JAZZ - Zymeworks: Marking Time

2023-06-20 06:39:41 ET

Summary

• Today, we revisit an oncology focused developmental concern called Zymeworks, Inc.
• The company continues to advance its lead drug candidate, has a huge potential partnership with Jazz Pharmaceuticals and a large cash hoard.
• The stock has spent most of 2023 marking time waiting for upcoming potential catalysts. An updated investment analysis follows in the paragraphs below.

The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man ."? George Bernard Shaw

Today, we are placing Zymeworks, Inc. ( ZYME ) back up in the barrel and making this small biopharma our spotlight feature of the day. Since we last highlighted this small cap name at the start of this year, the company has posted two quarterly reports and replaced a member of its C-suite. There also have been some trial results, company specific news and a big insider buy in the stock in March. An updated analysis follows below.

Company Overview:

Oncology focused Zymeworks, Inc. is headquartered in Vancouver, Canada. The company's primary drug candidate is Zanidatamab which the company is evaluating in targeting a variety of HER2-expressing cancers in combination with other drugs and also as a monotherapy. Zymeworks has several other compounds in its pipeline as well. ZYME stock currently trades just north of eight bucks a share and sports an approximate market capitalization of $520 million.

The company got a huge boost last October when it entered into a collaboration deal to develop Zanidatamab with Jazz Pharmaceuticals ( JAZZ ). Not only did Zymeworks get $50 million upfront from this deal, it also could receive nearly $1.4 billion in regulatory and commercial milestones as well as 10% to 20% royalties on commercialized sales of this product if eventually approved in the U.S., Europe and Japan. Zymeworks is also partnered with BeiGene, Ltd. ( BGNE ) for development of Zanidatamab in China and the Asia/Pacific outside of Japan.

The company has several studies underway evaluating Zanidatamab. The company also plans to initiate two Phase 2 studies around an ADC candidate zanidatamab zovodotin. However, Zymeworks will not proceed to registrational studies around this asset until it secures a developmental partner. In addition, some Investigational New Drug Applications or INDs around several pre-clinical assets in its pipeline should be filed starting in 2024. All of these assets are too early stage in development to be germane to this analysis.

Zanidatamab is a HER2-targeted bispecific antibody that simultaneously binds with two distinct sites on HER2, a protein expressed on many types of cancer cells. Early results of Zanidatamab have been encouraging and the candidate has garnered many designations in the U.S. and abroad. The company notes on its website that:

Zanidatamab has been granted Breakthrough Therapy designation for biliary tract cancer from the FDA and the CDE in China, as well as two Fast Track designations, one for previously treated or recurrent HER2-positive biliary tract cancers [BTC] and another for first-line gastroesophageal adenocarcinoma (GEA) in combination with standard of care chemotherapy. Zanidatamab also received Orphan Drug designation for the treatment of biliary tract and gastric cancers in the United States and for gastric cancer in the European Union ."

As previously noted, there are several studies ongoing and enrolling as can be seen here . The most important of these is dubbed HERIZON-BTC-01. This trial is evaluating Zanidatamab as a monotherapy to treat second line HER2-Amplified BTC. This trial initiated in the summer of 2020 and is ongoing. Preliminary data released in December of last year was encouraging and showed a confirmed objective response rate of 41.3% and median duration of response of 12.9 months.

It is important to note this indication has a high unmet need as second-line BTC has no FDA-approved HER2 targeted treatment options. The final patient in this pivotal study was enrolled in the spring of 2022 and is operating in North America, Asia Pacific, Europe and South America.

After final results of this study are tabulated, Jazz has the right to 'opt in' as part of its recent collaboration deal. If that happens, Jazz will pay Zymeworks another $325 million and pay all costs related to Zanidatamab development and commercialization. Obviously, this would be a huge milestone for Zymeworks and likely provide a big boost to its stock.

The company also continues to enroll patients in an ongoing Phase 2 study of Zanidatamab in 1L patients with HER2-expressing metastatic gastroesophageal adenocarcinoma and is using the same sites as the HERIZON-BTC-01 study. Preliminary data released this January showed an 84% overall survival or OS at 18 months as a first-line option with chemotherapy. Wells Fargo has noted that successful development for this indication could be a $450 million opportunity for Zymeworks.

First Quarter Results:

On May 8th, Zymeworks reported a GAAP quarterly loss of 37 cents a share, more than a dime a share above expectations. Revenues grew over literally nothing in the first quarter of 2022 to $35.6 million, easily besting the consensus. Revenue mainly came from the $34.4 million the company received for development support and drug supply payments via its collaboration deal from Jazz Pharmaceuticals. The other $1.2 million was from other partners.

R&D expenses dropped significantly from the same period ago, primarily as a result of lower headcount in 2023 and lower non-recurring severance expenses than occurred in 1Q2022. Ten days after first quarter results posted, the company announced that the Chief Operating Officer and President will step down from these positions but remain an advisor to Zymeworks. This follows the departure of Zymeworks' previous Chief Marketing Officer who left the company in early January as part of an organizational restructuring.

Analyst Commentary & Balance Sheet:

Analyst opinion is currently mixed on the prospects for Zymeworks. Since first quarter earnings posted, both H.C. Wainwright ($8 price target) and SVB Securities ($9 price target) have reiterated Hold ratings on the stock. Citigroup ($18 price target) and Stifel Nicolaus ($19 price target) have maintained Buy ratings on the shares.

Just over 15% of the outstanding shares in this equity are currently held short. A beneficial owner bought some $1.8 million worth of stock late in March. It is the only insider activity in these shares year-to-date.

On its first quarter earnings conference call, management reiterated its guidance calling for 2023 operating cash burn of between $90 and $120 million and cash runway through at least 2026. The company posted a net loss of $24.4 million in the first quarter, which was down some 66% from the same period a year ago. The company ended the first quarter with just over $410 million worth of cash and marketable securities on its balance sheet.

Verdict:

The current analyst firm consensus has the company losing $1.70 a share in FY2023 on just under $70 million. The analyst community sees losses dropping to $1.33 a share in FY2024 as sales grow to just north of $115 million. It should be noted there is a wide range of loss and revenue projections among analysts both for this fiscal year and the next. This is not surprising given revenue projections are around the timing of milestone payouts and other forms of partner reimbursement.

The company's main focus for the 2023 and 2024 will continue to center around the development of Zanidatamab. 2024 will see some IND activities as the company advances its non-Zanidatamab candidates in early stages of development.

Zymeworks continues to appear a solid ' sum of the parts ' story. The stock sells for not much more than the cash on its balance sheet. The company has key partnerships in developing this asset and the candidate has two potential lucrative indications it is targeting in mid/late stage development.

That said, it is hard to come up with a concrete potential timeline to commercialization. As of its last earnings conference call, management was still working with partners Jazz and BeiGene to come up with a potential filing timeline around BTC.

Until clarity is provided, I believe ZYME continues to merit a small ' watch item ' holding. I have most of my stake in this equity held within my personal accounts via covered call positions. This provides some downside risk mitigation and provides a solid return even if the stock continues to be range-bound in 2023.

A good traveler has no fixed plans and is not intent on arriving ."? Lao Tzu

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