Zymeworks Inc. (ZYME) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the Zymeworks conference call and webcast to discuss the acquisition of Theravance Biopharma. [Operator Instructions]. The conference is being recorded. [Operator Instructions]. I would like to turn the conference over to Shrinal Inamdar, Vice President of Investor Relations. Shrinal, please go ahead.

Good morning, everyone, and thank you for joining us. Today, we will discuss the closing of the Theravance Biopharma acquisition and what this transaction means for the next phase of Zymeworks. Scott Platshon, our Chief Business Officer, will begin with an overview of the transaction, including new power and the acquired R&D portfolio and how it advances our strategy at Zymeworks. Kristin Stafford, our Chief Financial Officer, will then discuss the financing structure, financial outlook and capital allocation framework. At the end, Ken Galbraith, our CEO and Chair, will open the call for questions. As usual, we will be making forward-looking statements during this call, including statements regarding the Fairmont bipharma acquisition, our financial outlook, the performance in growth of power potential development and commercialization opportunities, future business development and capital allocation. These 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 are referring to our latest SEC filings as signed on our website and as filed with the SEC. With that, I will turn the call over to Scott.

Thank you, Shrinal, and good morning to everyone joining us. We are thrilled to have closed our acquisition of Theravance. This transaction brings an important new medicine under the Zymeworks umbrella in EPRI. This only in-class once-daily nebulized Lama delivers meaningful clinical benefit to COPD patients who struggle to use handheld inhalers and is supported by a world-class commercial partner, Viatris. This acquisition also serves as a strong demonstration of the type of economics we are well suited to acquire at attractive prices for several reasons. First, Theravance maintains responsibility for hospital promotions, which introduces operational and structural complexities that render this transaction less attractive for traditional royalty buyers. Despite having a strong partner in Viatris, who manages most of the complexity associated with commercial promotion, this component is off strategy for a pure financial buyer. Second, we were able to provide an offer to acquire 100% of the equity of Theravance while traditional royalty buyers prefer asset acquisitions for structural reasons. Third, we were able to finance the acquisition via $350 million nonrecourse royalty-backed note with Owners at an attractive cost of capital. This financing is secured solely by YUPELRI cash flows and demonstrates how our differentiated model allows us to collaborate with large financial institutions, leveraging their lower cost of capital rather than competing with them for assets. Finally, YUPELRI is not the only source of value in this deal. The transaction also includes additional collaboration and royalty economics and R&D portfolio, very significant Irish tax attributes and an experienced commercial organization. Importantly, almost all of these other potential sources of value serve purely as upside and were not valued as contributing to returns. Since the transaction was announced in late June, our conviction has strengthened that there are more derisked trapped cash flows and assets that we are uniquely set up to access. The ability for Zymeworks to acquire whole organizations for access to R&D assets or cash flows makes us a differentiated acquirer with multiple avenues for value creation. Turning to the financial profile of the transaction. Our base case underwriting anticipates a mid-teens IRR over the long term. driven primarily by YUPELRI with a small contribution from VIBATIV, an important powerful antibiotic sold by Epitex. As mentioned, the base case does not assign any value to a number of additional opportunities. These include the potential utilization of approximately $2.5 billion of Irish tax attributes, future value from the acquired R&D portfolio and certain potential future milestones or other business development opportunities. The profit share from Viatris adds to our recurring cash flow foundation alongside Zahira, while also providing an opportunity to actively manage upside opportunity. The retained hospital organization is an important part of that opportunity. Hospital sales grew approximately 25% year-over-year in the second quarter of 2026, demonstrating continued momentum in the channel and we are thrilled to be welcoming a lean, skilled and highly experienced commercial and medical teams to Zymework. The routine team has demonstrated strong execution and understands the market, customers and product. We believe the hospital channel will continue to provide strong momentum to the brand over the coming years. As previously mentioned, the Viatris is responsible for promoting in the community and managing most of the complexities associated with commercial promotion and reporting. As we evolve the organization, we are also investing in the experience needed to support a more diversified business. With this in mind, we are adding new senior leaders from Theravance across technology, data science and AI as well as intellectual property. Stuart [ Knight ] will become Executive Vice President and Chief Information Officer of Zimmer where Stuart will guide the company's future technology strategy, including continued investment in the company's existing AI, data science and machine learning capabilities. Stuart brings substantial experience in biotech and pharmaceutical companies operating in both United States and Europe. Stuart will also be joined by Jesse Pecker as Vice President of Intellectual Property. We plan to hire a seasoned pharmaceutical executive with experience building and leading commercial pharmaceutical organizations to lead the commercial operations of Theravance. We will continue to evaluate the combined organization and provide updates on any future changes. For now, these additions strengthen the infrastructure we need to execute the next phase of our strategy. Beyond the commercial assets, Theravance Biopharma also adds an R&D portfolio Zymeworks. This expands our existing pipeline of wholly owned and partnered programs and gives us additional opportunities to create value through development partnering and other strategic alternatives. I'd like to reiterate, we do not assign any value to these programs in our base case IRR. We will only allocate capital to programs that have a clear, attractive risk-adjusted value creation potential. We will also evaluate partnering, licensing or other alternatives when those opportunities make sense. As a reminder, as R&D expenses in 2Q '26 were 20% lower than in 2Q '25, which is consistent with our planned reduction in R&D expenses. This approach allows us to preserve the upside associated with R&D while operating from a more diversified financial foundation. With that, I will hand over to Kristin to talk through the financial updates.

