Zymeworks Inc. (ZYME) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Zymeworks Strategy Update Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Shrinal Inamdar, Senior Director of Investor Relations. Please go ahead.

Thank you, operator. Good morning or good afternoon, everyone, to those of you joining from London. Thank you for joining our business strategy conference call. Before we begin, I'd like to remind you that we'll be making a number of forward-looking statements during this call, including, without limitation, those forward-looking statements identified in these slides and the accompanying oral commentary. Forward-looking statements are based upon our current expectations and various assumptions and are subject to risks and uncertainties, including those 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. In a moment, I will hand the call over to Ken Galbraith, our Chair and CEO, who will provide an overview of our strategic business update. At the end of the call, Ken will be joined for Q&A by Leone Patterson, our Executive Vice President, Chief Business Officer and Chief Financial Officer; as well as Adam Schayowitz, our Acting Chief Development Officer; and Scott Platshon, our newly appointed Acting Chief Investment Officer. Please note that we will not be taking questions on the HERIZON-GEA-01 topline data announced yesterday. As a reminder, the audio and slides from this call will also be available on Zymeworks' website later today. I will now hand the call over to Ken.

Thank you, Shrinal, and thank you, everyone, for joining us today on the call. Today is a milestone moment for Zymeworks, not just because of the positive data announced in the pivotal HERIZON-GEA-01 clinical trial of zanidatamab, but because of what this development represents for the future we're building here at Zyme. Yesterday, our partner, Jazz and BeOne announced positive topline data for zanidatamab, which, as you know, was designed in advance in a registration study by our team here at Zymeworks and importantly, was built using our proprietary Azymetric platform. We believe these results mark a major scientific and strategic validation of our scientific approach to multifunctional therapeutics. Before we speak to the strategic implication of today's news, I want to take a moment to recognize the patients and caregivers impacted by gastroesophageal adenocarcinoma, in particular, those who participated in the HERIZON-GEA-01 clinical trial. We're grateful for the patients for their courage to participate in our clinical research, which made this progress possible. For the families, clinicians and partners, thank you for your unwavering support, compassionate care and dedication. I'm especially proud of the work conducted by our team at Zymeworks. We designed and developed zanidatamab through to late-stage development. Your commitment fuels progress and innovation to expand the options available for those living with this aggressive disease. This positive result is not just a clinical milestone, it's a shared achievement with everyone [indiscernible] study possible. Now with the positive topline data announced from HERIZON-GEA-01 for ZIIHERA and pasritamig advancing into registration studies by J&J in September of this year, which I'll discuss shortly, we believe we have a unique opportunity as a biotechnology company. We have an emerging licensed product portfolio with potential long-term cash flows driven by late-stage development and commercialization by our partners. These potential cash flows provide us with an opportunity to be intentional about the natural evolution of our strategy. We built this company on disciplined capital deployment, a strong network of partnerships and the ability to identify and invest in high value differentiated platforms and products. Today, I'll walk through how this integrated model positions us for what we believe to be scalable, provide durable growth in revenues and eventual profitable operations and how our leadership and governance refresh supports that next phase. Here, you can see the potential value embedded in the collaboration with our partners, Jazz and BeOne for ZIIHERA. The partnership structure for ZIIHERA expansion, further development obligations and risk in exchange for a series of payments based on continued development and commercialization by our partner, Jazz. Our net investment in ZIIHERA through late-stage development prior to converting to our Jazz partnership was approximately USD 350 million. To date, we've already achieved a combined total of around $500 million in upfront and development milestones from BeOne and Jazz collectively, a strong validation of both the underlying science and quality of these partnerships. The $375 million upfront payment from Jazz in 2022 has been primarily utilized to build our current wholly owned R&D pipeline of clinical and preclinical product candidates. Milestone payments from the initial regulatory approvals in [indiscernible] and royalties on sales by Jazz and BeOne to date have been primarily used to fund the return of stockholder capital through stock repurchases totaling $60 million during 2024 and 2025. Looking ahead, there's approximately an additional $1.5 billion in potential development and sales milestones from Jazz and BeOne related to ZIIHERA with about $440 million of this expected in the near term based on the anticipated global regulatory approvals for GEA. We also expect royalty revenue to grow following potential near-term approvals to GEA based on the positive outcome of HERIZON-GEA-01 study announced yesterday with the U.S. supplemental BLA submission expected by Jazz in the first half of 2026. In addition, there's significant ongoing development plan for zanidatamab, including in HER2-positive breast cancer funded by our partners, which could provide the basis for further approvals, additional milestone payments and higher royalty income. As a reminder, we're eligible for a 10% to 20% tiered royalty from sales of ZIIHERA from Jazz, we previously guided to a $2 billion-plus peak sales opportunity for ZIIHERA. These milestones and royalties are meaningful, not only in quantum, but because they'll provide visibility to the possible defined future non-dilutive cash inflows. Importantly, our philosophy is not to deploy this capital automatically into higher risk late-stage internal development or immediate return of capital. Instead, these potential milestone payments and royalties may be used to fund our ability to pursue [indiscernible] initiative of compounding growth opportunities through selective royalty acquisitions, strategic partnerships and portfolio expansion to enhance what we believe can be recurring high-margin revenue. We also have opportunities for significant royalties stemming from additional late stage partnered assets such as pasritamig, which has advanced to now 2 Phase III clinical study. Pasritamig is a unique and differentiated T cell engager for prostate cancer that arose from our collaboration with J&J, utilizing