Zymeworks(ZYME) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Zymeworks Inc.'s unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2023, and related disclosures Item 1. Financial Statements This section presents Zymeworks Inc.'s unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2023, including balance sheets, statements of loss and comprehensive loss, statements of changes in stockholders' equity, statements of cash flows, and accompanying notes detailing significant accounting policies, investments, liabilities, equity, collaboration agreements, and subsequent events Index to Interim Condensed Consolidated Financial Statements This index lists Zymeworks Inc.'s unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2023, and related notes - The index lists the unaudited interim condensed consolidated financial statements for Zymeworks Inc. as of and for the three and nine months ended September 30, 2023, including balance sheets, statements of loss and comprehensive loss, statement of changes in stockholders' equity, statements of cash flows, and notes to the financial statements[23] Condensed Consolidated Balance Sheets This section provides a snapshot of Zymeworks Inc.'s financial position, detailing assets, liabilities, and equity as of September 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheet Highlights (in thousands of U.S. dollars) | Metric | Sep 30, 2023 (unaudited) | