Great. We are ready for our next session. We have here with us today, Ken, Chairman and CEO of Zymeworks. Thanks for joining us.
You are welcome. Thank you.
Perfect. Maybe we can just get started a little bit with giving us the lay of the land for Zymeworks, past 12 months, next 12 months. What should we be expecting?
Goodness. Yes, it has been a really busy time period for us. We just lived through an FDA approval for zanidatamab to be expanded in the U.S. to first-line GEA. It is amazingly exciting event, four and a half years in the making as a clinical study. But zanidatamab is now clearly the standard of care for HER2 positive patients with GEA, which is a pretty sizable population. Our commercial partner in the U.S., Jazz, got excited about that, so they have increased the peak sales potential that they see from Zani for that indication and the others to come to about $3 billion-$5 billion per year annual peak sales.
Pretty exciting to finally see us get to the point where the promise we saw in Zani a number of years ago, where we always thought it could be a meaningful medicine and deliver $5 billion in peak sales, means it's helping a lot of patients around the world, and we're really starting to see that happen right now, which is great. We've been spending our most recent time then about figuring out what do we do with that, and how do we build a real business around that's sustainable, durable, has positive cash flows. We grow those cash flows in a responsible way and build a more valuable company from that base that we have.
Got it. Yeah, very exciting times.
Yeah.
Yeah. Maybe we can start. You've reframed Zymeworks a little bit around different pillars, which is royalty growth, strategic acquisitions, and internal R&D. Can you walk us through how capital flows between these three different pillars?
Yeah, that's great. I know we've tried to start to describe our business because it is a little bit untraditional as an-
Right
R&D biotech, where we find ourselves. We think it is a really great opportunity we have in front of us to build the type of company that we think is really meaningful. I know there are different pillars, but it all supports the same foundation. I think we are just trying to build a really exciting business, but has phenomenal risk-adjusted durable cash flows as far in the future as we can see.
That is what we are trying to build, and we build that in multiple ways, but they all work together in the same thing. Obviously, our royalty interests are really valuable. If you look at what we have from zanidatamab and our royalties from Jazz Pharmaceuticals and BeiGene, if you look at our potential future royalties, if pasritamig is successful in phase III next year and gets to market with J&J, those are tremendously valuable assets, and I have them inside the company. The best thing I can do is find a way to protect and let those grow to the benefit of our own shareholders. There are some amazing risk-adjusted returns that can be generated from our partners driving revenue and driving our royalty share. That is exciting. We can think about using acquisitions to change the shape and nature of our business.
We did that recently this year with the announced acquisition of Theravance, which is still expected to close this year. It just gives us a chance to change the shape of the organization a different way. It can also be the source of some outsized returns if we are able to find the right company, find the right price, and also finance those efficiently, which I think we showed we could do with our financing partner, OMERS, who helped us with that. Finally, R&D is the lifeblood of what we do. Zanidatamab started as a scientific idea inside our company more than 10 years ago from a scientist who is still there trying to find the next one. That is really exciting. It can be the source of some amazingly outsized returns from innovation we make inside the company.
It can also be the source of strategic optionality, the way we think about all these different parts of the business go together. It will always be a part of what we do, but I think the business for us now has moved on to be something more than that. We are trying to spend some time describing what those different elements are, but they all work together to build what is hopefully a really interesting long-term proposition, as we said, but just focuses really on risk-adjusted, growing and durable cash flows in the future, regardless of the source they come from.
Got it. Very helpful. Maybe, you framed this building like a novel strategy of royalty aggregation and growth. How is your strategy really differentiated from your typical Royalty Pharma or your traditional royalty aggregator? What do you bring to the table that's differentiated?
Yeah, it's interesting. I think we knew back in 2022 when we decided to make this partnership with Jazz Pharmaceuticals over zanidatamab, that we were going to end up with this valuable royalty interest, and we weren't going to forward integrate to being a commercial entity like other biotechs might have done. At some point, I think we were going to face this premise of then, well, who do we become? We've got value in royalties. We've got value in R&D. Can we do them both in the same company? A lot of times we split those into separate entities and keep them apart. In some cases, we choose one or the other. I think where we found ourselves is a really interesting position of having some amazing long-term cash flows being generated by partners which didn't have the driving force being, I have my own commercialization force.