our Azymetric platform. All development costs were incurred by our partner, J&J, who has also paid for access to our platform. Pasritamig now advancing into registration studies in prostate cancer, thus providing visibility into potential future milestones and if approved, royalty of those designed by J&J. We continue to have the potential to earn $434 million in future development and commercial milestones as well as a mid-single-digit royalty on sales. Currently, J&J has guided to potential peak annual sales of pasritamig between $1 billion and $5 billion, making the potential opportunity for this asset as valuable as ZIIHERA for future royalties. In addition, Zymeworks continues to have a number of platform collaborations with other pharmaceutical companies, several of which are advancing in clinical studies. Our royalty base is expected to grow as partnered assets advance into later-stage development, reach commercialization and progress in new indications, which should in turn increase the visibility of future royalties. With a strong financial interest in 2 differentiated licensed products, each with multibillion-dollar annual peak sales potential, we have a unique position to protect and manage expected revenues from these licensed products and reinvest cash flow receipts back into a significant revenue-generating portfolio to drive outside returns with a unique risk profile different than traditional biotech R&D investments. Following a comprehensive strategic review with independent advisers, it became clear that the significant future cash flows expected from our partnered assets gave us a unique opportunity. The ability to seek to reinvest in and compound existing valuable royalty streams, enable internal R&D to focus on strength and deploy capital with a focus on what we believe provides the best possible risk-adjusted return to shareholders in ways that are far less dependent on high-risk, cost-intensive late-stage development. Simply put, we're transforming from a more traditional high-risk biotech to a revenue-generating organization differentiated by in-house R&D capabilities. We believe this strategy allows us to be more selective, more capital efficient and more impactful by channeling our resources into opportunities that can expand our royalty base and ultimately deliver meaningful returns to shareholders. With that in mind, our business model announced today is anchored in 3 connected growth engines: our R&D innovation, our strategic partnerships and our royalty aggregation platform. First, on pipeline innovation, we will continue to invest selectively in R&D programs where we see differentiated biology, validated targets and clear clinical paths, whether accessed internally or externally. This keeps our internal R&D risk profile disciplined. While we may prioritize partnerships for the later stages of our R&D portfolio, we remain committed to internal innovation. We plan to continue to allocate capital to early-stage R&D where our team can create meaningful value and where our capabilities truly differentiate us. Second, strategic partnerships have the potential to extend our reach and reduce our capital intensity. By sharing development costs and leveraging our partners' capabilities, we can advance multiple programs simultaneously while securing upfront and milestone payments to fund future innovation. Formation of partnerships can occur in an early stage utilizing one of our technology platforms or preclinical products or through clinical stage products validated with clinical data generated by Zyme. For example, we're exploring partnership opportunities for ZW191 to ensure this potential best-in-class program has the resources required to achieve its full potential in a highly competitive market. An ideal partner will be able to bring the scale, capital infrastructure to fully unlock the potential of ZW191 in a competitive space. Third, royalties. This is what we view as our compounding engine. The royalty and milestone income expected from our current partnered assets creates recurring high-margin revenue. This gives us the flexibility to reinvest back into our asset portfolio through pursuing a differentiated health care aggregation strategy. We believe we're well positioned to pursue targeted company and royalty acquisitions that complement our portfolio with opportunities that allow us to compound value without adding disproportionate risk. Our focus on these efforts will be broader than relying on royalty streams generated by patented medicines that are already subject to existing partnerships. In order to add diversity to returns and risk in our long-term portfolio, we may consider other opportunities in the broader health care universe, which we anticipate can generate passive income or positive and predictable cash flows. This approach includes potential single asset acquisitions, company acquisitions or pipeline partnerships where we co-develop or out-license assets selectively. We also see opportunities for royalty acquisitions and other structured equity investments that can leverage our financial and scientific insights to potentially generate high-quality recurring returns. And where appropriate, we may pursue spin-offs to unlock hidden value in our own R&D programs while maintaining long-term participation through equity and/or royalties. And we intend to continue evaluating opportunistic share repurchases as appropriate uses of excess cash flow in order to reduce share count and provide opportunities to generate TSR through this mechanism. Over the course of 2024 and 2025, we used $60 million of capital from ZIIHERA commercialization to reduce our share count by approximately 6%, while our licensed product portfolio appreciated in value through advancement of commercialization. As mentioned previously, our capital allocation decisions, whether investing in R&D, advancing partnerships, supporting growth in royalties or other health care assets or returning capital through share repurchases, all serve one purpose to help build sustainable long-term value. Together, we believe with these 3 strategic levers make us more resilient, more capital efficient and well positioned for consistent value creation. I'd like to spend a moment on our R&D strategy, which is designed to maximize value creation while minimizing risk and operating expense. First, our goal is to manage our growth investment in our R&D portfolio carefully through the size and scope of our portfolio. We will also look to integrate partnerships and collaborations into our R&D portfolio as a critical source of external funding. We aim to take assets through preclinical validation or early clinical proof of concept that points to our science can create the most value. We're focused on maintaining a lean and highly capital-efficient operating model. We aim to generate high-value assets and not building a large development infrastructure or increasing fixed operational cash burn. We aim to continue operating with discipline, and we'll look