Zymeworks Inc. (ZYME) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Zymeworks First Quarter 2023 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jack Spinks, Director of Investor Relations. Please go ahead.

Good afternoon, and welcome, everyone. My name is Jack Spinks, Head of Investor Relations here at Zymeworks. Today, we will discuss our first quarter financial results as well as provide an update to our ongoing business. Before we begin, I'd like to remind you that we will be making a number of forward-looking statements during this call, including, without limitation, those forward-looking statements identified in our presentation slides and the accompanying oral commentary. Forward-looking statements are based upon our current expectations and various assumptions and are subject to the usual risks and uncertainties associated with companies in our industry and at our stage of development. For a discussion of these risks and uncertainties, we refer you to our latest SEC filings as found on our website and as filed with the SEC. Later in this call, Chris Astle, our Senior Vice President and Chief Financial Officer, will be discussing our financial results, including certain non-GAAP measures. Description of our non-GAAP measures and a reconciliation to the most directly comparable financial measures as determined in accordance with GAAP are described in detail in our press release, which is available on our website at www.zymeworks.com under the Investor Relations tab. As a reminder, the audio and slides from this call will also be available on the Zymeworks website later today. Now I will turn the call over to Chris, our Senior Vice President and CFO. Chris?

Thanks, Jack, and thank you, everyone, for joining us today for our first quarter 2023 earnings call. As a reminder, I'd like to note that while I'll be presenting the prepared remarks and participating in Q&A today, Kenneth Galbraith, our Chair and CEO; Neil Klompas, our President and COO; and Paul Moore, our CFO, will also be available for Q&A following this portion of the call. With that, I'd like to begin today's call with an overview of our financial results, followed by a few recent developments and noteworthy updates across our business, before we open the lines for Q&A. This afternoon, Zymeworks reported financial results for the first quarter ended March 31, 2023. Zymeworks' net loss for the quarter ended March 31, 2023, was $24.4 million or $0.37 per diluted share compared to a net loss of $72.6 million for the quarter ended March 31, 2022. This decrease in net loss of approximately 66% year-over-year was driven largely by revenue from the reimbursable amounts received due to our collaboration agreement with Jazz and a decrease in R&D expenses. As reported, our revenue for the first quarter of 2023 was $35.6 million compared to $1.9 million for the same period in 2022. The increase in revenues were largely due to reimbursable amounts received for zanidatamab's clinical development and manufacturing pursuant to our collaboration and licensing agreement with Jazz and research support and other payments from partners. Research and development expenses for the quarter ended March 31, 2023, decreased by $16.6 million to $45.9 million as compared to $62.5 million for the quarter ended March 31, 2022. This decrease of 27% from the prior year related primarily to lower CRO and manufacturing expenses related to zanidatamab development and lower headcount-related expenses due to a decrease in headcount as compared to the same period in 2022. These were offset partially by an increase in clinical investigator costs for zanidatamab, and an increase in preclinical expenses for the continued development of our preclinical pipeline programs. As a reminder to those listening today, as announced on April 26, Zymeworks and Jazz entered into a transaction which, when closed, will transfer certain assets, contracts, and employees associated with the development of zanidatamab from Zymeworks to Jazz. This transaction was contemplated in order to simplify, focus and potentially expedite the clinical development and commercialization of zanidatamab. The financial terms, as previously disclosed under the original licensing and collaboration agreement remain unchanged. Zymeworks will continue to be eligible for reimbursement of certain costs of activities where we maintain responsibility and Zymeworks is also eligible for reimbursement of certain prepayments to third parties for services or other expenses under contracts to be transferred to Jazz pursuant to the agreement. In connection with our entry into these agreements, we anticipate our future research and development expenses and corresponding reimbursement revenue relating to zanidatamab under the license agreement with Jazz to decrease significantly. This reflects the transfer of responsibility as contemplated under the agreement, where Jazz will directly bear the ongoing zanidatamab-related costs incurred following the closing as opposed to the previously contemplated reimbursement mechanism. In connection with our amended agreement with Jazz, certain costs that we expect to incur will not be recovered by us, and the reimbursements to us from Jazz for the first quarter 2023 expenses will be reduced by the final agreed costs in connection with the transfer of the contracts and responsibilities to Jazz. We expect to begin recording the effect of these nonrecoverable costs in future periods. We expect our working capital requirements relating to our agreements with Jazz will be significantly reduced in Q2 due to the transfer of prepaid expenses to Jazz and the reduction in the receivables from Jazz under the reimbursement mechanism. For the quarter ended March 31, 2023, general and administrative expenses were $16.9 million compared to $12.1 million for the same period in 2022. Excluding the significant noncash recovery of GBP 5.1 million in stock-based compensation, but including the impacts of restructuring as recorded in the first quarter of 2022, our general and administrative expenses decreased by approximately $2 million year-over-year on a non-GAAP basis, in line with our expectations. Our cash resources consisting of cash, cash equivalents, and marketable securities were $412.4 million as of March 31, 2023. As of May 8, 2023, we had approximately 66.7 million fully diluted shares outstanding. With the continued focus on the balance sheet and the significant transformative impacts of the nondilutive inflows from our licensing and collaboration agreement, we continue to expect our cash resources to fund our planned operations for at least 2026 and potentially beyond. In addition, we are reiterating our net cash operating burn guidance of between $90 million and $120 million for the full year 2023. Neither of these guidance figures have changed from previous expectations as a result of the transfer of the ZZ entity to Jazz and the amendment to the licensing and collaboration agreement with Jazz. For additional details on our quarterly results and for a description