Buy Zymeworks Pioneering Cancer Treatments: Zanidatamab’s Promising Data (NASDAQ:ZYME)

Zymeworks Inc. (NASDAQ:ZYME) is a clinical-stage biotechnology company focused on developing innovative therapies for challenging to treat cancers and other serious conditions. ZYME leverages proprietary platforms concentrated on Multispecific Antibody Therapeutics and Antibody-Drug Conjugate Technologies. These platforms drive the creation of treatments to support a dynamic pipeline of drug candidates, including its flagship Zanidatamab, which is in phase 3 clinical trials and shows significant market potential, particularly for biliary tract cancer [BTC]. ZYME collaborates with strategic partners to bolster its clinical and commercial pathways.

Chemotherapy Disruption: Business Overview

Zymeworks was founded in 2003 and headquartered in Vancouver, British Columbia, Canada. This biotech company specializes in developing therapies for difficult-to-treat cancers and other serious conditions. The company’s main approach is through its flagship drug, Zanidatamab. This drug can potentially change cancer treatments. You can think of Zanidatamab as a highly effective and more targeted form of chemotherapy. This drug could become one of ZYME’s main value drivers if successfully developed and commercialized.

Concretely, ZYME has proprietary platforms with two approaches to drug development: Multispecific Antibody Therapeutics and Antibody–Drug Conjugate Technologies. Multispecific Antibody Therapeutics Technology involves creating antibodies capable of binding to multiple antigens. For instance, bispecific antibodies can bind with two different antigens simultaneously, increasing the ability to target cancers with complex mechanisms. Antibody-Drug Conjugate Technology combines the specificity of antibodies with the killing payload of cytotoxic drugs. Antibodies target antigens on cancer cells, delivering the cytotoxic drug directly to cancer cells, sparing healthy cells.

ZYME’s oncology approach starts by targeting cancers that are difficult to manage. Then, the company uses its proprietary technologies, such as Azymetric, to design bispecific antibodies. The platforms ProTECT and EFECT enhance the therapeutic potential of these drugs. T cell engagers are immunotherapy designed to direct T cells to recognize and kill cancer cells. They are bispecific molecules, meaning they bind in two different sites: to a specific antigen on the surface of cancer cells and a molecule on T cells called CD3.

Better Oncology: Platform and Zanidatamab

Moreover, ZYME’s other technologies are 1) Site Specific Conjugation, 2) TOPO1i platform, 3) ZymeLink with Auristatin, Hemiasterlin, and 4) TLR7 ISAC. Overall, these are all innovative technologies using ADCs and ISACs. First, Site-specific conjugation is a technology that precisely attaches to specific sites on antibodies. This mechanism is key because it delivers cytotoxins to targeted cancerous cells, minimizing collateral damage to otherwise healthy cells. On the other hand, ZYME’s TOPO1i platform is a technology that uses enzyme inhibitors to prevent DNA replication and cancer cells from dividing, slowing their proliferation.

The company’s ZymeLink platform can also design chemical linkers that connect the cytotoxic to the antibody, ensuring the drug is controlled once the ADC reaches the cancer cell. Zyme uses Auristatins and Hemiasterlin as cytotoxic agents, developing ADCs for target delivery. Such cytotoxic agents disrupt microtubule networks within cells, leading to their death. Lastly, the immune-stimulating antibody conjugates [ISACs] target Toll-Like Receptor 7 (TLR7). TLR7 is part of the immune system that identifies pathogens and activates immune responses. The conjugates are designed to activate immune cells at the tumor site, enhancing the anti-tumor immune reaction.

These platforms are the bedrock of ZYME’s potentially revolutionary oncology drugs. ZYME’s pipeline includes a variety of drug candidates. However, its most promising R&D project is undoubtedly Zanidatamab. This drug is a bispecific antibody targeting HER2 for treating biliary tract cancer [BTC], gastroesophageal adenocarcinoma [GEA], and breast cancer [BC]. The drug is developed in collaboration with Jazz Pharmaceuticals and BeiGene. It is in phase 3 (pivotal) clinical trials for these indications and used for BC and solid tumors in phase 2. Zanidatamab’s potential is undeniable as it could effectively become a targeted form of chemotherapy, which would be invaluable in the market. ZYME’s preliminary estimates are roughly $2.0 billion in revenue potential, assuming Zanidatamab’s approval for BTC. This is a highly promising drug application as there are few treatment alternatives for it.

Upcoming R&D Projects: Beyond Zanidatamab

It’s worth noting that Zanidatamab isn’t ZYME’s only application of its biotechnology platforms. For instance, ZW71 is a bispecific T cell engager targeting Mesothelin [MSLN], a gene that codes for a protein of the same name. This protein is overexpressed in several cancers, including mesothelioma, ovarian cancer, and pancreatic adenocarcinoma. It is in the preclinical stage, with an expected Investigational New Drug [IND] filing in 2024. Another example is TriTAC Checkpoint Inhibition, and TriTAC Co-Stimulatory Tri-specific T cell engager are under toxicology evaluation in preclinical stages. Also, JNJ-78278343 is an Azymetric and EFECT technology-based therapy for prostate cancer. This medicine is developed in partnership with Johnson & Johnson. However, these R&D projects are still relatively early, so I believe ZYME’s main value driver is Zanidatamab.

