Zymeworks: Leader In Bispecifics Space Makes Substantial Headway

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About: Zymeworks Inc. (ZYME), Includes: AZN, BGNE, GSK, JNJ, LLY, MRK
by: Jonathan Faison
Summary

Shares have nearly doubled since my initial recommendation to buy the dip in February of last year.

I provide a recap of the bullish thesis and recent events.

Zymeworks is making a name for itself in the bispecifics space with 9 active partnerships, and remains eligible for up to $8 billion in milestone payments plus royalties.

Clinical catalysts in the medium term for wholly owned assets could serve to create significant value for shareholders.

Zymeworks remains a Buy. Risk factors include the crowded nature of the HER2 space, disappointing data and negative developments with collaborations.

Shares of Zymeworks (ZYME) have nearly doubled since I suggested that readers "buy the dip" in February 2018. In that article, I pointed out that a bet on the stock was not merely a wager on prospects for lead program ZW25, but also on its impressive platform technologies with several partners exploring multiple indications. The stock has risen by 60% since my December article provided an update and noted that thesis continued to strengthen.

The company's first-quarter 2019 report served as a reminder that I needed to revisit this one due to decent progress being made in the clinic and multiple collaborations advancing to inflection points.

Figure 1: ZYME daily advanced chart (Source: Finviz)

When looking at charts, clarity often comes from taking a look at distinct time frames in order to determine important technical levels to get a feel for what's going on. In the above chart (daily advanced), we can see shares trading in a range for much of the past year before finally breaking out in late April. The stock broke out again in June after an asset partnered with Merck (MRK) finished late-stage preclinical studies and an update was provided at Jefferies Healthcare Conference.

Overview

In my last article, I touched on the following keys to the bullish thesis:

  • Zymeworks appeared to be especially appropriate for conservative investors given limited downside and significant upside potential. This was based on its possession of multiple therapeutic platforms which have received validation as reflected in current active partnerships. An example of this was its pact with Johnson & Johnson (NYSE:JNJ) to commercialize up to six bispecific antibodies based on the Azymetric and EFECT platforms (Zymeworks received $50 million upfront and was eligible for over $1.3 billion in milestone payments, with total milestone payments achievable under all six partnerships to total $5.5 billion plus royalties). Its Asia collaboration with BeiGene (BGNE) was also an important step forward, with Zymeworks receiving $40 million upfront and up to $390 million of milestone payments plus tiered royalties on future sales for ZW25 and ZW49 (not to mention a separate research and license agreement for $20 million upfront and up to $702 million in milestone payments plus tiered royalties on global sales).
  • Additional upside involved the company's wholly owned stable of pipeline product candidates, most of which were in the preclinical stage. Data for lead program ZW25 (Azymetric-based bispecific antibody targeting two distinct domains of HER2 receptor) showed impressive activity in patients with HER2-expressing cancers who'd been already been treated on average with 6 HER2-targeted regimens (very advanced disease). Updated results from the phase 1 monotherapy study in heavily pretreated patients with various HER2-expressing cancers showed progression-free survival of 6.21 months and an overall disease control rate of 82% and 7 partial responders (41%). Digging deeper, in eight gastroesophageal cancer patients with median 4 prior systemic treatments, the response rate was 50%. The tolerability profile continued to appear solid, with just one patient experiencing Grade 3 fatigue and no treatment-related serious adverse events observed.
  • Zymeworks' next wholly owned program also looked intriguing. ZW49 is a biparatopic HER2-targeted ADC which ideally improves internalization and delivery of the cytotoxic payload to cancer cells. Preclinical data was supportive, showing complete tumor regressions in high and low HER-2 expressing patient-derived xenografts and encouraging efficacy in a model of breast cancer brain metastases (compared favorably to approved treatments including Daiichi Sankyo's DS-8201, which received Breakthrough Therapy Designation). Though not unexpected, efficacy was demonstrated at levels sufficient enough to be well-tolerated and suggesting a substantial therapeutic window. In management's presentation at Jefferies last year, they called ZW49 essentially ZW25 in the form of an ADC or antibody drug conjugate.
  • Key executive hires also served as a green flag, including Anthony Polverino, Ph.D. as Executive Vice President of Early Development and Chief Scientific Officer (previously served at Kite Pharma as interim chief scientific officer and as vice president of research during the period in which Yescarta was approved).

Figure 2: Pipeline (Source: Corporate presentation)

Given that multiple clinical catalysts are coming up and further development collaborations seem likely, I'm looking forward to revisiting to determine how the thesis has progressed and what kind of upside opportunity exists in the medium term.

Select Recent Developments

On January 17th, the company reported achievement of a new development milestone in its collaboration with Eli Lilly (LLY), namely that Zymeworks received an $8 million milestone payment after its large pharma partner submitted the IND application for its immuno-oncology bispecific antibody enabled by the Azymetric platform.

At the end of April Zymeworks announced several key hires in the form of Mark Hollywood, Senior Vice President, Technical and Manufacturing Operations; Neil Josephson, M.D., Vice President, Clinical Research; and Bruce Hart, Ph.D., Vice President, Regulatory Affairs. Mr. Hollywood last served as Vice President and Head of ZymoGenetics (a Bristol-Myers Squibb (BMY) company), while Dr. Josephson last served as VP of Clinical Development at Seattle Genetics (SGEN). Dr. Hart also served for 15 years at Seattle Genetics as regulatory lead for Adcetris. I see these last two hires as significant green flags.

On May 14th, Zymeworks announced a licensing agreement was granted to Iconic Therapeutics giving it non-exclusive rights to the ZymeLink ADC platform for the development of its ICON-2 Tissue Factor ADC for cancer. Note that this is the first collaboration using the ZymeLink platform, and the agreement gives Zymeworks co-promotion rights with increased royalties for products using the Iconic ADC program. If Iconic outlicenses the program, instead of co-promotion rights Zymeworks will receive a share of revenue Iconic receives from partners plus tiered royalties on worldwide net sales.

A couple days later, the company announced that GlaxoSmithKline (GSK) expanded its 2016 agreement to gain access to Zymeworks' heavy-light chain pairing technology and will have the option to develop and commercialize bispecific drugs across different disease areas. In blue sky scenario, if all six programs were developed and licensed, the value of the collaboration would be up to $1.1 billion, not to mention increased tiered royalties on global sales.

Other Information

For the first quarter of 2019, the company reported cash and equivalents of $180.3 million as compared to net loss of $13.6 million. Research & development expenses rose to $17.5 million, while G&A came in at $9 million. Revenue rose to $11.9 million as a result of $8 million milestone payment from Lilly and $3.5 million recognized deferred revenue from agreement with BeiGene.

As for future catalysts of note, continued progress in the clinic for ZW25 and ZW45 should continue to drive upside as key inflection points are reached. The registrational trial for ZW25 in first line gastric cancer seems especially promising given strong responses observed in the phase 1 study. At Jefferies, management noted that for ZW49, the starting dose of 1 mg/kg is significant because it could be close to what would be an active and relevant dose for these patients (the sweet spot could be found somewhere in the first four cohorts). They are going after breast and gastric cancer, spreading out across high, intermediate and low HER2 expressors plus a basket cohort to observe the full totality of what ZW49 could accomplish in different tumor types and at varied HER2 expression levels.

Figure 3: Clinical development overview (Source: Corporate presentation)

Inking of additional collaborations (or expansion of existing agreements) would not be a surprise in the medium term as well.

As for market opportunity being targeted, despite the crowded nature of the HER2 field and excessive amount of competition, management continues to claim that they can carve out a niche with the company's two lead candidates.

Figure 4: Market opportunity (Source: Corporate presentation)

The terms of AstraZeneca's (AZN) deal with Daiichi Sankyo for development of trastuzumab deruxtecan (DS-8201) serve as proof of continued interest in this space by Big Pharma and potential value creation here ($1.35 billion upfront payment with milestone payments of up to $5.55 billion).

As for institutional investors of note, decent-sized stakes are owned by the likes of Baker Brothers, Vivo Capital and Perceptive Advisors. The history of insider selling in 2019 does not inspire confidence.

Final Thoughts

To conclude, with cash backed out, the resulting valuation of around $500 million seems more than reasonable considering potential prospects for Zymeworks' two lead, wholly owned product candidates. Consider that the company has 9 active partnerships, including 2 bispecifics that Eli Lilly has moved into the clinic and another one from Merck entering the clinic soon as well. In total for all deals, Zymeworks is eligible for up to $8 billion in milestone payments plus royalties, which speaks to the ease of use with its "plug and play" technology platforms. Management has set a lofty objective of making ZQ25 and ZW45 standard of care for HER2 expressing cancers and to show superiority over Herceptin and Perjeta plus or minus chemo (the current gold standard). Given promising phase 1 and preclinical data, I'm looking forward to further clinical updates in the second half of 2019 and next year as well. Playing devil's advocate, I still feel that the HER2 field is increasingly crowded, and it's hard to have an edge in determining which breakthroughs will truly bring about the next wave of innovation (and how they will fare commercially).

For readers who are interested in the story and have done their due diligence, I suggest patiently accumulating dips over the next couple quarters. For those who've already done well on the prior recommendation, a position here remains attractive for the long term (multi-year time frame) as key collaborations and wholly owned assets advance.

Risks include increasing amount of competition in the HER2 space, disappointing clinical data, setbacks in the clinic and negative developments with partnerships. Given the company's solid cash position and low burn rate, dilution in the near term is not expected.

As for downside cushion and elements of derisking, data observed thus far plus lucrative partnerships and cash position make this holding seem significantly derisked (potential downside of perhaps 25% or back to mid-teens for share price is my best estimate).

Considering the crowded and rapidly evolving nature of the HER2 space, where I feel that I have less of an edge, I'm not currently considering the stock for ROTY. That said, with a multi-year time frame, this is likely a multibagger as wholly owned assets progress in the clinic and partnered programs make significant headway.

I greatly appreciate you taking the time to read my work and hope you found it useful. Consider clicking "Follow" next to my name to receive future updates and look forward to your thoughts in the Comments section below.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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