ZYME - Zymeworks: Completion Of Jazz Deal Provides New Life

Summary

• Zanidatamab passed the key test in December that led to partner Jazz's opt-in.
• HERIZON-BTC-01 results exceeded expectations with a much longer duration of response.
• Zanidatamab is now Jazz's responsibility and Zymeworks stands to benefit as the program moves forward.
• With nearly $500 million in cash at the end of 2022, Zymeworks is ready for the new era with a near-term focus on zanidatamab zovoditin (ZW49) and a medium/long-term focus on the preclinical pipeline.

Zymeworks' ( ZYME ) zanidatamab passed the clinical key test in late 2022 and that led to the finalization of the licensing deal with Jazz Pharmaceuticals ( JAZZ ) which secured sufficient funding for the next phase of potential value creation for Zymeworks, driven by zanidatamab itself, and in the medium to long term, by the company's early-stage pipeline.

In my October article , I covered the deal with Jazz, but the focus was more on what zanidatamab could do for Jazz. This article will focus on the data Zymeworks generated with zanidatamab in the HERIZON-BTC-01 trial and how the deal with Jazz represents the start of a new era for Zymeworks.

Zanidatamab exceeds expectations, Jazz provides an additional $325 million in cash

The expectations for the HERIZON-BTC-01 trial were set by the previous data zanidatamab generated in this population which is late-line HER2-expressing biliary tract cancer ('BTC') where the candidate achieved a confirmed partial response rate of 40% and a disease control rate of 65% in 20 evaluable patients and the median duration of response was 7.4 months. The prognosis is otherwise poor for these patients as the response rate to chemotherapy ranges from 5% to 15%.

And zanidatamab did not disappoint in December. Zymeworks reported an overall response rate of 41.3% and this was slightly above the 40% it achieved in the previous trial, but the duration of response was much longer than anticipated at 12.9 months, more than 70% higher than the previous trial. Zymeworks also said that the safety profile of zanidatamab in the trial was consistent with that observed in previously reported monotherapy studies with no new safety signals. Detailed data from the trial will be presented at a future medical conference.

The company did not have to wait long for Jazz's decision, but that was part of the option deal signed in October. Two days after Zymeworks reported the topline results, Jazz confirmed its opt-in which triggered a $325 million payment to Zymeworks, on top of the previous $50 million payment for the option on this deal.

Zymeworks is also eligible to receive up to $525 million in regulatory milestones and up to $862.5 million in potential commercial milestone payments and tiered royalties on net sales between 10% and 20%. Jazz will also cover all costs. Most of the economics go to Jazz, but Zymeworks has retained a decent portion, and given the size of the company, it can still be a major beneficiary if zanidatamab grows to be a meaningful product later this decade.

There are approximately 7,500 new cases in the United States every year and zanidatamab's use will be limited to second-line patients and less than 20% over-express HER2. This suggests that second-line BTC is a very modest commercial opportunity for zanidatamab, but it represents an important first step for the asset on the side of clinical de-risking and was required for Jazz's opt-in.

The path forward for zanidatamab

Although not a certainty at this point, the HERIZON-BTC-01 data should lead to a BLA filing for accelerated approval for the treatment of second-line HER2-expressing BTC. Zymeworks will discuss the next steps with partners Jazz and BeiGene ( BGNE ). The regulatory update on BTC and the detailed data presentation from this study are the most important near-term events for this asset and for Zymeworks.

However, the more important clinical catalyst is next year - the data from the pivotal HERIZON-GEA-01 trial of zanidatamab in patients with unresectable locally advanced or metastatic HER2-positive gastric esophageal adenocarcinoma ('GEA'). This trial is a much larger one with 714 patients and with three arms - the control arm is the combination of trastuzumab and chemotherapy and there are two zanidatamab arms, the first is the combination with chemotherapy and the second is the combination of chemotherapy and PD-1 antibody tislelizumab from Asia-Pacific partner BeiGene. The primary endpoints are progression-free survival and overall survival, and unlike the BTC trial, if this trial is successful, it should lead to full approval.

In January, Jazz and Zymeworks reported combination data of zanidatamab and chemotherapy as a first-line treatment of patients with HER2-positive metastatic GEA ('mGEA'). Below are the results:

In 42 patients evaluable for OS receiving zanidatamab in combination with chemotherapy, the 18-month OS rate was 84% (95% CI: 68%, 93%), the 12-month OS rate was 88% (95% CI: 73%, 95%), and the median overall survival had not yet been reached (with 26.5 months median duration of study follow-up). Treatment with zanidatamab resulted in a confirmed objective response rate ('cORR') of 79% (95% CI: 63-90%), a disease control rate ('DCR') of 92% (95% CI: 79-98%), with three patients achieving complete response among 38 response-evaluable patients.

The median duration of response was 20.4 months (95% CI: 8.3-NE) with a median progression-free survival (mPFS) of 12.5 months (95% CI: 7.1-NE) with 17 patients having an ongoing response at the time of data cutoff. The regimen was manageable, tolerable and consistent with the observed safety profiles reported for other standard combination regimens for patients with HER2-positive GEA.

The results look decent but have caused little to no investor excitement when they were reported.

And finally, the next steps in the development of zanidatamab will also be important and investors will be looking for updates from Jazz and BeiGene in the following quarters.

The path forward for Zymeworks

Zymeworks ended 2022 with a pro-forma cash balance of $490 million and that does not include the expected $30 million reimbursement from Jazz for the development costs of zanidatamab in the fourth quarter.

In the near-term, zanidatamab remains by far the most important asset for Zymeworks and the related updates will be the largest share price movers in the next two years.

In the medium to long term, the focus will be on ZW49 or zanidatamab zovodotin and on the progression of preclinical candidates into the clinic, starting in 2024.

Zanidatamab zovodotin is a HER2-targeted bispecific antibody-drug conjugate. It combines the design of zanidatamab with the addition of a proprietary cytotoxin. It is currently being investigated in a phase 1 trial as a treatment for patients with locally advanced or metastatic HER2-positive cancers that have progressed on existing approved therapies, including HER2-targeted agents. I reserve the right to change my mind, but so far, this candidate has not delivered on its promise and I currently do not consider it a viable candidate. The preliminary data do not look convincing and I do not see how this candidate can differentiate itself in the very competitive HER2 treatment landscape.

The rest of the pipeline is too early to matter at this point, but it will be increasingly important in 2025 and beyond. Zymeworks plans to push one candidate a year into the clinic in the next five years, starting in 2024. Four potential candidates are listed in the pipeline slide below, but we have to wait and see what these candidates can deliver in the clinic and it will be a long wait.

Conclusion

Zymeworks is in a much better position than it was a few months ago. The finalization of the Jazz deal has added $375 million in cash to the company's balance sheet and it has eliminated all the expenses related to zanidatamab. Partners BeiGene and Jazz are now in charge of the development and commercialization of zanidatamab and Zymeworks still has participation in the form of regulatory and commercial milestones and up to 20% in royalties on net sales in all territories.

Zanidatamab-related updates are still the most important catalysts for the stock in the near term and we have to wait until at least 2025 for the internal pipeline to start to matter, notwithstanding ZW49 (zanidatamab zovodotin), which is still in active development but I am not really expecting a lot from this asset.

The share price of Zymeworks did rise in the last few months thanks to the Jazz deal and the positive HERIZON-BTC-01 trial data, but with a market cap of approximately $550 million and a pro-forma cash balance of $490 million, the stock still looks well-positioned to ride the zanidatamab wave higher in the following months and quarters.

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