So, as a whole, I believe ZYME’s pipeline is quite robust, diversified, and supported by key partnerships with larger companies. Such alliances can leverage clinical pathways and commercial infrastructure to expedite development, provide financial support, and potentially increase market penetration as soon as ZYME obtains FDA approvals. So, from an investor’s perspective, it’s encouraging to see that the company has a continuous stream of catalysts for several drugs across different stages because any of them could deliver news favorable to the stock price. Naturally, Zanidatamab remains the one closest to the finish line, but all of ZYME’s R&D projects are promising.

It’s also worth noting that during ZYME’s latest 4Q and FY 2023 earnings conference call, executives highlighted the achievement of several milestones in 2023, such as positive phase 2 results for Zanidatamab in first-line GEA treatment. In fact, Zanidatamab for BTC is now virtually in phase 3, pending regulatory approval. This drug application has multiple possible approvals from the US FDA and China National Medical Products Administration [NMPA] for second-line BTC treatment. Second-line treatment is employed after the disease has shown resistance or relapsed after the first-line therapy. Lastly, I think it’s worth pointing out that overall, ZYME has a diversified portfolio strategy beyond Zanidatamab, with various IND submissions for different types of cancer expected from 2024 to 2025.

Can’t be Bearish: Valuation Analysis

From an investment perspective, ZYME has a $630.2 million market cap. According to Seeking Alpha’s dashboard on ZYME, the company is expected to generate $112.2 million in revenue by 2025. This would imply a forward P/S ratio of about 5.6. However, this is significantly higher than the sector’s median forward P/S ratio of 3.5, suggesting that ZYME trades with an embedded premium. Yet, I believe this makes sense because if the company’s preliminary estimates of Zanidatamab’s revenue potential in BTC are mostly accurate, then the company’s revenues would quickly grow into billions post-FDA approval. Also, the recent BLA submission is another green flag for Zanidatamab. Naturally, this eventual FDA approval is an inherently speculative assumption. Still, since Zanidatamab’s potential revenues are about $2.0 billion, and the current market cap is just a fraction of that, I think such a valuation premium makes sense to some extent.

Nevertheless, ignoring that the company remains a money-losing entity is impossible. ZYME lost $14.5 million in its latest quarter alone. I estimate the company burned through about $122.4 million in 2023. I obtained this figure by adding the company’s 2023 CFOs and Net CAPEX. Still, despite such a cash burn, ZYME’s balance sheet looks solid and has enough resources to last a few more years. It holds $374.3 in cash and equivalents against just $26.8 million in total debt. This means that at my current cash burn estimate, ZYME should have enough liquidity to fund its operations through 3 more years.

This is actually quite good because its lead project (Zanidatamab) has multiple catalysts coming up in 2024 and 2025, so three years is more than enough to get the company through them. After the recent BLA for Zanidatamab, I believe the odds of an eventual FDA approval increased significantly. Especially because data from the Phase 2b HERIZON-BTC-01 trial showed a confirmed objective response rate of 41.3%, this is almost three times as much as standard chemotherapy in BTC patients, so the improvement is notable and was well tolerated. An accelerated FDA approval could quickly catapult ZYME into the spotlight of oncology despite its relatively underfollowing status. So, as a whole, it’s difficult to be bearish on ZYME because the embedded premium relative to peers seems reasonable in light of the revenue potential it holds with Zanidatamab. The odds seem in ZYME’s favor, and early data has been promising so far. So, I think it makes sense to rate it a “buy” at these levels.

Investment Caveats

The biggest risk at this stage is the progress of the Phase 3 trial. So far, Zanidatamab seems promising, but investors need to be aware of the possibility of delays or disappointing results in the upcoming stages. Even issues with patient recruitment could become major setbacks if mishandled. These variables could quickly shift investors’ expectations of Zanidatamab and ZYME’s stock price.

Moreover, it’s important to acknowledge that even if ZYME does everything right and obtains positive results, the bottleneck can still be the FDA itself. After all, the FDA drug approval process is complex and lengthy. Sometimes, committees require companies to provide additional data despite initially promising results. There are no guarantees that ZYME’s approval process will be smooth. Scaling, competition, and other market risks will become relevant even with hypothetical FDA approval. However, despite all of these risks, I believe ZYME has a clear pathway with reasonable odds of approval over a long enough time frame. Since Zanidatamab’s potential is huge because it disrupts current chemotherapies, ZYME’s potential revenues are just as sizeable. Hence, I think the risks are worth it for investors who understand them.

Worth the Risk: Conclusion

Overall, ZYME is a promising biotech company betting on a different way to chemotherapy. Traditionally, chemotherapy has been riddled with substantial collateral damage to healthy, non-cancerous cells. However, cancer is such an awful condition that the downsides were worth it as long as it slowed down the spread of cancer in the body. If successfully developed and commercialized, ZYME can disrupt this healthcare equation with Zanidatamab. From a first principles perspective, this drug takes the positives of chemotherapy, enhances them, and achieves it with reduced side effects. This is still relatively experimental, but early trial data is incredibly encouraging. Moreover, the company’s financials are liquid enough to sustain operations and obtain such FDA approval. Hence, despite the previously mentioned risks, a “buy” rating makes sense.