to discontinue programs that seek to be relevant or attractive to potential partners. The program doesn't have clear external demand or a differentiated profile, we intend to redeploy those resources quickly as we've already demonstrated. This discipline is essential to keep the portfolio focused. We tend to structure our in-house discovery work to be tightly scoped to produce assets with strong biology, robust preclinical data or early proof of concept, assets that naturally attract high-quality partners. In parallel, we retain the ability to execute on selective platform collaboration deals that allow us to apply our discovery capabilities more broadly through partnerships as we did with J&J for pasritamig. These types of collaborations can expand our reach, create additional opportunities to generate long-term royalty value without increasing internal R&D spend. We continue to advance 2 differentiated TOPO1 payload ADC, ZW191 and ZW251 in early Phase I studies, and we have a diverse and extensive preclinical R&D pipeline for future development independently or through collaborations. And with a productive internal R&D organization, we can always retain the optionality to continue development on our own beyond clinical proof of concept when justified by a product candidate with a clear regulatory path, exceptional potential and maintaining our financial discipline around gross R&D investment in wholly owned product candidates. And finally, we intend to continue building our pipeline for both internal discovery and external business development. This balanced approach allows us to source the best ideas where they originate inside our labs or from external innovators. Together, these pillars create an R&D strategy that's focused, efficient, partner-ready and align with our overarching goal, generate high-value assets that ultimately may expand our royalty base. We believe that what can set us apart in the royalty aggregation space is our ability not only to simply acquire commercial royalties like traditional players, but to create them in ways that most others simply cannot. Traditional royalty companies compete over a relatively small pool of market of late-stage assets. We believe that our model opens up a much broader landscape of opportunity, which gives us an opportunity to generate high-quality royalty streams through science, through partnerships and through strategic transactions. We have all the tools of the traditional royalty model and that we can acquire existing royalty streams structured through synthetic royalty deals and acquire companies we believe have trapped or undervalued royalties. However, we also have the ability to create royalties through discovery collaborations, leveraging our R&D expertise to partner early where value creation is high. We can also generate royalties from internally discovered assets, advancing programs to preclinical or early proof of concept to create attractive partner-ready assets that can convert innovation directly into long-term royalty income and transfer development risk and cost for our partners. We can also make capital allocation decisions for products with exceptional potential to fund increased development on our own with our internal R&D capabilities. Lastly, we can selectively bring in external programs where our team can add scientific development value and turn them into new royalty positions through partnerships. We believe that this combination, the ability to both create and acquire royalties gives us significant strategic flexibility, broadens our opportunity set, potentially reduces competition for deals and potentially positions us to build a more diversified, more durable and ultimately more valuable royalty portfolio than traditional players. This is how we expect to unlock royalty value beyond traditional models and create compounding growth for the long term. To help position us for success during the last quarter, we continue to evolve the structure of our Board and management team to bring in deeper expertise in strategic capital allocation and external acquisitions, ensuring we have the right mix of scientific, financial and partnering expertise to execute on this next phase of growth. We believe that these recent governance and leadership enhancements, including the appointment of Scott Platshon as the acting Chief Investment Officer today, position us well to execute our novel strategy. These strategic appointments bring additional expertise to complement our existing scientific and clinical leadership and build even stronger foundation to drive this novel asset and royalty aggregation strategy for value creation. To complement our internal analysis, we have and will continue to engage independent financial and legal advisers to assist in evaluating a full range of strategic alternatives and provide objective guidance on the company's strategy to build long-term value for shareholders. We believe that these changes position us to execute with precision and agility while maintaining the strong scientific and financial discipline that's always defined our company. In closing, I want to emphasize the essence of our model, discipline, flexibility and sustainable value creation. With a refreshed leadership team, a growing royalty base and a portfolio of high-value opportunities, we're executing from a position of strength. With almost $300 million in cash resources and up to $440 million in potential near-term milestones related to the potential approvals of the HERIZON-GEA, we believe that our strong financial position allows us to move at the right pace with potential acquisitions, partner wholly owned assets on the right terms at the right time and compound long-term value deliberately rather than reactively. We've already reported $103 million in revenues for 2025 as of September 30, allowing us to operate from a very strong financial position. And finally, our $125 million share buyback authorization announced today reflects our commitment to disciplined capital allocation and our confidence in the long-term value of the company based on our chosen strategy. Should the right opportunity arise, we have access to a number of low-cost financing options, but importantly, we do not believe we need to access the capital markets in the near term to deliver on our current plan. We still see the opportunity to buy back shares as an attractive option even at today's price. That's a meaningful differentiator in this environment. Our hybrid model gives us flexibility to adapt as markets change and the discipline to stay focused on long-term growth. We believe we built a business that can perform across cycles, scale sustainably and deliver attractive returns near term and in the years ahead. We're extremely confident in our path forward and the long-term value this strategy can deliver for all of our shareholders. With those remarks, I'd like to thank everyone for listening, and I'd like to turn the call over to the operator to begin the question-and-answer session. Operator?

