Zymeworks gets a big target cut from Paradigm Capital

Canadian biotech name Zymeworks (Zymeworks Stock Quote, Chart, News, Analysts, Financials NYSE:ZYME) has seen some big developments in recent weeks, with the stock now close to all-time lows. But Paradigm Capital Markets analyst Scott McAuley is maintaining a “Buy” rating on the company, saying in an update to clients on Wednesday that ZYME still has some fence-mending work to do with investors.

Vancouver-based Zymeworks is a clinical stage biopharmaceutical company developing novel antibody-based therapies to treat multiple forms of cancer. Its lead asset is zanidatamab (ZW25), currently being evaluated in Phase 2 trials for several cancers, while second candidate ZW49, an antibody-drug conjugate, is in Phase 1 safety and efficacy studies across a number of HER2-expressing cancers.

McAuley’s latest analysis comes after a newsworthy few weeks for the company, including the replacement of its founding CEO, announcing a significant company restructure and completing a new financing round. With his Buy rating, McAuley has lowered his target price for Zymeworks from $60.50/share to $24/share for a potential return at press time of 213 per cent. (All figures in US dollars.)

McAuley’s target slash came from removing neoadjuvant breast cancer from his estimates, lowering market penetration assumptions and accounting for dilution.

“The steep sell-off over the past five months means that ZYME is now valued less than when it went public in 2017, despite the clinical success it has seen to date with zanidatamab,” McAuley said. “We see the restructuring and financing as the new CEO taking the big hits early; however, renewing confidence with investors, especially given the overall negative biotech sentiment, will be a challenge.”

Zymeworks began 2022 by announcing the appointment of Kenneth Galbraith as its new Chief Executive Officer, with the appointment effective as of January 15.

Galbraith, a former Zymeworks board member who has worked in various life sciences roles since 1987, will replace co-founder Ali Tehrani, who had served as both President and CEO since 2003.

“I have long believed in the potential of innovative technology platforms to generate novel multispecific antibodies and antibody-drug conjugates and transform the treatment of cancer. Zymeworks’ innovative approach, technology platforms and emerging product pipeline represent a tremendous opportunity, and I look forward to leading the Company during this exciting period of innovation in cancer therapies,” Galbraith said in a January 5 press release.

With a focus on key company priorities moving forward, Galbraith immediately set about making changes, announcing a plan to cut the company’s overall workforce by 25 per cent by the end of 2022, along with eliminating half of the team that was previously considered senior management.

“While we sincerely understand and appreciate the personal impact of these changes on employees in our organization, starting immediately, a smaller, more focused workforce is essential for us to improve our operating performance and accomplish our key priorities in a more cost-efficient manner,” Galbraith said in a January 20 release.

On February 1, the company closed its previously announced underwritten public offering of approximately 11 million common shares, including the exercise in full of the underwriters’ option to purchase nearly two million additional shares, for a total of $115 million in financing.

According to McAuley, Zymeworks had $250 million in cash available at the end of the year, and that the new financing will extend the company’s runway beyond the end of 2022, with the planned restructure also contributing from that standpoint.

McAuley forecasts the company’s financial picture to become a bit murky in the next couple years, with his 2021 revenue forecast set at $6.8 million (previously $2.4 million), a significant drop from the $39 million the company reported in 2020 and quite a bit off from the consensus projection of $15.6 million. For 2022, McAuley forecasts the company’s revenue to be zero, well below the consensus estimate of $39.3 million.

Meanwhile, with continued research and development in progress, McAuley continues to project losses in the company’s EBITDA moving forward, though the losses aren’t quite as severe. After reporting a $150.8 million loss in 2020, McAuley projects a loss of $214 million in 2021 (previously $231.7 million) against the consensus estimate of a $227.7 million loss, with another projected loss of $231.1 million (previously $254.5 million) in play for 2022, ahead of the consensus projection of a $259.6 million loss.  

With fourth quarter financial results expected to be released on February 24, McAuley believes Zymeworks has been one of many underachievers in the biotech sector along with Mersana Therapeutics and BioAtla, but could still present an interesting investment opportunity. 

“We see ZYME as significantly oversold and an opportunity for investors. However, we do not expect a fast turnaround,” McAuley said. “The recent financing will have soaked up significant near-term interest, the sector remains under pressure with the XBI Biotech ETF down 17 per cent YTD and trading at levels from before the pandemic and investors may want to see execution from the new CEO.”

Zymeworks’ stock price has suffered about an 80 per cent loss over the last 12 months and about a 53 per cent drop since the start of 2022. The stock closed Tuesday at a 52-week low of $7.64/share, a long way off its 52-week high of $41.79/share on February 16 of last year.