Zymeworks Inc. annual report, FY2022

Zymeworks Inc. 2022 Form 10-K Summary

Business context and reporting period

Zymeworks is a clinical-stage biotechnology company developing multifunctional biotherapeutics, primarily for oncology. Its lead candidates are zanidatamab, a HER2-targeted bispecific antibody, and zanidatamab zovodotin, a HER2-targeted antibody-drug conjugate. The filing covers the fiscal year ended December 31, 2022; it is an annual report rather than a standalone fourth-quarter filing.

The company completed its redomiciliation from British Columbia to Delaware on October 13, 2022 and moved its common-stock listing from the NYSE to Nasdaq in December 2022. It had 294 employees at year-end, including 291 full-time employees.

Key financial metrics

Metric	2022	2021	Change
Collaboration revenue	$412.5 million	$26.7 million	+$385.8 million, or 1,445%
Research and development expense	$208.6 million	$199.8 million	+$8.8 million, or 4%
General and administrative expense	$73.4 million	$42.6 million	+$30.8 million, or 72%
Income from operations	$130.5 million	$(215.6) million	Improved by $346.2 million
Net income (loss)	$124.3 million	$(211.8) million	Improved by $336.2 million
Basic earnings (loss) per share	$1.91	$(4.11)	Improved
Net cash provided by operating activities	$144.1 million	$(192.5) million	Improved by $336.6 million

Reported operating and net margins were approximately 31.6% and 30.1%, respectively, compared with substantial negative margins in 2021. These margins were driven primarily by collaboration revenue and are not indicative of recurring product-sales profitability.

2022 revenue included $375.0 million recognized from the Jazz collaboration, $24.3 million of Jazz development support payments, $5.0 million from Atreca, and $8.2 million of other research and development support.
Cash, cash equivalents and short-term investments totaled $492.2 million at December 31, 2022, comprising $400.9 million of cash and cash equivalents, $91.3 million of short-term investments and $0.9 million of long-term investments.
Total assets were $648.7 million and stockholders’ equity was $493.0 million.
Total liabilities were $155.8 million. The filing does not disclose conventional borrowings or term debt; reported obligations primarily comprise accounts payable, deferred revenue, operating lease liabilities and other liabilities.
Net cash increased by $199.0 million during 2022. Financing cash flow included $107.5 million of net proceeds from the January 2022 equity offering.
Accumulated deficit remained substantial at $558.8 million despite the 2022 net income.

Material changes versus the prior comparable period

The October 2022 Jazz agreement materially changed the financial profile. Zymeworks received $375.0 million in 2022 and remains eligible for up to $525.0 million of regulatory milestones, $862.5 million of commercial milestones and tiered royalties of 10% to 20% on future Jazz-territory net sales, subject to regulatory approval.
Research and development spending increased modestly, driven mainly by zanidatamab clinical-trial and manufacturing costs. Zanidatamab-related third-party program costs increased 35% to $117.4 million, while zanidatamab zovodotin costs declined 62% to $4.8 million.
General and administrative expense increased 72%, largely due to Jazz transaction-related professional fees, restructuring costs, depreciation and other professional expenses.
The company reduced its workforce by approximately 25% during the first quarter of 2022. Restructuring costs included $5.2 million of severance, $3.7 million of other charges and a $10.4 million reversal of previously recognized stock-based compensation; management does not expect material additional restructuring costs.
Shares outstanding increased following the January 2022 equity offering and exercises of pre-funded warrants. There were 63.1 million common shares outstanding at December 31, 2022 and 64.0 million at March 3, 2023, excluding additional potential dilution from options, restricted stock units, pre-funded warrants and exchangeable shares.

Pipeline, outlook and management commentary

Zanidatamab was being evaluated in Phase 1, Phase 2 and Phase 3 studies, including pivotal trials in previously treated HER2-amplified biliary tract cancer and first-line HER2-positive gastroesophageal adenocarcinoma.
Top-line HERIZON-BTC-01 results showed a confirmed objective response rate of 41.3% and median duration of response of 12.9 months in the specified previously treated BTC population. Full results were expected in the first half of 2023.
Zanidatamab zovodotin remained in Phase 1 development. Management planned continued development at a recommended Phase 2 dose of 2.5 mg/kg every three weeks, multiple Phase 2 studies beginning in 2023 and potential registration-enabling studies before the end of 2025, subject to results and a future collaboration partner.
The company expected to submit IND applications for preclinical candidates ZW191 and ZW171 in 2024 and maintained a goal of five new IND applications by 2027.
Management stated that existing cash resources, together with certain anticipated collaboration milestone payments, were expected to fund operating and capital requirements for at least the next twelve months from the filing date. This expectation depends partly on uncertain future milestones and the company also stated that substantial additional funding will be required for longer-term operations.
Zymeworks has no approved products and has generated no product-sales revenue. Future revenue is expected to depend on collaboration payments, milestones, royalties and eventual product commercialization.

Risks, contingencies and unusual items

Clinical and regulatory risk remains high: no product candidate had received marketing approval, and positive early or top-line data may not predict final results or regulatory approval.
Revenue and earnings were heavily concentrated in non-recurring Jazz consideration. Future milestone payments and royalties are contingent on development, regulatory and commercial success.
The company relies on Jazz, BeiGene and other partners for development and commercialization activities, and most collaboration agreements contain termination rights, including termination for convenience in some cases.
Zymeworks relies on third-party manufacturers, contract research organizations and other service providers. Manufacturing, supply-chain, enrollment, clinical execution and data-quality problems could delay development.
The company is exposed to competition from approved HER2 therapies, biosimilars and competing antibody-drug conjugates, as well as intellectual-property challenges and potential patent litigation.
The post-redomiciliation organizational structure may create tax and operational inefficiencies. The company was evaluating alternatives after concluding that previously contemplated post-arrangement transactions could produce adverse tax consequences.
A contingent consideration liability related to the Kairos acquisition was $1.2 million at year-end. Potential future Kairos-related milestone payments total up to C$8.5 million, plus possible royalties.
The company adopted a new rights plan that generally imposes significant restrictions on an unauthorized acquisition of 10% or more of the common stock; the plan was scheduled to expire June 8, 2023.
Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022. Because the company is a smaller reporting company and non-accelerated filer, the auditor did not provide a Section 404(b) attestation.
KPMG issued an unqualified audit opinion. Its critical audit matter concerned judgments regarding distinct performance obligations and revenue recognition for the Jazz agreement.

Important facts for investors to verify

Whether zanidatamab receives regulatory approval, the timing and content of regulatory filings, and the final HERIZON-BTC-01 and other pivotal-trial results.
Whether the Jazz and BeiGene collaborations remain on schedule and whether anticipated milestones are actually achieved and collected.
The company’s cash burn excluding one-time collaboration proceeds, expected timing of additional financing and potential dilution from equity securities, options, warrants and exchangeable shares.
Clinical safety, durability of response and comparative efficacy for zanidatamab and zanidatamab zovodotin.
Progress toward the planned 2023 Phase 2 studies for zanidatamab zovodotin and the 2024 IND submissions for ZW191 and ZW171.
The tax and operational consequences of the unresolved post-redomiciliation restructuring and the status of the rights plan.
Whether future collaboration revenue becomes more recurring or remains dependent on large, non-recurring milestone and licensing payments.