[Operator Instructions] And our first question is going to come from Charles Zhu with LifeSci Capital.

This is Sue Won for Charles. Congrats on the data and progress. So on potential royalty deals, do you have any specific therapeutic areas or methodologies you want to prioritize based on Zyme's expertise on protein engineering? And how would you weigh incremental buybacks versus pipeline acceleration or asset purchases?

Yes. No, thanks for the question. I mean, obviously, we have a strong internal scientific capability around our own therapeutic areas we operate in and obviously, in our biologics approach inside the company. Obviously, using that expertise to access the right opportunities would be something we could do. But I wouldn't feel restricted by the range of what we practice the science inside the company. I think we do have the ability to reach out externally to find expertise elsewhere beyond the company to look at things that might be more diverse from what we do today in Zyme or the therapeutic areas we concentrate in. One of the objectives of the portfolio will be to seek some diversity of revenue sources and that might be therapeutically product modality, et cetera, as we've explained. So I don't feel constrained by what we do today. But obviously, we'd like to explore the synergies of the scientific capabilities we have in thinking about external assets or external opportunities that are existing as royalties that we can bring inside the company. For the second question, obviously, we have practiced capital allocation for share repurchase over the past year. So we've used $60 million to reduce our share count by 6% at a time period when value of the business has been increasing. I think we will continue to have the same type of approach, build long-term value in the underlying assets that we have, whether they're royalty assets or R&D assets. And while that growth strategy is being undertaken, reduce the share count on a consistent basis. And we think with the combination of capital applied in both of those ways, that's where we hope to find significant outsized returns in the long term from that approach.

And the next question comes from Andrew Berens with Leerink Partners.

Congrats on the results announced yesterday. We haven't seen the data, but I think that they will be impressive based on the press release. I was going to ask about the assets that you mentioned in the press release that are not traditionally risky biotech assets, but I think you clarified that. I just wanted to ask about the strategy. Are there any assets that you may consider taking across the finish line by yourself? Are you going to commit to out-licensing programs in early stages and turning them into royalty milestone investments? And -- the reason I'm asking is I recall Array BioPharma had a similar strategy and investors in that company were frustrated about the amount of value that was out-licensed. It wasn't until they committed to late-stage development that the stock broke out of its trading range but eventually unlock strategic value. And then just one additional question about how China may fit into the strategy.

Yes. Thanks for all the questions, Andy. And again, we're really anxious to work with Jazz and BeOne to present the full HERIZON-GEA-01 data. And obviously, they're giving guidance on when that will occur. So we really look forward to that conversation post data. I guess with respect to the multitude of question you have there, I think we have optionality to take R&D assets as far as we would like. I think when we look inside the company and see ourselves with a pretty -- what we think is a pretty substantial emerging royalty portfolio, we may value partnerships that drive more royalties and milestones in a way that might be different than other biotechs. That's one point to make. I think when you think about traditional biotech risk investment, I think one of the things we recognize is just looking at the story of ZIIHERA inside the company. We took that ourselves into 2022 into early stages of registration studies before partnering with Jazz and turning that into a fully licensed asset with an upfront payment, but a really interesting structure of royalties and milestones going forward. If you look at the value of that inside the company from 2022 and we just starting registration studies, to now when we're commercialized on the breakthrough expansion indications in the larger market, that has appreciated that stream of royalty and milestones we're entitled to has appreciated value a considerable amount and the annualized rate of return reflected in that appreciated value is really considerable. And for that, we had to simply believe in the product, not monetize the asset and let our partners do the work to get through development and commercialization. So that type of risk, I think we see is a little bit more predictable than maybe starting from a very early biologic target and trying to work all the way through the spectrum. So we look at those rates of increase and think about how we can do things, access external assets to try to get those same returns. We're obviously at the same stage now with pasritamig, which has just gone into registration studies in Phase III with our partner, J&J. We have an interesting financial interest in that royalties and milestone if you go forward a couple of years and think about the conclusion of those registration studies and if successful commercialization, the rate of growth of that financial stream for us is significant and can be put into terms in terms of annualized rate of returns that are very significant. And again, the only thing we have to do is let our partner do the work of developing personalization, not monetize that and hold on to it and adjust the risk appropriately at a late-stage development opportunity. That's a different thing than what we also do, which is again, start with novel biology in early stage and try to work our way into the clinic either alone or with partners. So I think that's the thing we think about in terms of risk. I think continuing to operate not just a royalty portfolio, but an active R&D operation inside the company gives us optionality of how far we take specific assets in the case of pasritamig that was built off a technology platform, paid for completely by our partner, and they've moved it through the development stages. For ZIIHERA, we took that ourselves as a much larger investment right in the early Phase III studies and they recognize that we need a partner to kind of explore the continued full value and peak sales opportunity of zanidatamab and partnering in a transaction, which I think gave us a really good return analysis and the investment that we took in early Phase III trials. So I think we have a lot of optionality from that basis. But I think with an emerging royalty portfolio that we think is growing at a really great rate, we probably have a different value, intrinsic value inside the company of converting things from unpartnered investments to partnered opportunities, which then become more royalties and milestones inside our royalty portfolio. So having the optionality to build that externally or internally is important, but we will value partnerships where appropriate, probably a little bit differently than other biotechs do, but it does not take away the ability for us to pursue our own programs further as we use to hear right in the registration study and create a lot more value before having to partner or deciding to partner on a commercial basis. Obviously, there's a tremendous number of licenses currently held by companies based in China due to all the partnering activity with pharma companies outside of China. And I know there's been a number of royalty players looking to think about how you might access the value of those royalties and license agreements. So we'll obviously consider that and try to see if it does fit into the strategy that we have, which is not a straightforward buying royalties for commercial products. So a differentiated strategy, whether that can operate within that license held in China or not, we'll just have to wait and explore that further to see if that's something we can ask for ourselves.

Okay. I don't want to get lost, but I appreciate what you've done to turn the company around. It's impressive, but I do think the company is in a vastly different place than it was when you took over the helm.