of our non-GAAP financial measures and a reconciliation of GAAP to non-GAAP measures, I encourage you to review our earnings through their SEC filings as available on our website at www.zymeworks.com. Now I'd like to spend a few minutes talking about our early R&D portfolio, which we recently highlighted at AACR as well as some brief updates to our clinical program. Last year was an important year for our early R&D programs as we unveiled 4 new preclinical candidates and multiple platform technologies that enable us to continue developing Novel Therapeutics. This year, we have continued that momentum with a significant presence at AACR, where we presented 11 posters showcasing the focused development program we have in the antibody drug conduit or ADC, and multispecific antibody therapeutics, or MSAT space. While I will encourage you to listen to our AACR webcast that discusses these product candidates and technology platforms in detail, I would like to highlight that we expect to nominate this year an additional IND candidates slated for 2025 submission. We also continue to remain focused on utilizing partnerships as a means to both fund and expedite the development of additional programs while leveraging additional non-dilutive funding mechanisms. Our partnership strategy is purposeful. With the 5x5 strategy we laid out in October of last year, which outlines our plan to have 5 new INDs by 2027, and we believe we will have the opportunity and funding to bring 5 candidates to the clinic. Our robust technology platforms and world-class early R&D team provide us with the tool to continue growing our pipeline of early-stage preclinical product candidates beyond just these 5 in-house programs. These potential preclinical product candidates represent both a potential source of nondilutive funding and also can act as a source of screening for opportunities that we believe will help create a portfolio of both in-house and partnered candidates. We anticipate that for the in-house candidate developed via our 5x5 strategy, we would progress candidates through Phase II clinical studies, where we would then pursue an ex-U.S. partnering strategy. With that, I'll briefly touch on zanidatamab, our clinical candidate recently partnered with Jazz Pharmaceuticals in the fourth quarter of last year. As you may have seen, our partners, Jazz and BeiGene, recently announced 2 exciting upcoming presentations at ASCO in June of this year. The first I will speak to today represents the first zanidatamab abstract to receive an oral presentation at a major medical meeting, where we intend to discuss the full findings from our Phase II pivotal study of zanidatamab as monotherapy in previously treated HER2 amplified biliary tract cancer or BTC. Second-line BTC has no FDA-approved HER2-targeted treatment options, and our top-line data, which showed a confirmed ORR of 41.3% and a median duration of response of 12.9 months in previously treated patients with HER2 amplified and expressing disease as presented in December of 2022, would represent a potentially significant step forward in the treatment of patients with previously treated HER2 amplified BTC. We look forward to the presentation of the full data set by our partner, Jazz, in June at the 2023 ASCO Annual Meeting in Chicago. The second abstract accepted for a poster presentation at ASCO to be presented by our partner, BeiGene, will be an update to the previously presented results from the Phase Ib/II study of zanidatamab in combination with docetaxel as a first-line therapy for patients with advanced HER2-positive breast cancer. Presented at ASCO 2022, this study provided a promising ORR of 90% in the study population. The future potential milestone and royalty payments from our zanidatamab licensing and collaboration agreement with Jazz, which will remain unchanged following our entry into the amended collaboration agreement, and our similar agreement with BeiGene, are expected to continue to be a significant source of non-dilutive capital for Zymeworks as zanidatamab progresses towards potential approval, which would come with regulatory and commercial milestones. Along with our global partner, Jazz, and Asia Pacific partner, BeiGene, we look forward to the continued global development of zanidatamab, where we believe zanidatamab has the potential to treat a broad range of HER2-expressing cancers, including the potential to address unmet need outside of our 2 pivotal studies in BTC and GEA. We continue to have an exciting calendar ahead of us over the coming 2 years. As I mentioned earlier, with the upcoming presentations at ASCO and additional potential publications over the coming months, our partners will continue to present zanidatamab data that we believe can help position it, if approved, as the HER2-targeted antibody of choice for patients with HER2-expressing cancers. Later this year, we also plan to present additional data from our weekly cohort of zanidatamab zovodotin orzanidom, our HER2-targeted ADC, and expect to launch our 2 Phase II studies in non-small cell lung cancer in combination with PD-1 and in breast cancer after progression on T-DXd and in patients with lower levels of HER2 expression. We continue to pursue a combination strategy and would expect to partner with this asset prior to any registrational studies. While we need to gather more clinical data in the target indications, we believe that zanidatamab has the potential to be a preferred HER2-targeted ADC after patients progress on T-DXd or where a combination approach with the use of an ADC may make sense. We look forward to the continued development of this asset and reporting on the continued progress. Moving on to our portfolio of preclinical assets. We expect to nominate the next preclinical product candidate this year with an IND filing planned for 2025. We also continue to expect 2024 IND filings for ZW191, or folate receptor alpha targeting top summarize ADC and for ZW171, or mesothelin-targeting 2+1 format T cell engaging bispecific antibody. Further, we anticipate nominating a 2026 IND candidate in calendar year 2024 as well. This timeline highlights our commitment to our 5x5 strategy, targeting 5 new INDs for 2027, which underpins the potential future development of our next-generation antibody-based therapeutics. On the partnering front, we expect to continue pursuing preclinical partnerships to progress our preclinical development programs. This includes our expectation this year of partnering some of our early-stage assets as we continue progressing our ADC and MSAP portfolio in the coming years. As we leverage our focused R&D engine, we intend to continue our work to generate candidates where our partner may be the ideal choice to move them forward. For these assets, we will continue to seek attractive economics with upfront payments that help fund the development of our in-house candidates. With that, I'd like to thank everyone for listening to our prepared remarks, and I'll turn the call over to the operator to begin the question-and-answer session. Operator?