I need to feed it with assets, and so I need to develop a portfolio to feed them. We didn't go through that process. I think we found ourselves in a position where we felt we could be both, have these strong growing royalty interests that we could manage actively like we were a royalty company.
But at the same time, still be active R&D innovators, and those two things could work together. Our differentiation is that we're really purely not one or the other. We operate in the middle zone, which makes us different, which means we can get access to transactions like Theravance, which may not appeal to either a straight royalty company as a financial player or a straight R&D biotech. Those are the types of transactions where I think the outsized returns live for us. We might look a little bit like a royalty company in terms of value, but I've got the operational infrastructure and R&D to do things like create my own royalties for my own programs by partnering and by bringing in assets and actually operating on them to some other point in time to create additional royalty interest.
I think it just allows us to operate in a different way. We are really excited about exploring the synergies of not having to choose about what you do with a company that has got a really great royalty interest and R&D ambitions. You find the way to make those work together with proper financial discipline, thoughtful capital allocation, and looking for growth in value, regardless of which side of the house that comes from.
This is not traditionally what is done. What are some of the challenges of pursuing this approach of having both your R&D optionality together with your royalty portfolio?
Yeah, I think it is to get people inside the company, and hopefully investors on the outside of the company, to think this is not two portfolios or two different businesses being run in one ticker symbol. It has really got the same ambition, regardless of what you are trying to accomplish. I think in trying to find things that help you on both sides, but really just try and focus on what are we trying to accomplish. We are trying to be innovative in the way that we run the business. We are trying to grow something that is successful long term, but we are really interested in just really what is the risk-adjusted cash flows that can be generated on a durable basis moving forward, and how do I get credit for that, being a publicly traded company over time for my investors.
It is trying to make sure that people understand this is run as one business with different parts to it.
We'll allocate capital to where we think the biggest benefit might be for shareholders over time.
Got it. You also have a quite extensive pipeline.
I was wondering just in terms of what goes into the decision-making of partnering an asset versus pursuing it on your own internally.
Yeah, I think in our history so far, we've generated value in a number of different ways. So obviously, zanidatamab we discovered, it was our own initial R&D. We took it right into phase III trials before we partnered with Jazz Pharmaceuticals to complete the development and fund the commercialization. So we've certainly done well when you look at the types of returns we're going to earn from that process. We also started life as a platform company with a platform to develop complicated biologics, and we're able to work in a collaboration with Johnson & Johnson to make a really differentiated T-cell engager for prostate cancer, now called pasritamig, which is in multiple phase III trials. So we were obviously able to find a way to hopefully generate some good returns from that if that's successful to get to market. So I think we've done that already.
We have a few other things we're trying to show. We obviously have some thoughts now on integrating additional partnerships into our wholly-owned portfolio, which we're working on. We did talk at our last conference call about this thought of having a collection of assets that maybe we could spin off into a separate entity and fund with some outside investor capital, maintain a large equity stake and a royalty share. Obviously, we've got these new pan-RAS targeted ADC programs that we are disclosing at AACR this year, might suit that purpose perfectly. It's a way for us to orchestrate and have continued development of a very productive and diverse pipeline, but not all just straight off our own balance sheet.
Got it. Okay. That's clear. It makes a lot of sense. Maybe just talking a little bit about GEA, when we had the recent positive decision that triggered the $250 million milestone. How are you thinking about redeploying this money?
Yeah, again, no predetermined allocation on that. I think we've done a good job so far of deploying capital this year. We obviously borrowed money against our future Zani royalties from Royalty Pharma back in March of $250 million. We put half of that into a share buyback program, which I think is a way to drive future TSR for our shareholders and a return of capital. The other half of that funded the Theravance acquisition, or are part of the Theravance acquisition.
