Zymeworks CEO Kenneth Galbraith in Cambridge, England last Thursday.Betty Laura Zapata
Ali Tehrani had two goals when he founded antibody developer Zymeworks Inc. ZYME-Q: to develop drugs that would improve human health and to build a fully integrated pharmaceutical company that not only developed drugs, but also took them to market.
The 22-year-old Vancouver company last week took a big step toward achieving the founder’s first wish. Zymeworks, along with commercialization partners Jazz Pharmaceuticals PLC and BeOne Medicines Ltd., said on Nov. 17 that its lead antibody, zanidatamab, had proven to be highly effective in stopping the spread of a digestive system cancer in human trials. Zymeworks stock soared to a four-year high.
That comes after another Zymeworks-discovered drug, pasrimatig, showed such strong results in safety studies this year that Johnson & Johnson – which licensed the antibody from Zymeworks in 2017 – is moving it straight into advanced efficacy trials. The prostate cancer drug got a fast-track designation in October from the U.S. Food and Drug Administration, meaning it could get to market quicker than other drugs.
Both drugs are expected to generate billions of dollars in peak annual sales; Zymeworks, which has received hundreds of millions of dollars in payments from its partners, stands to make hundreds of millions more in annual royalties if the drugs sell as expected.
Zymeworks stock hits four-year high on promising results from digestive cancer trial
That would be a mark of huge success for any biotech startup. But it has also prompted Mr. Tehrani’s successor, chief executive officer Kenneth Galbraith, to ditch the founder’s second goal: to become Canada’s first pharma giant.
On Nov. 18, Mr. Galbraith unveiled a new strategy: Zymeworks will become a royalty company, deploying its expected gusher of cash from partnered drugs to buy streams of royalties from other drug developers for treatments nearing commercialization. It will look to strike “synthetic royalty” deals, in which investors pay upfront for a share of a drug’s expected future sales, and to invest in single assets or whole companies across a range of therapies. Zymeworks director Scott Platshon, a partner with biotech investment firm EcoR1 Capital LLC, is leaving the board to lead the strategy.
Zymeworks may not grow up to be the next Eli Lilly and Co., but the company’s pragmatic, risk-averse partner model “has worked out much better in terms of return to shareholders than trying to be a fully integrated biotech company and commercialize all of our own products,” said Mr. Galbraith in an interview. “We have to figure how to allocate that capital so that it drives total returns.”
Zymeworks will still seek to discover and advance drugs through early studies, but it will do so selectively to keep costs and risks down, Mr. Galbraith said. Those drugs the company does develop will likely be partnered off to others to advance them to market.
The company also plans to buy back up to US$125-million of stock, after repurchasing US$60-million worth in the past two years. It now has US$300-million of cash and a market capitalization of about US$1.75-billion.
The hybrid strategy is “not a typical path of a biotechnology company,” Bloom Burton & Co. analyst David Martin said. “Until they do a royalty deal like what they’re contemplating, we can’t tell if it would be positive or negative to the valuation.”
Mr. Galbraith says Zymeworks will seek to discover and advance drugs through early studies, but do so selectively to keep costs and risks down.Betty Laura Zapata/The Globe and Mail
The strategy shift is a reminder of the long odds that face early-stage drug developers that have dreams of joining the ranks of Big Pharma. Though biotech startups Amgen Inc. and Gilead Sciences Inc. grew into giants each valued at more than US$150-billion, that’s exceedingly rare in a business in which most industry leaders are a century old or more. Canada is the only Group of Seven country without a pharma giant, though some domestic upstarts such as AbCellera Biologics Inc. hope to change that.
Past Canadian life sciences companies achieved some success, including QLT Inc. (where Mr. Galbraith served as chief financial officer), Angiotech Pharmaceuticals Inc. and BioChem Pharma Inc., by partnering with others to take their innovations to market rather than doing so themselves. Most biotechs either die or are acquired if their drugs show promise. One of the few Canadian companies to try the integrated approach, Aurinia Pharmaceuticals Inc., has contended with activist investors and its stock only recently appreciated after treading under US$10 a share for three years.
When Mr. Galbraith joined in 2022, Zymeworks stock was under pressure after the company had spent US$350-million to advance zanidatamab to late-stage trials.
That year, he struck a deal with Jazz that saw it pay US$375-million upfront to Zymeworks plus a promise of later milestone and royalty payments, following an earlier, smaller deal with BeOne for Australia, New Zealand and Asian markets outside Japan. Jazz took on the cost and risk of completing trials for multiple ailments, gaining rights to sell the product in North America, Europe and Japan.
“What we did in 2022 was much better for our shareholders and we still found a way to get this product to market,” Mr. Galbraith said.
The upfront payments enabled Zymeworks to fund seven early-stage development programs and have brought in US$106-million more from its partners so far. Zymeworks could bring in US$1.5-billion more from development and sales milestones from the two deals, including US$440-million if the digestive cancer treatment gets global regulatory approvals. Zymeworks will also earn 10 per cent plus in royalties from sales.
The J&J deal could net another US$434-million in development and commercialization milestone payments and pay a mid-single-digit royalty on sales.
That could fund a lot of research and development, but it’s risky business; Zymeworks has shelved two of the seven drugs in development. Mr. Galbraith said after a strategic review “it became clear that the significant future cash flows expected from our partnered assets gave us a unique opportunity.” By reinvesting in royalty streams from third-party drugs in advanced stages of development, Zymeworks can back programs that have cleared most R&D risks.
As for Mr. Tehrani, he now runs another biotech startup, but he says he’s “immensely proud” of what Zymeworks has accomplished. “I am more excited about the medicine, less about the business side of things.