[Operator Instructions] Our first question is from Stephen Willey with Stifel.

So I fully understand the Jazz amendment. I guess if I look at revenue this quarter, I think about, I don't know, about $34 million of that was either resource support payments or drug supply payments from Jazz. And I think about 80% of R&D or any related clinical development costs. So should we just assume then that once the amendment closes at some point in 2Q that those 2 things will no longer offset each other in the P&L?

Yes. I'll let Chris answer that. Go ahead, Chris.

Yes, thanks for the question. That's right. Post the closure of this transaction with Jazz, the revenues from Jazz from the expense reimbursement will go away, and also the direct expenses we're incurring and then being reimbursed from Jazz will also go away. It's just worth noting there will be a partial quarter in Q2 from the beginning of the quarter through to the close. So there will still be some revenue and expenses relating to that, but that will go away. And it's just worth noting that revenue is recognized within the quarter, but then the as the expenses on the P&L, but then we keep that as accounts receivable on the balance sheet until it's reimbursed the following quarter.

Okay. I got it. And then I know you've talked before about being able to potentially monetize some of the agreements from the portfolio that you have of legacy licensing agreements. And I guess how do you structurally go about this? I guess do you propose some kind of flat repurchasing cost to the original licensing party? Or do you try to price this like an option and sell to some third party? I would just be curious as to how you go about potentially realizing that strategy.