I think for the $250 million that comes from GEA, that'll strengthen our balance sheet and just give us optionality to deploy to the next thing that we think will drive value, whether that's another R&D program, whether that's another acquisition, whether it's continuing to buy back shares because we continue to feel like we're undervalued compared to the future value of the assets that we have. We'll just look for the best opportunities and decide to fund those. We're a little bit different than traditional biotech now. We don't have cash runway guidance. We don't think about having cash and spending it on R&D to get to some point. We think about ourselves as an operating company that will try to deploy cash wherever it can.
And try to retain a minimum amount of cash as we can because retaining too much cash will just simply hurt returns. We want to put that money to work, and once we have it, we will find the best opportunity to pursue in the right mix of allocation.
Got it. And maybe just in terms of how you view the GEA opportunity, as you mentioned at the beginning, Jazz Pharmaceuticals has increased their peak sales vision or guidance for Zani. What metrics are you particularly looking at for this early launch in GEA?
Yeah, good question. It is obviously a sizable patient population. I mean, 20% of GEA patients are HER2 positive, so could be potential patients for zanidatamab. In the HER2-targeted space, it is the second largest market opportunity beyond metastatic breast cancer for a HER2-targeted agent. Herceptin has been the standard of care for 12 years, and now Zani in combination with chemo, with or without BeiGene's tislelizumab, is the new standard of care. That is a great position to be in. We are really excited about the preparation that Jazz Pharmaceuticals and BeiGene have made to launch this in the U.S. together with tislelizumab and Zani going together. We have done a really good job, I think, on the HER2 diagnostics piece, because obviously there is a patient population in there that is brand new on label.
Esophageal adenocarcinoma was not covered previously with a HER2-targeted agent, so worked very hard with Roche to make sure that we had a diagnostic test that was validated during the study to be approved in conjunction with the drugs, and that happened. So really excited about having that ability to make sure that patients who need to get a diagnosis can get it on a HER2 basis and know if they qualify for Zani. I think the work that Jazz Pharmaceuticals did in the U.S. marketplace with the initial indication in biliary tract cancer helped them establish themselves in centers that might be centers that prescribe also for GEA, getting a permanent J-code, doing a lot of other things, I think will just help us get off to a really great start.
I think we're really optimistic to have a new standard of care available for patients, really excited about the job our commercial partner has done to prepare to do that, and we're really just looking forward to see what the early metrics would be in the first quarter or two of launch and see how many patients we're getting to access to and how many we're getting on therapy.
Got it. In terms of MFN and ex-U.S. pricing pressure, does that have any impact on your view on expected royalties and your deal with Royalty Pharma?
No, obviously MFN and ex-U.S. pricing strategies have been things that everyone's thought about, and I'm sure Jazz and BeiGene have thought about that and been working on that. I think the peak sales estimate that Jazz gave recently of Zani potentially being $3 billion-$5 billion a year in peak sales takes into account their strategies around MFN and ex-U.S. pricing. So there's nothing new in that for us in our outlook for Zani.
Got it. Maybe just touching upon the breast cancer opportunity, we're going to see some data, I think Jazz has guided to late 2027 or 2028. What are your expectations there? How large do you think the opportunity is?
Well, obviously looking at the history of trastuzumab in the HER2 space, I think the number of settings that trastuzumab was able to help patients was phenomenal and helped it achieve its $7 billion in peak sales eventually. We did a lot of early clinical work in zanidatamab in different patient settings in breast cancer, different combinations. Certainly can see from that early clinical data that there's a place that zanidatamab can have to improve the standard of care in a way that's not possible with current agents and maybe not possible with an ADC format like T-DXd or other agents. So really looking forward to this first study as being the first randomized study to compare zanidatamab against trastuzumab in conjunction with a chemo regimen in the post-EN patient population.
That'll be the first randomized study to give us some sense of whether zanidatamab can outperform trastuzumab in that setting. I think if that does happen, then I think there is a thought that maybe there's a broader role for zanidatamab. In breast cancer, Jazz obviously outlined some additional registration strategies they have, some of the clinical studies they'd like to do in different patient settings, including neoadjuvant and adjuvant. We've had some data come out recently around that. So I think zanidatamab could have the potential to help be an important component in a number of different settings in breast cancer, and this study is just really the first one to establish something.
