Zymeworks: End-2022 Binary Event May Trigger Milestone (NYSE:ZYME)

I covered Canadian bispecific antibody drug developer Zymeworks (NYSE:ZYME) in December 2020 and then again in July 2021. Since then, the stock has fallen terribly despite promising data from zanidatamab, there’s been a major churn in company management, couple of aggressive takeover bids that were rejected, and the Jazz deal that basically sold zani for $50mn, milestones and royalties. That, in a nutshell, is ZYME’s history over the last 18 months.

Zymeworks is a leader in bispecific antibodies, or BsAbs, which have multiple arms for binding to different parts of a cancer cell (to put it simplistically). This results in higher specificity, stronger binding, and better cancer killing. Zymeworks partners with a number of big biopharmas, licensing its technology to them. It also has its own pipeline of molecules. Lead asset right now is zanidatamab targeting biliary tract, gastroesophageal adenocarcinomas, breast, and colorectal cancer in phase 1 and 2 trials; and ZW49 targeting advanced or metastatic HER2-expressing tumors.

Zymeworks began 2022 with a major change at the helm. Kenneth Galbraith, a veteran industry leader with years of prior experience in multiple M&A deals, replaced Dr Ali Tehrani, founder and previous CEO. In two weeks, Galbraith, known for selling multiple emerging companies in high value deals, swiftly changed half the management team, replacing a number of members including the Chief People Officer, Chief Commercial Officer and Chief Scientific Officer/EVP Early Development. Two existing C-suites were moved up to new positions; Neil Klompas, CPA, CA became the new Chief Operating Officer and Chief Financial Officer, and Neil Josephson, MD the new Chief Medical Officer. With this change in the team, there was also a decision to cut up to 25% of the workforce by the end of 2022.

What this signifies – given Mr. Galbraith’s background – is that the company is trying to make itself lean and mean in order to effect a sellout. A lean company is good for selling because the proceedings do not get thinned out by sharing them with unnecessary elements. It also focuses decisions in the hand of top management; contrary opinions are hemmed out. At least that is the initial conclusion I can draw. I must say that for a small company like Zymeworks to have a VP of Biometrics and Intellectual Property and so on makes it a little management heavy, even today. No wonder shareholders have been perennially complaining of high operating expenses.

Along with the management change, the company listed some aggressive key priorities for the next 2 years [edited]:

• Fully recruit the HERIZON-BTC-01 pivotal clinical study for zanidatamab by mid-2022 [in Biliary Tract Cancer];

• Fully recruit the HERIZON-GEA-01 pivotal clinical study for zanidatamab by the end of 2023 [in Gastroesophageal Adenocarcinoma];

• Finalize a clear clinical development path for ZW49 based on additional clinical data expected in 2022 from the ongoing Phase 1 clinical trial;

• Execute on new partnerships and collaborations to support the development and commercialization of zanidatamab and Zymeworks’ early-stage R&D pipeline and technology platforms; and

• Improve Zymeworks’ financial position over 2022 and 2023 through a combination of alternatives, including forming additional partnerships and collaborations, monetizing existing assets and products and securing additional financing.

The R&D targets are fine; what is interesting is the numerous mentions of collaborations and partnerships. This is a mild way of telling shareholders the company is ready to sell – something. I can see that the company has indeed followed through with this target, although in ways that may not be satisfactory for shareholders, as we will see with the Jazz deal.

Recently, Wells Fargo analysts started coverage with the following comments:

As potential catalysts, Wells Fargo cites pivotal topline data expected for bispecific antibody Zanidatamab as a second-line option for biliary tract cancer in Q4 2022 and as a first-line combination therapy in HER2-positive gastroesophageal adenocarcinomas in 1H 2022.

While the former is a small/ rare indication, the analysts project a $450M opportunity for the latter, where, according to them, the candidate has outperformed the combination of BeiGene’s (BGNE) anti-PD-1 antibody Trastuzumab and chemotherapy.

Note that $450mn figure, to which we will return shortly.

The enthusiasm for zanidatamab was somewhat marred by adverse events data of zanidatamab zovodotin in a phase 1 trial in 76 patients with HER2+ cancers. Out of seven patients with grade 3 or higher TRAEs or treatment-related adverse events, two were found to be grade 4 events, and there were three TRAE-related patient discontinuations. While drug activity was observed, the AE profile brought down the stock.

Just last week, the company entered into a licensing agreement for development and commercialization rights to zanidatamab in the US and EU and certain other major geographies. A $50mn upfront payment, $325mn if HERIZON-BTC-01 is successful, $525M upon achieving certain regulatory milestones and up to $862.5M in potential commercial milestone for total potential payments of up to $1.76B. Zymeworks is also eligible to receive royalties between 10% and 20% on Jazz’s net sales of the drug, if approved. Those are the terms. Now, let’s go back to the analyst projection for peak sales for zani, which stood at $450mn – if zani is successful both in the clinic and commercially. So, with this deal, although the upfront payment is small, ZYME is getting up to four years of zani’s peak sales amount back as cash payments, plus the high royalty figures in these major geographies. This seems like a very good deal for the company, given its pre-commercialisation stage.

This limited deal follows a bid for the entire company at $10.50 by All Blue Falcons, a private player, which the company rejected.

“We believe that the company has suffered from severe value erosion due to a number of serious missteps by an unfocused leadership with no clear strategy for improving performance. Over the past 12 months, stockholders have witnessed the company miss a number of important deadlines publicly announced in press releases, endured poorly executed earnings calls and experienced confusing and damaging public messaging, all of which has led to a significant loss of credibility and investor confidence in the company and its management team,” All Blue wrote in its April 28 letter to Zymeworks’ board.

Many of these events referenced are from before the new CEO took over; however, Falcons also criticized Galbraith for a dilutive offering early in the year, which raised funds for zanidatamab’s development work.

Financials

ZYME has a market cap just shy of $400mn and a cash reserve of $242mn as of the last quarter. The company expects this fund to last into the second half of 2023.

Bottomline

ZYME is a company in transition. The Jazz deal and the rejection of the Falcons takeover bid has sort of argued against those who thought the new CEO is out to sell the entire company for whatever he could get. However, the Jazz deal also tells us the company is not averse to letting go of not just its former management but also its lead asset – but for a good price. A major catalyst will be BTC data by the end of this year, which, if good, will trigger a $325mn milestone payment, which will, in one fell swoop, become a make or break event for this company. As such, the current low price presents an opportunity. Jazz has already done research worth $50mn betting on positive BTC data.