No, that's great. And I think this is just another natural evolution of where we see the ability to drive long-term shareholder value by still doing R&D, but recognizing we have substantial emerging royalty portfolio that's going to be here for the long term, and we can actively manage that in a way that we think about it from an asset perspective, we can drive significant long-term returns from both the royalty portfolio and the R&D assets we have and we can reduce share count effectively, we continue to do that as we have done. And I think that really sets up for what we think are some optimal shareholder returns in the future.

And our next question will come from Stephen Willey with Stifel.

Congrats on the topline release yesterday. Ken, I kind of think you spoke to some of the increased interest in these external royalty acquisitions. But just wondering how you're thinking about the competitiveness of Zymeworks just from a cost of capital perspective? And then should we assume that the overall risk profile of these external royalties that you'll be seeking will be kind of similarly derisked and nonbinary in nature?

Yes. No, thanks for the 2 questions, I think, Steve. Yes, I think from our perspective, we just looked at what we've already done with respect to ZIIHERA from probably 2022 to where we are now. And I think we saw that stage over the last 3 years being kind of predictable risk, late-stage development, looking at the strength of the counterparties, our partners to deliver on development and commercialization goals. And so we like the idea. If you look at the rates of return that are implied by the value of our stream of royalty and milestones from 2022 to today, it's a pretty substantial annualized return. And I think we understand the risk profile that we went through with that, including a pretty binary Phase III risk readout yesterday, which was in our favor, which is great. I think we like that risk return relationship. So finding opportunities where we can get that would be great. We also have opportunities to look at maybe something that doesn't really subject us to that substantial risk now based on going to Phase III and looking at going to commercialization with a partner. So we like that opportunity. So we would look to find things that have the same flavor of potential annualized returns from holding on to those strips of royalties and milestones and not trying to deviate too much from the risk profile associated with those. At the same time, we do have innovative R&D, which has a different risk profile, and we think about investing in the programs that we have, whether they're preclinical or early clinical. So we do like the mix of those 2 within a portfolio basis. And so that should be the type of things that we're looking towards. I think as we access some targets externally. I think we'll start to show how we think about executing what that looks like with specific assets or specific royalty streams that we're able to access externally and also how we think about integrating partnerships and collaborations and what's right now a wholly owned portfolio and how that also creates some internally generated royalties and milestone streams through partnerships on things that we currently own. I think the combination of those 2 and the right mix could be quite interesting. And so we're looking forward to executing on both of those, the reasons that Adam and Scott joined us to help us execute on those and get that going quickly. And I think once we look at how that profile changes for Zymeworks going forward, we hope that with the potential to have even greater returns than we might think of from what we look at the company right now without really adjusting the risk profile.

And our next question will come from Yigal Nochomovitz with Citi.

This is Joohwan Kim on for Yigal. Congrats on the progress. Maybe just 2 quick ones from us. How far along are you in the process of conducting your first deal? And can you provide any color on when or what pace we might start seeing deals being announced?

No. No, we won't give any guidance until we complete transactions. Obviously, we've been thinking about this for most of 2025 and just had this expectation that with a positive topline result from HERIZON-GEA-01, it would just lead to increased expectations of substantial cash flows from ZIIHERA flowing into the company and making sure that we understood how we would thoughtfully allocate that capital to different parts of the business to drive long-term returns. And so we've been thinking about this considerably, working a way at how we would have a differentiated strategy from more traditional royalty modernization players and other folks that might be also looking at these assets for different reasons. And so I think we understand completely how we can be differentiated and how we can compete and how we can get access to external assets at really attractive prices and be able to drive value from there. Just won't guide on more details of that strategy because it's competitive, and I don't want to set up expectations for completion of deals but very high hurdle rates for what is necessary to not just allocate capital back to reducing share count in trying to build that royalty portfolio. So provided we can find opportunities that meet our financial requirements to add to the royalty portfolio, then we'll be doing transactions. We also have the ability to focus on internally generated partnerships as we integrate into a pretty sizable wholly owned portfolio and also looking externally at what might be available and where we would place capital. So I think as transactions occur, we can get a good sense of the cadence and shape of what we're trying to accomplish and then hopefully it becomes more clear why this is the optimal strategy because of the situation we find ourselves in with ZIIHERA and pasritamig potentially joining that later on. I think it was a pretty interesting license portfolio already and looking at the wholly owned R&D portfolio we currently have in the company and where that can be built as well.

Got it. And just to double-click on that, on your thought process that led you to the shift in your value proposition, I guess, specifically, what is always the plan with the Jazz and J&J cash?

Let me ask again, sorry, I didn't hear. Can you ask again.

Sorry. just to double-click on that in terms of your thought process that led you to the shift in your value proposition, specifically, was this always the plan for the J&J and Jazz cash?

Yes. I think we've always -- as an evolution of the strategy, we obviously considered a range of strategic options to drive shareholder value when we might find ourselves with the HERIZON-GEA-01 data positive and as we did look at moving into the Phase III study. So we did look at it a different model. Again, we aligned around this particular concept because we felt it would drive the optimal shareholder returns that would be long-term and durable. And we felt it was differentiated enough in the way that we would approach it that we didn't have the ability to see through being able to generate those returns. So it's clearly a differentiated strategy. We think we have all the capabilities to execute it effectively, and it's better than the other options that we looked at for a company that might find itself in a position of having an emerging and sizable substantial cash flow coming from initial assets that are licensed and commercialized by others and its own traditional biotech innovative R&D. And so we've been working for some time thinking -- trying to find the right strategy that suits Zymeworks in the situation we find ourselves in, and we've landed on evolving the strategy to what we're presenting today as one that drives optimal stockholder returns.