Thanks, Scott. As Scott mentioned earlier, another component of the transaction is approximately $2.5 billion of Irish tax attributes that we acquired. We have assigned no value to the utilization of these attributes in our base case IRR and expect to sign no value to the attributes of purchase accounting as well. It's important to note that the tax attributes exist because of the depth and breadth of the R&D in the business as we've just reviewed. We will evaluate potential opportunities to utilize these attributes in connection with future Irish revenues, IT structuring and potential acquisitions or investments involving our Irish legal entities. Our existing R&D operations provide an important foundation for that evaluation. The actual utilization, timing and value of these attributes will depend on applicable tax laws, regulations and the facts and circumstances of any future transactions. So similar to the R&D portfolio, we view the tax attributes as additional optionality rather than assumption under -- rather than an assumption underlying the transaction. On this slide, I wanted to return to the financing structure and remind everyone that a significant portion of the transaction was financed through a nonrecourse note with Owners Life Sciences secured by the power cash flows at a very attractive cost of capital in relation to the mid-teens IRR we expect the transaction to provide. The structure is designed for the notice serviced by the underlying Yupelri economics and is nonrecourse to the broader Zymeworks business, subject to the terms of financing arrangements. Yupelri is currently generating approximately $60 million of annualized cash flows or current run rates, providing the durability and predictability that allows us to structure this financing. During the note period, OMERS received 75% of the YUPELRI profit share cash flows to service interest and principal with the residual economics retained by Zymeworks. Once the note is repaid, the remaining cash flows revert to Zymeworks. This financing structure allows us to access a high-quality commercial asset while preserving capital for other opportunities across our business. The transaction is expected to be accounted for as a business combination and the purchase price will be allocated to the fair value of the net assets acquired and primarily includes rights related to YUPELRI with any remaining amount recorded as goodwill. Yuperi is expected to represent the principal identifiable intangible asset and will be amortized over its estimated useful life generally through the expected loss of exclusivity period. We also expect to recognize a tax liability due to an uncertain tax position as part of the accounting for the business combination. And upon expiration of the applicable audit period in October 2026, the liability may reverse, resulting in the recognition of a noncash income tax benefit in the fourth quarter of 2026. When looking at the Viatris collaboration agreement, it's important to remember that Theravance does not record product sales. Viatris records 100% of YUPELRI's net sales, while Theravance reports a single line item at its financials, which is called Viatris collaboration of Genovenue. This number is a net figure that includes Theravance's 35% share of profits and losses and adjustments for shared costs. To model the quarterly cash flow from YUPELRI, you must apply the 35-65 split across 3 distinct buckets. For net sales, we need to take 35% of the total U.S. net sales. For Theravance commercial expenses, you need to add back 65% of the commercial cost that Theravance incurred the antepost there advance share of these costs and for Viatris commercial expenses, we subtract 35% of the commercial cost Viatris card and Theravance and Viatris for its share. An illustrative example has been provided on the right-hand side of the slide with actual revenue and expense line items for the financial year 2020 -- with the completion of the Theravance acquisition and the $250 million milestone payment triggered by the FDA approval of Sahara and GEA on August 25, 2026, the company has provided updated financial guidance, utilizing relevant financial metrics that I believe provide a more suitable framework for evaluating operating performance of the business. The company expects total revenue for 2026 to be between $278 million and $292 million and 2026 adjusted EBITDA to be between $114 million and $128 million, excluding the impact of any future transactions. At the current time, we won't provide any specific revenue guidance by source, specifically referring to milestone revenue or 0 royalties from Jazz from day 1. Recently, Jazz has updated peak sales guidance for Sahara to be between $3 billion and $5 billion. As an illustrative example, annual royalties due to Zymeworks would be between $485 million and $885 million based on those peak sales estimates using the 20% royalty rate for sales above the $2 billion threshold as previously disclosed. Sales of Veera by B1 and their Asia Pacific territory would be incremental to these sales estimates from Jazz as with the resulting royalties Zymeworks. Adjusted EBITDA is a non-GAAP financial measure and a reconciliation between GAAP reported and non-GAAP financial information presented for historical periods can be found in the appendix at the end of this presentation. Our guidance today reflects our current expectations for the acquired business and the broader side works operating profile. As with all forward-looking guidance, actual results may differ based on a number of factors, including commercial performance, collaboration revenue, operating expenses and other risks described in our public filings. Going forward, we believe total revenue and adjusted EBITDA provide a more meaningful framework for evaluating timework as we transition to our business supported by multiple sources of revenue and operating cash flow. We will provide updates on our 2026 financial guidance as needed with respect to future events and transactions and expect to provide