Zymeworks Stock: A Buy On Key Catalysts, Strong Cash Position (ZYME)

If you look at the chart of Zymeworks (NASDAQ:ZYME) you can see that shareholders have had to wait fairly patiently for a couple years for a sustained turnaround. Now the company’s US partner Jazz Pharmaceuticals (JAZZ) and Asia-Pacific partner, BeiGene (BGNE), are potentially within a year of approval and launch of zanidatamab, a bispecific anti-HER2 antibody originally developed by ZYME, with potential in several cancer types. On top of the potential approval and launch of zanidatamab in multiple markets, the company continues to work on its own pipeline members, several of which are antibody-drug conjugates (ADCs) which are a hot commodity right now. This article takes a look at the road ahead for ZYME.

Zanidatamab

Zanidatamab is a bispecific antibody binds two non-overlapping parts of the HER2 molecule, which is found on certain tumor types, blocking its signaling, reducing its expression and resulting in an immune attack on the cell expressing HER2.

ZYME already produced strong enough data to strike two deals for the development and commercialization of zanidatamab. The first with JAZZ in the US/EU/Japan among others, and BGNE in the Asia Pacific region (except Japan and India). The first indication where the drug would be launched is second-line biliary tract cancers (BTC), an indication for which zanidatamab is already undergoing a rolling regulatory submission in the US. That submission is expected to complete in H1’24, so if there were a 12 month review time, we could expect a H1’25 approval and launch by JAZZ. This approval will also trigger the payment of milestones from JAZZ.

The size of that milestone doesn’t seem to have been disclosed but there are up to $525M worth of regulatory milestones alone from JAZZ (ie not including a further $862.5M in potential commercial milestones), which are related to approvals in different indications in different geographies.

… we are entitled to some milestones on approval, by indication, by geography, from both BeiGene and Jazz.

Ken Galbraith, CEO of ZYME, JP Morgan Healthcare Conference Presentation, January 11, 2024.

Based on comments from the CEO it appears that approval of Zanidatamab for the treatment of BTC (in the second line setting) in the US should trigger a milestone, and similarly approval in that indication in the EU should trigger a milestone. Further, subsequent approval in gastroesophageal adenocarcinoma (GEA) should trigger another regulatory milestone.

With regards to BGNE’s regulatory submissions of the zanidatamab data in BTC, approval by the regulator in China could come even sooner, in H2’24. As such, even if a launch in China wouldn’t happen until H1’25, it would provide a catalyst in H2’24 for ZYME, as approval should come with a milestone and would signal the confirmation of a royalty stream opening up.

When the potential of these milestones and royalty streams, which could start coming in as soon as 2024, is considered, it isn’t surprising the CEO has been willing to point out the current discrepancy between them and the market cap of the stock.

We also think the value of future cash flows from Zanidatamab that will flow to us contractually, from Jazz and BeiGene, remain, you know, well above our current market valuation. So we’re hoping that disconnect goes away as we get more data, more approvals, launches underway, that we’ll get more, a more truer reflection of that in our stock price of what we see as the risk-adjusted NPV of that.

Ken Galbraith, CEO of ZYME, JP Morgan Healthcare Conference Presentation, January 11, 2024.

Indeed although reaching peak sales of $2B+ from zanidatamab would require a number of successes across multiple indications, the first step of opening up the additional indication, GEA, is possible near-term. Notably, the HERIZON-GEA-01 study, in first-line HER2+ GEA is expected in H2’24. Since approval in a second indication often involves a briefer regulatory review (8 months instead of 12 months) the time from reporting results to launch in that indication could be a little shorter.

Antibody pipeline provides near-term catalysts

ZYME has several other drugs in the pipeline outside of zanidatamab. One of the most advanced is zanidatamab zovodotin, an ADC version of zanidatamab with an auristatin payload. That drug is entering a phase 2 study in patients with non-small cell lung cancer (NSCLC) overexpressing HER2 in H1’24.

