, realizability of deferred tax assets and the fair value of financial instruments. We base our estimates on historical experience, known trends and events, contractual milestones and other various factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. There have been no material changes to our critical accounting policies as of and for the three months ended March 31, 2023, as compared to those described in the section titled “Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2022. For new accounting policies adopted during the three months ended March 31, 2023 , see “Part I – Item 1 – Financial Statements—Notes to the Condensed Consolidated Financial Statements—1. Description of Business, Basis of Presentation and Consolidation and Significant Accounting Policies—Significant accounting policies” in this Quarterly Report on Form 10-Q. Table of Contents Recent Accounting Pronouncements See Note 1 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for information regarding recent accounting pronouncements.