initial guidance for 2027 in conjunction with the release of our annual financial results for 2026 and expected in the first quarter of 2027. One of the most important changes following the Theravance acquisition as well as the Hero's approval of GEA is the increased role of cash flow in our capital allocation framework. As we generate cash from the Commercial and royalty portfolio, we have multiple avenues for deploying that capital. We can continue to invest in our wholly owned R&D programs. We can advance the R&D programs acquired through Theravance internally or through out licenses or spinouts. We can acquire additional R&D programs, royalty streams or commercial assets individually or in multi-component acquisitions and we can repurchase shares when we believe that represents an attractive use of capital as we have done since August of 2024. We will evaluate these opportunities based on expected risk-adjusted returns, strategic fit and our broader financial position. The objective is not to prioritize one use of capital permanently, but to allocate capital towards the opportunities we believe can create the longest, the greatest long-term value. I'd like to highlight what we believe this means for Zymeworks. Historically, the company was primarily driven by R&D catalysts and individual development events. Following the Theravance acquisition, we are beginning to build a more diversified business. We now have growing royalty revenues, commercial cash flows and multiple sources of operating revenue. At the same time, we retain our wholly owned R&D programs, our partner pipeline and the ability to pursue additional acquisitions or partnerships. This creates a different financial foundation for Zymeworks. Recurring cash flows provide greater visibility, commercial growth can provide operating leverage, our R&D portfolio provides additional opportunities for future value creation and disciplined capital allocation allows us to connect these pieces and continue investing in the opportunities we believe offer the most risk-adjusted returns. We believe the Theravance acquisition is an important first step in demonstrating that model at scale. And importantly, this transaction does not change with Zymeworks is fundamentally built to do. It gives us a stronger financial foundation from which to do it. The acquisition of SeriaBioporma is the first tangible validation of the strategy we outlined less than a year ago, and we believe it demonstrates something genuinely new and how life sciences capital can be deployed. There are 3 things we want investors to take away from today. The first is about access. Zymeworks can acquire operating companies were valuable cash flows such as royalty streams, profit participations and commercial economics are embedded within a broader business structure that traditional royalty investors are not typically structured to acquire. Because we can acquire the whole company, we evaluate those cash flows alongside commercial assets, including R&D pipelines that we have the potential to develop tax attributes that we may be built to leverage and other sources of value that would otherwise remain embedded within the operating business and in some cases, at no incremental cost. What this means in practice is that Zymeworks creates a new origination channel. Companies with embedded royalties have a path to monetize those assets and royalty partners have access to high-quality opportunities, they may not otherwise be able to source for structure. In acquiring the commercial royalty economics, Zymeworks also gains access to R&D pipelines and platforms that are embedded within these businesses, which we can develop, partner or spin out. We believe that is a meaningful and durable competitive position. The second is about structure. We've demonstrated that durable contracted cash flows directly -- can directly support acquisition financing, including non-request structures that align the financing instrument with the underlying asset economics. This allows our Zymeworks to pursue acquisitions of meaningful scale while aligning the financing with the cash flows of the acquired business and preserving capital for other uses. During 2026, we have accessed approximately $600 million of nondilutive financing through nonrecourse notes at an attractive cost of capital with proceeds supporting both the Theravance acquisitions and continued share repurchases. This financing strategy, together with our repurchase program reflects our focus on minimizing equity dilution for shareholders. Our last public equity offering was in January 2022, and we currently have no plans for another equity issuance. The third is about value creation beyond the initial cash flow. In addition to the commercial and royalty streams, Zymeworks retains the ability to generate value through active development profit share arrangements, licensing and potential feature spin-outs, that distinguishes our model for traditional royalty organizations where returns are largely defined at the point of acquisition. For us, the acquisition is the starting point. Recurring cash flows provide a foundation from which we can fund R&D pursue additional acquisitions or partnerships or return capital to shareholders based on where we see the best risk-adjusted returns at any given time. We are pleased with how this transaction has come together, and we believe it gives investors a clear picture of what Zymeworks is building and how we intend to keep building it. This is not the end of the story for the year. We have additional catalysts ahead, including the continued U.S. commercial launch for vanagetumab and GEA by our partners, upcoming data presentations from our partners, J&J and Jazz as well as important updates from our own pipeline, including the Phase I optimization data for ZW191 that we expect to present at ESMO in Madrid on October 24. The -- we look forward to sharing those developments with investors over the coming months. With that, I'll ask Ken to join us as we open the line for questions.