And the next question will come from Jon Miller with Evercore.

I guess I'll start on how much you plan on spending on internal assets before a partnership. How do you determine what the right time for a partnership is? And I ask that knowing that different indications in different spaces require vastly different amounts of clinical development spend to get to a derisked place where a partnership or an out-license makes more sense it can deliver value for the company. So can I get a sense of how far you take some of the existing programs that you have internally [indiscernible] and then maybe in the reverse direction, you mentioned, Ken, that the pool of external options is limited in terms of late stage derisked assets. But you also said that you have a broader pool maybe than others in the royalty acquisition space might have. And I'm wondering what you're looking for, what you might be okay with looking at an external pool that's materially different from what other loyalty -- royalty players would clear or what extent?

Yes. Two good questions, Jon. I think if you look internally, not that we have any of that format for how we think about investing in R&D and at what stage it might make sense to monetize some of that with a partner or bring in a partner and continue to share success. And if you look at ZIIHERA and pasritamig are probably the end of those 2 things when you think about ZIIHERA, we took right into registration studies with a $350 million investment on a single product before partnering it and looking at it then from a return of capital. Pasritamig came from a technology platform where there was 0 investment on our part [indiscernible] ROIC. So those are probably 2 ends of that. I think over the past 3 years; we've tried to build a portfolio and maintain its wholly owned just because then we have enough control over the shape and structure and targets and product modalities in that portfolio. And now that we've made a couple of hundred million dollar investment in that since 2022, we like the idea of integrating the right partnerships into that. That could be looking at earlier-stage collaborations that we haven't really done in the last couple of years are focused on. It could be looking at a certain stage of development for any of the assets that are in the clinic or moving in the clinic, could be a combination of those 2 things in a collaboration, could be a broader collaboration with a single party rather than multiple collaborations with different parties. So I think we're open to investing in R&D where it makes sense based on criteria we laid out and understanding how integration of partnerships can get the most value of that R&D, but also thinking about how it adds to the royalty portfolio that we already have and have a desire to expand and grow and actively manage. So the way we look at those things might be a little bit different, but I don't think there's any format kind of between -- there's no set format to decide we'll do exactly this all the time. We have a pretty good wholly owned portfolio that should allow us to integrate partnerships and collaborations in a variety of ways to drive that R&D forward and be competitive and also add to the future royalties and milestones we might receive in our portfolio.

And then on external?

Yes. I think on external, we thought a lot about differentiated. I mean a lot of these royalties that might be attractive to us are sitting within potential companies, which might also have other assets or platforms that they're working on, which may not be a value to somebody looking to acquire them just for capital or life. I also think holding on to ZIIHERA and not monetizing and holding out a position not monetizing it through development to commercialization generates substantial returns. So we might have the ability to hold on to these royalties and milestone streams until they mature and become more valuable rather than some of the monetization activity we see in the marketplace today, which is a pretty high cost of capital and the capital is put back into R&D assets, so we think that we might have the ability when you see a collection of assets together, some licenses, some unpartnered assets, some platform and be able to get access to all of that at the same time and then figure out how to curate that between the royalty portfolio, our R&D assets. And again, it's something we did a skill set in Zyme back in 2022, where we kind of took over the company and rationalize the burn rate, really refocus the R&D around certain things, turn the key assets from partnered to -- unpartnered to partnered. We've kind of already curated our own company in that way from 2022 onwards, and we see the benefit now that we have for what that looks like. We might get the opportunity to do that, and most financially oriented royalty players don't have the capabilities or interest in doing that. So we might find opportunities that are better able for us to assign value or ascribe value and maybe do a little bit more work around getting that value by the work that having R&D organization would allow us to do.

And our next question is going to come from Mayank Mamtani with B. Riley Securities.

Congrats also on the HERIZON-GEA topline results yesterday. So on the royalty aggregation platform, Ken, is there a certain component of biotech space that you feel there's most return potential when you apply this ZIIHERA learning from 2022 of resisting monetizing royalty streams through the last 3 years? Your focus is obviously very broad but also looks opportunistic. So any insight on the funnel process of narrowing opportunities? If you can't commit to timing of execution, if you are able to comment on the sort of upfronts that you could be targeting? And would that be tied to how cash flows in from Jazz and J&J? And then I have a follow-up.

Yes. I mean part of it is, again, trying to use the synergies or value of having internal R&D organization alongside you as you think about accessing the external assets or external royalties. It's something that no other royalty monetization players have. So finding ways where we can use that capability is great. But we would also be looking for things that fit into our existing portfolio. So the way we look at the future cash flows we might receive from first here and eventually pasritamig and eventually potentially other internally generated royalties, we're looking to understand what that cash flow looks like and how we can bring in things that would enhance it. It might enhance it in terms of accelerating some of the cash flows, it might do that in terms of getting to a higher fee cash flow. It might be increasing another tail. It might be trading one royalty for another to get a little bit of diversity from the products they relate to the platform, the therapeutic areas, the stage of development. So we really look at the portfolio approach and our focus are to try to make that portfolio more valuable than it is today with just what's in it today in terms of ZIIHERA, pasritamig, maybe some other things. So what we'll look for will be specific to our own portfolio and looking for ways to make that more valuable in the context of our own portfolio. So if we need diversity, we can go and gather money in the synergy of R&D group. We can stay close to things that we know. I think we have a range of optionality in the way that we look at it. And we might have more optionality or flexibility in how we build that portfolio than others who might be interested in similar types of assets. So hopefully, that's a different approach and the way we might have find value differently based on our own circumstances might be able to find attractive assets that we can get for a better input price or we can make more value out of those assets than others might be able to.