Got it. You've previously mentioned your buyback strategy is linked to your view of Zani's potential. So how does this change in, or bigger or larger opportunity in the breast cancer market ultimately link to your buyback strategy?
Yeah. I've always thought zanidatamab could be an amazing new medicine and get the types of sales potential that you're seeing with Jazz's new estimate. Back in 2022, when I took over as CEO, there weren't a lot of people maybe within the company or even investors or joining Wall Street that agreed with that. That's maybe why our valuation was so low. I think we always had this view that as soon as we could afford to, one of the strategies we could undertake is to try and buy back as big a piece of the company as we could afford-
before the market caught up with the view that zanidatamab was a powerful medicine. That would just, again, just provide some additional potential returns to those shareholders who decided not to sell into a buyback. So we started that in the summer of 2024 with whatever capital could become available because we could just see the ability to impact future TSR. We started that when the stock was $9 a share, I think. To date, we have bought back, since we last reported, 10.5 million shares, which would make us the second largest shareholder in our own company if we did not cancel them. It is a pretty meaningful capital allocation, $215 million of buying back our own shares at that time period. The market has caught up to us a little bit because we are not $9 a share anymore.
But we certainly feel comfortable that that was a good opportunity for us to make additional returns for shareholders as the promise of Zani played out. We will continue to do that because I still think the value of just Zani within our stock is still not fully reflected, and maybe that takes some additional commercial experience, maybe it takes another clinical trial to read out, but eventually it will. It does not reflect the value of YUPELRI, which will come to us from Theravance as a commercial entity. It does not really take into account pasritamig. It does not really take into account any impact from the rest of the pipeline.
So we still see a role to try to find a way to reduce share count, take shares out of circulation at a price point that we think is attractive for those shareholders who decide that they do not want to sell at the current price and want to hold on for longer. We can certainly see the boost in TSR that can become as that. I know we are probably one of the few biotechs that thinks about returning capital in that type of context, but I think it is an important element of thoughtful capital allocation the way we think about it in biotech.
Very helpful. Maybe switching gears to the Theravance acquisition.
I want to be mindful, probably you're limited on what you can share.
Sure
I guess why Theravance? Why now?
Yeah, I think we talked about the strategy last year of how we felt we could have an acquisition strategy that would help us to actively manage royalties, but also potentially bring R&D assets inside the company. That maybe in some of these multi-component situations, we might be a preferred bidder at a price that we would think would be justifiable and could be financeable. We've looked at a number of opportunities, still have. There's a number of those opportunities out there. I think Theravance just seemed to fit everything that we were looking for in a first acquisition. It was pretty substantial, but we were able to finance it very efficiently with our financial partner, OMERS. I think that was a very attractive piece of it.
We get what you might think is a mature commercial asset because it's been on the market for seven or eight years, but it's still got a long timeframe to be built. It's really the only product of its kind in the U.S. marketplace, with those cash flows are very durable, and there's growth opportunities even within that context. I think there was also some residual R&D assets that we can evaluate to decide if there's something that's interesting and that we assigned no value. There's a couple of other license programs that could provide some additional income. There's a pretty big pool of tax attributes which might be beneficial for us in the future.
in terms of how we think about managing our tax exposure as we go forward. I think if you look through the summary of the merger, I guess it's not closed yet, but the summary of the merger, you can see that we were able to compete for that company on a price point which made sense to us and was financeable because it was a little bit of multi-component. We could attribute value to different parts that other bidders couldn't. I think those are situations where I think being neither just a royalty company, nor neither an R&D focused company, but somewhere in between or trying to do both in the same ticker symbol is advantageous. It's advantageous the way we run the business.
It might be advantageous for the types of acquisitions that we might get access to at prices which we think are very fair, that can be financed efficiently and can drive growth even beyond where we see it going with Zani and pasritamig being the other part of the portfolio. I think it was a well-positioned first time for us to get some good assets. It's a good mid-teens IRR. We can certainly do better than that. I think it was financed in a way that was appropriate for the type of company we are. I think it certainly set the framework for what people might expect us to look at. Additional multi-component acquisitions where we can attribute value across it and realize that value within Zymeworks in a way that maybe others can't do inside their entity.