Thank you, Kristin and Scott, Operator, we're ready to open the question-and-answer period.

[Operator Instructions]. Our first question comes from Yigal Nochomovitz with Citigroup.

This is Johan Kim on for you go. -- progress One quick question from us. With core hospital sales growing 25% year-over-year. And as you look towards third quarter, can you help us understand whether acceleration is driven primarily by existing accounts or expansion into new hospitals or improved conversion in the community setting?

Thanks for the question. I'll ask Scott to provide a general answer. Obviously, we won't be able to see any specific control. The third quarter is reported by us in November, but I'll see if Scott has any general comments to address your question.

Yes. Thanks for your great question. And it's a very attractive part of this franchise. We're really excited to welcome a very lean and skilled team that's responsible for the remarkable performance in the hospital today. I'm going to make just a few high-level comments about the hospital channel broadly. The first point is that the hospital sales cycle is very different than the community. It's a very skilled and site longer return on investment and getting new hospitals online and getting on primaries can often take 6 months to multiple years. And there's still a lot of opportunity for additional accounts to come online. There is also opportunity for growth in existing channels. So it's a little bit to your question. The answer is both. And we're really excited to have a great team to help us drive that channel that remains pretty underpenetrated at this point.

Our next question comes from Charles Zhou with LifeSci Capital.

This is Sue Won for Charles. Congrats on progress. Following up on the hospital channels, can you share your plans to maximize hospital channel sales including how many of their versus account managers and medical reasons you retained, whether you plan to add headcount? And what leading indicators you will use to measure progress.

I'll see what else Scott wants to add to that some of the detailed questions we won't get into, but I'll see if Scott has something to add generally to your question. Beyond will be answered in the last one.

Yes. Thanks for the question. I think we're going to shy away from any sort of specifics. At a high level, there's a huge opportunity in the hospital 15 million to 16 million patients in the U.S., 2 million plus really strong candidates for YUPELRI. And there's a really strong rationale for why YUPELRI should play such a great role in the hospital. And I can give you just sort of a few of those anecdotes. Patients with COPD exacerbations find themselves hospitalized, a therapy like YUPELRI makes a lot of sense, support title breathing. It's really the right way to deliver a medication. And being the only in-class long-acting has a real pharmacoeconomic benefit. We have respiratory therapists going in 3, 4, 5 times a day to deliver short-acting nebulizers that are often used in appropriately or take a lot of time. And so there's an enormous opportunity. I think we'll shy away from giving sort of any specific trends we're looking at. At a high level, I will say about the team. This is an exceptionally talented team, an average tenure well above industry norms. And we think that there's several years ahead of of continued hospital -- very meaningful hospital growth for the brand.

Our next question comes from Gregory Renza with Truist Securities.

Congrats on the deal closed. Guys, just with respect to some of the R&D assets that you've discussed about potentially looking externally, namely the Paras ADC portfolio as well as ZW191. -- just provide some updates on how that's either going to be accelerated or how the evolving the framework with which you want to take that forward with externalization?