It might in fact be possible to see some data from the phase 2 NSCLC study in 2024 as well, which is a more substantial catalyst than the study simply getting underway. Phase 1 data of zanidatamab zovodotin demonstrated an overall response rate of 30% (9/30 patients) at 2.5 mg/kg in patients with a variety of tumor types expressing HER2. Notably, only 16% patients experienced grade 3 or greater treatment-related adverse events at that dose of zanidatamab zovodotin. One of the patients in the phase 1 trial achieving a partial response was a NSCLC patient, so the drug does appear to be active in that tumor type. As such, it seems possible the phase 2 study in NSCLC could produce something positive.

As for ZYME’s other antibody drugs, they are only getting underway, with several investigational new drug (IND) applications expected in the next couple of years, so I won’t discuss them in detail in this article.

Financial overview

ZYME had cash, cash equivalents and marketable securities of $390.2M at September 30, 2023. Subsequent to the end of the quarter, a private placement of 5,086,521 pre-funded warrants at $9.8299 per warrant raised a further ~$50M in gross proceeds. ZYME’s January corporate presentation notes cash resources of ~$455M as of December 31, 2023, and the company expects this cash to last into H2’2027. R&D expenses in Q3’23 were $32.8M and G&A expenses were $17.0M in the same quarter. Revenue, from research and development collaborations, was $16.5M in Q3’23. Net loss for the quarter was $28.7M and net cash used in operating activities was $132.3M in the first nine months of 2023. At that rate, and considering cash of ~$455M at December 31, 2023, ZYME could keep operating for another 10 quarters or into mid-2026.

Of course such a cash burn calculation assumes no milestones or royalties to raise the company’s cash, and that cash burn would remain the same in an era where the development of Zanidatamab has been handed off to JAZZ, and partially handed off the BGNE. Of course ZYME will be developing its own antibodies, but in the short-term a lot of that work is early-clinical stage or preclinical. In any case, I’m not worried about ZYME having to raise again any time soon.

As of November 6, 2023, there were 70,001,987 shares of ZYME’s common stock outstanding. As of November 6 there were also 3,974,766 exercisable options outstanding, and 3,235,659 options not exercisable at November 6, and 792,763 shares worth of restricted stock units outstanding. The ~5M pre-funded warrants should also be added in to give a fully diluted count of ~83M shares. That would give ZYME a fully diluted cap of ~$883M ($10.64 per share).

Conclusions, rating and risks

ZYME has cash for years to come and some very key catalysts on tap in the next 12 months. With Zanidatamab, two key regulatory catalysts would be potential regulatory approval in China in the first indication, second-line BTC, perhaps in H2’24, and then potential US approval in H1’25 in second-line BTC. In terms of clinical catalysts, H2’24 should see the report of topline data from HERIZON-GEA-01, a phase 3 study of zanidatamab in first-line, HER2+ GEA. Further, initial results from a phase 2 study of zanidatamab zovodotin could also be reported in H2’24, but investors should keep an eye out from guidance on that, including timely initiation and enrollment of the study.

I rate ZYME a buy based on the fact that key regulatory catalysts (approval of zanidatamab in the US and China) in the next 12 months can trigger milestones, and the confirmation of a royalty stream from an antibody with a market potential in the billions. The fact that JAZZ and BGNE are taking on the costs of the launch means that I wouldn’t expect ZYME to experience a tough transition from developmental stage to commercial stage that many biotechs experience. Beyond the regulatory catalysts, there are upcoming clinical catalysts such as data from HERIZON-GEA-01 which can help zanidatamab move towards it market potential and results from a phase 2 study of zanidatamab zovodotin. Those clinical catalysts help me get to a buy rating for ZYME.

The risks of any long in ZYME are several fold, three of which I’ll discuss here. Firstly, if JAZZ or BGNE are not successful or experience delays in achieving regulatory approval of zanidatamab, ZYME stock will likely fall.

A second risk relates to upcoming clinical data, if zanidatamab doesn’t perform in HERIZON-GEA-01 as expected, the potential for zanidatamab to be approved in GEA, not just second-line BTC, could be written off, causing the stock to fall.

Lastly, if the current rally in many ADC names cools off, then ZYME could fall, even without there being any materially negative update on its pipeline members.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.