Got it. Are you keeping the hospital sales force? How much of an incremental investment do you think that side of the company is going to require for you to keep up with this royalty stream?
Yeah, I think on first view, you might think, well, you're not a commercial company. You talked about you partnered your assets and you're collecting royalties, and now you're buying something that's not a royalty, it's royalty-like, but you're buying something that's in a profit-sharing joint venture with Viatris in this case-
where you've got your own commercial responsibilities. You've got a small promotion force in the U.S.
which is driving the hospital segment piece of that joint venture. I think when you think about something that's royalty versus something that might have some additional ability to manage the upside by the P&L management. We do have the ability to invest in that sales force to invest on the hospital segment. We obviously share that with Viatris. But we have the ability to impact the top-line results, and we have the ability to impact our share of that from the joint venture because we're entitled to a 35% share of profits, and the joint venture is defined. We actually like the additional potential to drive additional returns through the investment decisions we can make about how we support and how that goes.
And certainly that small hospital-based sales force for YUPELRI is certainly providing a pretty big bounce to some of the potential opportunities that can still be pursued with that product, even though it's been on the market for seven or eight years now. We're really excited about the idea of how that could contribute and how that might grow in a way that's better than maybe people expect right now with the type of product it is and where it is in its product life cycle.
And it's certainly something we can support against the revenues that'll come to us anyways in that collaboration. I think it's a really nice setup and, again, another way where maybe we can get some returns that are a little bit beyond the mid-teens that was necessary for us to do the transaction.
Got it. Part of this acquisition is financed through debt through OMERS, right? Can you talk us a little bit about the strategy there? Can you repeat this? Is this something that you can repeat with the upcoming acquisitions that you are planning?
Yeah, I think there is a tremendous amount of capital and interest in getting exposure to products and to revenues, maybe not in equity in biotech, but those actual revenues that exist. We have raised $600 million in debt this year between our Royalty Pharma transaction and our OMERS transaction. It is all non-recourse, so I do not think we have created any financial risk in the organization beyond risk against the products. We have been able to get a cost of capital that is very attractive to us. If you look at the Royalty Pharma debt, which was around 10%, if you look at the OMERS debt, that is financing the Theravance transaction, that is between 8% and 9% all-in price. Those are very attractive cost of capital when you think about biotech equity and other things that you can have access to in biotech.
I think that is very attractive for us to think about. As I said, with the Royalty Pharma, we were able to use half of that to buy back shares where we think the return for shareholders is well beyond the cost of capital. We were able to use the other half to fund our part of the Theravance acquisition, which when combined with the OMERS financing, allowed us to do a transaction which was $900+ million in total transaction price. I think we have used debt instruments in a proper way, but in a way that allows us to build the business in a much broader way than maybe otherwise we couldn't. I think some of those products are very attractive in the context of a company like ours that has got a pretty healthy future cash flow going forward.
It is also a company who has not done an equity financing in four and a half years in biotech. There are not many of those that can say that. In fact, we bought back 10.5 million of our own shares over that time period. I think we are finding a way to allocate capital thoughtfully, finance the business efficiently using a variety of instruments, and build a collection of assets, some of which are derived from royalties or profits from commercial sources, and some of which are coming from R&D innovation in a way that I think is really attractive when you look at the future outlook for the company's shares.
Very helpful. Maybe last question on Theravance. Just how are you thinking about their I&I pipeline and is there any synergy with your own pipeline, or are you planning on further developing some of their assets?
Yeah, we can't say too much about it till closing. I think all we've said so far, which we'll have to stick to, is that we're going to use our R&D resources inside the company to evaluate the R&D assets which they have. Theravance obviously had a 30-year amazing history of being a great scientific organization and developed some great products that got to commercialization, developed some products that failed in clinical studies, but that's the nature of our business. We're going to look through those assets that we have access to, which we ascribe no value to decide if there's something there that maybe we should invest in. Maybe that's something attractive for someone else to invest in that could be licensed out and bring in additional proceeds. We'll do that in the normal course of also looking at the R&D opportunities we have inside the company.