And at what point, Ken, a spin-off could make sense? Would it be an asset internally that requires an extensive R&D capital, late-stage development and you have exhausted extracting optimal value from potential larger pharma transaction. Is there anything obvious in your portfolio that might be trending towards that direction?

No. I mean we have a pretty broad internal R&D portfolio right now with multiple research teams in it. So obviously, we would still consider the opportunity that may be a bundle of assets or opportunities, or late stage and early stage would be more effectively capitalized moving forward in a spin-out situation. And quite frankly, if we're able to receive a share of that through royalties, milestones, equity participation, that would be fine. We could also see ourselves accessing external assets to us that might bundle very nicely with things that we're doing internally and might catalyze a situation where something might look like it could be sustainable on its own with its own future moving forward. And again, taking our share of that in royalties, milestones and equity participation might be okay. So I think the idea of bringing external assets and understanding what -- how it affects our R&D portfolio and being open to the kind of idea of spin-offs that we have seen other biotechs consider and do might be interesting and because one of our priorities is enhancing the value of our current royalty portfolio over the long term, we could ascribe more value maybe to some of what we see in that spin-off than others might who don't have that same priority around the emerging royalty portfolio.

And our next question will come from Yaron Werber with TD Cowen.

Congrats again on the data yesterday. I second that. I think that data should look really good. Hopefully, at ASCO GI, we'll see when it comes out. Maybe, Ken, a couple of questions sort of interrelated, #1, you have substantial royalties coming to you from ZIIHERA and also then from J&J. Would you consider monetizing those royalties ahead of time, royalties are obviously at a premium? Or do you want to hold on to those as a way to then fund your own effort. And then secondly, you're obviously about to return cash to shareholders to kind of help boost your own stock price. So I imagine a lot of the activities from now onwards are going to be financed with proceeds from future milestones that are coming to you? Or would you even be willing to access cash in sort of different ways? And then maybe finally, I mean, just so we understand, it sounds like you're thinking about going out and buying royalty streams that are mis-monetized or not appropriately valued? Or are you thinking actually bringing in additional programs from the outside, developing them and then monetizing them in a partnership or a royalty stream?

Yes. I think on your last question, I think we see ourselves having the option to do both and maybe in a way where we can access both of those things in one biotech company, let's say, or in accessing assets we can split off of one biotech company. That might differentiate the way we might be able to ascribe value of the transaction as different and preferred than just a royalty monetization player. I think the way we think about ZIIHERA and pasritamig is the net present value of those future royalty streams are much higher than they were 3 years ago because they advanced in development, at least getting in commercialization and looking to broaden the label and pasritamig obviously moving into Phase III. The way we got value from that was holding on to them and having belief in them and then being able to -- eventually, we're going to realize more value from those, so I think we like that approach. So I think we would intend to hold on to those as a core piece of our portfolio. They obviously will throw off capital. We announced today the milestones that will come to us on ZIIHERA from the FDA approval. And so we will get capital that comes from the royalty portfolio and turns into cash. And the question is how do we allocate that capital and try to explain today how we might think about it differently than yesterday. But I think we would like to hold on to the core of those royalty pieces. Again, they can always be monetized if you have a specific use. I think you can look at example of BeOne monetizing all the DLL3 royalties that they were entitled to their involvement with tarlatamab to do more R&D. So there are reasons why you might do that. But at the core, this long-term sustainable growing base of royalties and milestones on at least hear about pasritamig coming into the forefront, the ability to have more of them. I think holding on to those has generated substantial appreciation and value and eventually realization when we receive milestones and royalties. So I think we like that, obviously, it's a very valuable asset. You can always borrow against that if you want to access capital sooner than it comes in. But I think at the core, we like to keep ZIIHERA and pasritamig royalty streams inside the company. They are always that we -- the core of the strategy. And again, we've talked about this. We've got a pretty reasonable portfolio on the R&D side that's all wholly owned with multiple teams and assets at various stages, and we've committed a couple of hundred million dollars to building that, and we'd like to integrate partnerships and collaborations into that to move the promising ones forward in a way that maybe not be all of our capital. So if we're successful at continuing to manage R&D with discipline, if we're able to integrate partnerships into this to turn it from a wholly owned portfolio into something that has partners and collaborators working alongside of us, the cash needs on R&D will be more modest over time and won't require us to monetize as a requirement ZIIHERA and pasritamig royalties and milestones to fund that R&D. So I think there's a number of things going on here at the same time that just utilize our current situation where we find ourselves with 2 great licensed products that look really promising, a wholly owned portfolio and this idea of thoughtful capital allocation to build the royalty portfolio, still fund innovative R&D and reduce share count at the same time and a mixture of the capital allocation of those 3 components could really drive some interesting outsized returns for that total business.

And our next question will come from Eva Fortea with Wells Fargo.

Eva from Wells Fargo. Congrats on the recent data. So quick one from us. Can you provide a little bit more color on what today's announcement means for 191 and 251 development? And specifically for 191, you mentioned partnership discussions are underway. So how would you balance combination strategies in earlier line opportunities with partnership deals? Like would you wait to secure a partnership before moving to late stages of development in early line?

