There's a good chance that Zai Lab's (ZLAB 2.60%) stock will make a journey into the stratosphere in the next few years, and that means growth-hungry investors should consider loading up on its shares, and soon.
Whereas other mid-cap biotechs of roughly its size might be struggling to get their first medicine out the door, Zai Lab already has several on the market, and it soon probably will have even more thanks to a bazaar's worth of late-stage programs barreling toward commercialization. Let's explore what that could mean for shareholders and examine how it manages to be so prolific.
NASDAQ: ZLAB
Key Data Points
Gassing up the rocket ship
Zai Lab's rocket fuel is its pipeline, which could yield it more than eight new drug launches within the next three years, in addition to the four cancer treatments it already has on the market. Between the launches and its existing products, management is anticipating that it will be profitable before the start of 2026. That's good, because its $1 billion in cash should be enough to last it through much of 2025 but not beyond, given its total operating expenses of $545.3 million last year.
In 2022, its freshly launched ovarian cancer drug Zejula brought in $145.2 million of the company's total revenue of $215 million. It also makes a device called Optune, which uses tumor treating fields to disrupt certain solid tumors, which was responsible for $47.3 million in sales.
Importantly, Wall Street analysts expect that Zai Lab could have sales of more than $489 million for 2024 thanks to Zejula's continued gains, growth of other medicines, sales and increasing adoption of Optune, and other new launches. It isn't often that investors get the opportunity to buy shares of a biotech that's on the verge of increasing its revenue by more than double.
So what's the catch? Why is Zai Lab's stock down almost 30% in the past 12 months when the analysts are calling for it to rise by 162% in 2023?
The company primarily competes in China despite doing some of its research and development work in the U.S., and the frenetic pace that projects move through its pipeline is largely a result of the favorable regulatory environment in China. It's also highly skilled at rapidly enrolling patients into its clinical trials and working with local regulators to shorten approval timelines.
But it still needs approval from regulators in the U.S. for its medicines, perhaps to make it easier to enter the market there in the future. Of course, there is no guarantee that it will be able to commercialize its medicines in the U.S. as quickly as in China, nor is there a guarantee that it will ever try to compete in the U.S. Still, a potential entry into the U.S. market means that the company has a very long runway for growth if it reaches the bottom of the enormous China market.
The risks aren't massive, but they exist
Zai Lab isn't as risky as many other biotechs because it has products on the market and enough cash to keep the lights on for a while, but there are still a couple of risks worth understanding.
A relatively minor risk is the standard biotech investing boilerplate: Clinical trials could fail to deliver the results that the market expects, thereby delivering a hit to the company's share price. But because there will be so many other programs queued up for their chance at success, one failure might not even hurt the stock as much as it might with an earlier-stage biotech.
A somewhat more insidious risk is that the strategies it uses to quickly perform clinical trials and get its medicines approved in China will fail to translate to other regulatory regimes, which would set back its chances of being able to ever compete anywhere else without doing a lot of additional work to re-create its past clinical trial results. So far, the Food and Drug Administration (FDA) hasn't dissented from the results of regulators in China, where Zai Lab sought dual approvals.
There is also a slim chance that it will take longer to reach profitability than management expects, which would necessitate slashing some costs or taking out new debt. It only has about $20.3 million in debt right now, so it probably could borrow quite a bit without causing a problem down the line.
In light of the fairly benign set of risks of an investment and an abundance of upcoming opportunities for it to excel, Zai Lab is a stock that's probably worth buying sometime soon, before it starts to realize the rapid growth that it probably will soon find.