One of the parts of having the multi-component acquisition is we can undertake with our operational infrastructure the abilities to look through some of those opportunities and see if there's something there that could be interesting to move forward with. Once we get to closing and after that, we'll talk a little bit more about how we're going to evaluate and possibly move any of those things forward if that's the choice we make.
Got it. Have you provided any more insight on when the closing might happen, or is it second half of this year?
Second half is still the guidance.
Okay.
Obviously, there is a proxy on file now, so there is an annual meeting date coming up, a shareholder meeting coming up.
We do still expect it to be closed in the second half of this year. I think once that is closed, given the Theravance acquisition, given the GEA approval that we just received in the U.S. for Zani, we will take the chance to have a call with investors and talk about the closing of Theravance and where we are going forward with that, and also start to provide some forward-looking financial guidance for the business, which we really have not done to date, but we need to start doing that. We will start doing that process post-closing.
Got it. Very helpful. Maybe with the last few minutes, just wanted to touch upon your own pipeline. What are the assets that you are the most excited about that you would like to highlight, or that we might expect to see some data in the next 6-12 months?
Yeah. We're really excited about the R&D innovation going on inside the company. Obviously, we've got a good track record now with zanidatamab as being an amazing medicine. Hopefully pasritamig is on its way to doing the same thing. I think we're really excited about the breadth and diversity of it. It's a very productive R&D organization with a lot of breadth. For us, it's just trying to figure out how do we curate that given the capital intensity of R&D, given the risk profile that relates to more later-stage R&D. We're really excited. We've obviously got our topoisomerase payload ADCs, two of which are still in phase I clinical studies, looking for more data readouts on those. Hopefully, we'll be able to report those as we have something important to say.
We've talked a lot about our trispecific T-cell engager approach, where we've got a number of opportunities to incorporate a CD28 costimulatory factor into a normal bispecific. The first one of that is ZW209. It's our DLL3 CD3 CD28 trispecific, which we still have scheduled for a 2026 IND. That'll be interesting.
We still have our I&I assets that we've been working on with looking at our ZW1528, which is our bispecific antibody, looking at IL-4 receptor and IL-33 in combination in COPD. With some of the recent data at ERS, where I was this weekend before coming here with looking at a competitor compound for IL-33, I think it just unlocks some potential for us to think about that aspect. Then two years ago, we started working on the next payload beyond topo ADC, and we decided that was delivering pan-RAS inhibitors to an ADC construct. We just disclosed that in April, and we have three programs that we're pretty excited about figuring out how we can move those forward, likely in a spinoff entity.
We're really excited about the potential for that R&D. Beyond that, a whole host of other things that hopefully we can find chances at future scientific conferences coming up to talk about. I'm really excited about the breadth, the diversity, the productivity we have, the innovation that's in those molecules, and then just trying to figure out how we find a way to move those forward while maintaining the financial discipline we have over where we see the company going from here.
Got it. Is there a sweet spot for partnering the assets out, like a sweet spot in terms of timing? Is it you generate phase I data, and then you partner it out, or you spin them out, or should we expect, for example, the RAS ADCs to be spun out even before phase I
trials initiate?
Yeah. I think from our perspective, what we've seen over the past year or more is, again, and everybody will notice this, is the amount of pharmaceutical interest that's moved down from late-stage compounds into very early-stage compounds.
Right.
Anything that can be innovative, even at an early stage of development, is capturing a tremendous amount of value right now. I think from our standpoint, there's no magic timeframe. I think just understanding who might have an interest, what's innovative about what you're creating, and I think you have optionality to decide how far you take something on your own versus when you decide to bring in and integrate a partnership or collaboration into that. We're open to those discussions happening, even though they might seem like they're early or taking something further ourself because that's the right thing to do. That's all driven by pharmaceutical interest, also driven by investor interest in creating new spinoffs and new spin-cos and new entities out of existing assets.
I think we have some of those that could be the source of some of those future spinoffs as well.
Got it. Very helpful. We are out of time. Thank you so much for joining us today. This was incredibly helpful.
Oh, thanks very much. Appreciate being here.