Yes. Thanks for the question, Greg. I'll take that question on directly. I think as we talked about early in the year, we did talk about the fact that we had a really rich and diversified wholly-owned R&D portfolio. Since then, we've made new disclosures around the Penrose, which wasn't even public at that time. And I think it's obvious that we have a very productive R&D group, working in multiple themes in both ADCs and multi-spec antibodies that we would like to find ways to bring in partnerships, collaborations, external capital so we can move as much of that forward as possible where it's justified by continuing data, but without relying just on our P&L to be able to do that because I think we have our own financial metrics in mind. And so we're trying to find ways that partners can have resources and dedicated teams, where maybe a spin-off entity that's dedicated to a particular portfolio, as we talked about with the Paras ADC portfolio might again have dedicated resources dedicated focus, and we can move as much of the portfolio as is justified forward in the same way we've been working all through this year to understand what collaborations make sense for us, which parts of the portfolio versus which parts we'd like to keep wholly on to ourselves and move forward with our own capital. I think as we mentioned, we're not finished this year with potential catalysts in our operating plans for the year. So think as we can complete such transactions, we'll announce them. And I think as we move along with some partnership collaborations at it's been off, get a better sense of how that shapes the the R&D portfolio, we're certainly not running out of substrate or things that are really interesting we'd like to pursue. We just have internal limitations on capital, very high standards for things to move forward. But I can certainly see how a few key partnerships and collaborations, spin-off entity would help us exploit the totality of the R&D portfolio and by retaining royalties and milestone interest, equity interest in the case of spin-off we can find a way to create -- continue to share in the success of those future portfolio in the same way we will or expect to with Zane and eventually Pasig. And so you look to have to wait for those transactions, but we're making good progress. And I think we're excited about some of the options that are available to us to move some of those programs forward, but not with just our own P&L.

Our next question comes from Brian Cheng with JPMorgan.

This is Sarah on for Brian. You continue to emphasize that $2.5 billion of Irish tax attributes, but they're still excluded from the base case IRR and purchasing accounting. As we sit here today, -- what do you view as a realistic top to using them? Is it the existing activities that you have future acquisitions or some form of IP structuring?

Yes. Good question. I'll let Kristin come on and answer that question if you -- with whatever your guidance you'd like to provide, Kristin.

Yes, sure. So we see that these rate these are just $2.5 billion of attributes really depends on the nature of the attributes and the amount and the timing of the future taxable income and tax rules, as we mentioned. So we're working through the appropriate ways to incorporate them into our broader structure, but we do see potential paths to use them, as we mentioned, kind of more broadly over the presentation.

And just to confirm, those are not included in our base case mid-teens IRR. So any ability to utilize those would be upside for us and the investment that we've made in the Theravance acquisition.

Our next question comes from Yaron Werber with TD Cowen.

This is Dan on for Yaron. Congrats on the progress. You highlighted 25% year-over-year growth in your per hospital sales in Q2 and continued margin expansion. I just similar to what we should expect for the product revenue trajectory for the next 3 to 5 years? And long term, how are you thinking about Paris peak sales opportunity in COPD.

No. Thanks. I'll see what Scott wants to add to that question.

Great question. We're not going to be providing any product level specific guidance today, but as previously highlighted, the hospital channel is really important for a couple of reasons. You highlighted the 25% growth year-over-year in the second quarter. We do see opportunity. The hospital channel should continue to drive momentum over the coming years and contribute to the brand. I think I will just take this opportunity to highlight the importance of the hospital channel beyond just the exact figures that are provided year-over-year. YUPELRI is really an amazing medicine for patients and also recovering from an exacerbation partly because of the value it delivers to them. But the other really important thing to remember about the hospital sales force that we're really thrilled to welcome to Zimmer is as patients leave the hospital and transition back into the community. There's a lot of incentives, both from the hospitals and payers and for the benefit of the patient care to keep them on an amazing medicine like YUPELRI. And so it does serve as an important sort of funnel into the outpatient community setting where the Viatris is responsible. So I think we'll shy away from any sort of specific guidance around the hospital channel other than to say -- the hospital channel itself is an area we expect continued growth, and it has continued impact as patients transition back out into the community.

Our next question comes from Stephen Willey with Stifel.

Yes. providing all the color here. So I guess it looks like your volume growth is flat in the community setting when you back up pricing. And I know that's the attress's detail. But do you have any estimate? I know Scott just talked about this of the percentage of community sales that actually originate with a hospital-based script? And I guess how much more runway do you see in the community setting if you're able to grow the hospital base component and potentially increase the conversion rate?