Yes. Thanks. I mean we obviously have a goal of integrating partnerships and collaborations in the wholly owned portfolio, but we have time to do that effectively and properly. And so I think we want to make sure that we protect the value of the assets we're generating and integrate partnerships and collaboration at the right time in the right way into this wholly owned portfolio that we've built the last couple of years. Obviously, for ZW191, the early data we disclosed, we think supports that it could be the potential best-in-class and obviously, the point of continuing to study it in the next stage of Phase I is to get some better characterization around tolerability, better characterization of activity and get some more confirmation that this could be the best-in-class asset. I think recognizing the indications of interest in ZW191, having a potential best-in-class when you're behind a number of others and when you're thinking more about combination strategies to compete [indiscernible] then convincing someone else who maybe has more resources to come on board to move that forward to explore the full potential of it. So that's a specific situation around when it might make sense and how we catch up with folks who are ahead of us in gynecological cancer. And so that's a partnership-driven model related to enhancing competitiveness, still sharing upside success, but trying to find someone who can help us make the most out of what hopefully continues to be next year a potential best-in-class opportunity in ADC. So that's driven. But I think we have the ability to integrate partnerships in the right way and the right structure and the right timing because we have the strength in this financial position. And so we're going to continue to stay in a strong financial position. But integrating partnerships and collaborations, someone else help us fund that portfolio going forward that we've worked the last couple of years to fund entirely on our own and retain it as wholly owned. It now is time to change that proposition. So we'll have to wait and see what those partnerships look like when they're indicated, how broad they are in the R&D structure and how they go along with not only moving R&D forward, but also adding additional valuable royalties and licenses from development stage that we can hold in our portfolio until they mature.

And our next question will come from Brian Cheng with JPMorgan.

As you think about the couple of directions that you have laid out, like seeking additional royalties, building out internal pipeline, returning cash to shareholders, how do you quantify the resources allocated to each of these buckets going forward? And on the royalty front of the business, is there a certain return benchmark at a certain time horizon that you and the team need to achieve?

No. Thanks for the question, Brian. Yes, we have very strict financial criteria related to adding additional royalties in the royalty portfolio. That we have to complement what we have there in a way that makes them more valuable. But we have a very specific criteria to allocate capital there. And so you'll see us be very financially disciplined and how we might invest in accessing external royalties or external royalties and assets together. The same way we have very strict criteria for how we decide what R&D investments to make and what programs and when to continue. So I think you'll see the same financial rigor as a part of that. I think what we're trying to do inside Zymeworks is to allow some optionality and flexibility about where we see capital allocation driving shareholder returns from time to time. So we obviously wanted to take advantage of what we thought was a valuable growing business that was mispriced the last year. So we decided that buying back 6% of the stock count was a good move to try and boost total shareholder return. If you look at the average price of buyback and the value that's been created, I think that was a good allocation of capital. At the same time, we were funding R&D that made sense to us, and we continue to do that. We're just adding -- evolving our strategy to add another option for capital allocation for ourselves that we can -- liking the returns that we're seeing from our licensed products with ZIIHERA and pasritamig so far in the way they mature is finding a way to reallocate capital back into that type of royalty or income-based asset. And so having the flexibility to decide how and when to allocate capital amongst those 3 different options for us and having a strict financial criteria over accessing the royalty portfolio or making additional R&D investments will keep us disciplined and we can have the optionality and flexibility to move capital where we think it can on its own or in combination with a mix of capital allocation, drive the right shareholder return over the long term, given the circumstances we find ourselves in. We've obviously renewed the share repurchase plan with another $125 million potential because we still see at this current price, an attractive opportunity to continue to reduce share count as our entire business gets more valuable as it advances. And so we want to be prepared to do that. At the same time, we're still funding R&D. And at the same time, we're still looking for opportunities to allocate capital back into our emerging royalty portfolio. Having the ability to do all 3 and change as circumstances allow themselves is the optionality and flexibility we think will drive optimal shareholder returns over the long term, and that's what we're focused on as a strategic element, that's what we tried to describe today as a strategic outcome of a positive HERIZON-GEA-01 study, which enables us to think about this as a strategy.

I show no further questions in the queue. I will now turn the call back over to Ken for closing remarks.

That's great. Well, thank you for everyone, for joining us today. I realize back-to-back press releases during a conference week might be difficult to take everything in, but we're happy to follow up with questions. You'll hear us talk obviously more about HERIZON-GEA-01 when that data is ready to be presented. We really look forward to doing that. I think it really hopefully confirms the potential of zanidatamab to be a really meaningful medicine in the HER2-positive space, not just in GEA where we completed Phase III, but in a much broader way, and we're looking forward to being able to explain the GEA data to you, but also we think there's much more potential of zanidatamab than maybe is realized today and explain how we'll get there. Secondly, we hope that the evolution of strategy that we've announced today clearly delineate what we're working on from here that the HERIZON-GEA-01 data allows us to think about. And we'll be looking forward to executing on the strategy, continue to communicate it and hopefully, you can look at the progress of the different elements of the strategy and get a better understanding of why we think this is the optimal way to drive shareholder returns in the context of the circumstances that Zymeworks finds itself in, which are very unique and differentiated. And we look forward to executing on this strategy in an excellent way and be able to report success around the strategy of execution in the weeks and months ahead. So thank you again for your time.

This concludes today's conference call. Thank you for participating. You may now disconnect.