Revisiting Zymeworks After A Big Licensing Deal (NASDAQ:ZYME)

I’d rather hear an ugly truth, rather than an obscure lie. – Ana Monnar

Today, we are putting Zymeworks Inc. (NASDAQ:ZYME) back in the spotlight for the first time since our initial article on this clinical-stage biopharmaceutical company in July of last year where we tagged the shares as ‘a small ‘watch item’ holding for aggressive investors at this point in time.’

Company Overview:

Zymeworks is based in Vancouver, Canada and is focused on developing new treatments for cancer. Currently the shares trade for just over $7.50 a share and sport an approximate market capitalization of just under $500 million. The company has several compounds under development but its most important pipeline asset is a bispecific antibody candidate called Zanidatamab. The company is pursuing using Zanidatamab to target a variety of HER2-expressing cancers in combination with other drugs and also has a monotherapy.

A pivotal study called HERIZON-BTC-01 using Zanidatamab as a monotherapy to treat second line HER2-Amplified BTC (Biliary Tract Cancer) is well underway. Initial results came out in December. They showed an objective response rate or ORR of 41.3% and median duration of response of 12.9 months in patients with previously treated HER2-amplified and expressing biliary tract cancers. Full results are scheduled to be disclosed in the back half of 2023.

If ultimately successful, this could have a huge impact on Zymeworks. Both via a potential large payout (see section below) and this could pave the way for Zanidatamab being the first HER-2 targeted therapy approved for BTC.

Recruitment of over 700 patients with HER2-Positive advanced or metastatic Gastroesophageal adenocarcinoma or GEA in multiple sites across the globe for a pivotal study called HERIZON-GEA-01 is also well under way. Wells Fargo believes this could potentially be a $450 million market.

Zymeworks presented results of Preliminary Phase 1 Trial for Zanidatamab Zovodotin also known as ZW49 at the recent ESMO Congress. This is the first-in-human study evaluating zanidatamab zovodotin in HER2-expressing cancers as a monotherapy. Management noted that these preliminary results from this 77 person trial were ‘very encouraging‘. It should be noted that when the abstract from this presentation came out in September prior to the presentation, the stock fell approximately 20% that day mainly around the concerns around adverse effects in this study.

The company also has a variety of pre-clinical candidates that might have value in the long term. Zymeworks plans to file five IND requests over the next five years.

Licensing Deal with Jazz Pharmaceuticals:

We noted in our first article around Zymeworks that:

A new partnership is hardly outside the realm of possibilities to extend the company’s cash runway given how many collaborations and partnerships it has already put together around its platforms/candidates.

And that is exactly what happened on October 19th when the company signed a new licensing deal with Jazz Pharmaceuticals (JAZZ). The deal involved a $50 million upfront payment pending antitrust approval. This agreement gives Jazz Pharmaceuticals the exclusive rights to develop and sell Zanidatamab Zovodotin in the U.S., Europe, Japan and all other territories except for those Asia/Pacific territories which Zymeworks had licensed to BeiGene (BGNE).

Zymeworks can also garner up to $525 million upon achieving certain regulatory milestones as well as 10% to 20% royalties on commercialized sales. In addition, the firm could see up to $862.5 million in potential commercial milestones. Finally, if Jazz choses to continue the collaboration after results from HERIZON-BTC-01 are posted, Zymeworks will receive an additional $325 million upfront payout. If Jazz ‘opts in‘ to this collaboration, it will also pay 100% of the cost of zanidatamab development and commercialization.

Analyst Commentary & Balance Sheet:

The analyst firm community is not sanguine on the company’s prospects right now overall. Since third quarter numbers posted, four analyst firms including Barclays and JP Morgan have reissued Hold ratings on the stock. Price targets proffered range from $7 to $9 a share. SVB Securities downgraded Zymeworks right after the Jazz licensing deal was announced and slashed its price target from $19 to $8 on the news as the analyst there believes Jazz is ‘unlikely to exercise its options for the treatment targeting some of the more significant indications, such as breast cancer and colorectal cancer‘

Stifel Nicolaus ($18 price target) did maintain its Buy rating while in mid-December Jefferies upgraded ZYME to a Buy and raised its price target from $7.70 to $11 a share.

Just over 25% of the outstanding float in the stock is currently held short. One beneficial owner bought just over $150,000 worth of stock in the fourth quarter. Several other insiders sold approximately $70,000 in aggregate during the quarter as well.

Earlier this week, the company disclosed it ended 2022 with approximately $490 million in cash and marketable securities on its balance sheet which will fund all operations through 2026. However, I believe Zymeworks is assuming the $325 million payment from Jazz pending its ‘opt in‘. Management expects to burn $90 million to $120 million worth of those funds to support all company activities in 2023. The company has no long term debt.

Verdict:

Let’s state the obvious, the market is essentially valuing the company’s pipeline at nothing right now as the stock basically sells for the net cash on its balance sheet (pending the opt in from Jazz). The large short position and negative analyst commentary is somewhat confusing given this. Zymeworks also received a buyout off last spring for $10.50 a share that it rejected as too low and that way before the partnership with Jazz Pharmaceuticals.

That said, the stock has put longer term shareholders through the ringer over the past few years. The litany of negative analyst opinions as well as a large short position in this name remains concerning. The lack of significant insider selling is encouraging. The stock is also up some 40% since our first article on it. Given all this, ZYME seems to continue to merit only a small ‘watch item‘ holding for aggressive investors.

The truth is rarely pure and never simple. – Oscar Wilde