That's a good question. And again, we did look at a proposal last year to monetize a portion of the future milestones and royalties, so all those legacy deals as a basket. So not entirely, but as a portion. And we did that to have an additional potential financing vehicle to the extent that we were later closing a partnership in collaboration with Jazz than we were. We didn't need to do that. So we didn't execute that proposal. It was obviously at a higher cost of capital than we were able to get from the Jazz collaboration, so there was no need to do it. I think this year, in 2023, we expect and hope that a number of those programs will progress. And once they do, we think that will throw off some additional milestone cash inflows to us, as well as progressing a number of those programs to make the future milestones and royalties more viable because they'll be closer in time. So it's something that, after this year, if we can progress that pipeline, we may look at a similar structure or something that's a little bit different, but it is an ability for us to tap into a financing source should we choose to. We just weigh the amount of capital we could get, the cost of capital, and what we would use those funds for right now. Obviously, with a cash runway that's at least until 2026, unlikely beyond. We don't see the need to draw an additional cost of capital right now, but it is always available to us.

Our next question comes from Charles Zhu with Guggenheim Partners.

Congrats on the progress. My first one is regarding Zane's clinical update in the second half. Any additional color around how we should be setting our expectations around that data set, particularly around the distribution of histologies? Will we, for example, have an additional line of sight for a single agent data in your priority Phase II indications such as non-small cell lung cancer or post-HER2 breast cancer? And on a similarly related note, it sounds like the data will be from weekly dose cohorts. How many read-throughs will these data have to your other schedules that you may be evaluating with Zane?

Yes. Thanks for the question. I mean, obviously, we have a tremendous amount of additional data that we've been able to accumulate since the cutoff for ESMO that was presented last year and the following patients longer. We've got the 2-week dosing cohort finished. And we've also enrolled additional patients on monotherapy at the 2.5 mg per kg, including more patients in non-small cell lung cancer and more patients who are posting in HER2 in breast cancer. We're still writing the abstract right down, Charles, so I can't say exactly what will be in it, but we're looking forward to provide as much context as we can for Zane. And in addition, we'll be closing that monotherapy arm and focusing on the combo studies that the other cohorts in non-full lung cancer breast that we're looking forward to going ahead with. And we're continuing to do some preclinical work around combinations, not with just PD-1 but TKIs and other checkpoint inhibitor combinations beyond PD-1 because I think there is some interest in looking at what might be possible by looking at CTLA-4 and even LIV-3 and others. So there still is tremendous preclinical work going on this year. I'm just not sure what will be in the abstract that we submit at first, but I don't expect it to get our last disclosure on zanidatamab.

Got it. Sounds great. Maybe one follow-up regarding some of those combinations, especially with respect to combining Zans with PD-1, maybe something a bit more forward-looking, how are you thinking about enrollment criteria by PD-L1 and/or HER2 status? Would patients need be positive to presume for both? And do you also intend on stratifying by the level of positivity?

I mean those are great questions. You'll see once the protocols are on clin trials, you're able to get some more information around that. Obviously, there's still a tremendous interest, as you can see from recent dealmaking in other options in the HER2 ADC space beyond DXd and T-DM1, and we've been pretty clear our strategy with zanidatamab has been to try to be the HER2 ADC of choice post-DXd and try to give physicians a different mechanism on the antibody because it is the biparatopic any backbone. We've tried to give KOLs a different payload, which is something that they've been requesting. And we'd like to give them the optionality of using zanidatamab in combination with other agents that are standard of care in indications where it's applicable. And that's how we arrived at right now the post-DXd space is defined in breast cancer and non-sale lung cancer, and that's why we've let ourselves look at studying at least 2 cohorts in non-small cell lung cancer, at least 2 cohorts in breast cancer to get some clinical data to support what we think KOLs are asking for as another agent of choice in the HER2 ADC space. And so I think once you see the protocols on controls.cov, then you'll have a lot more information about the nature and the structure of those studies.

Our next question comes from Derek Archila with Wells Fargo.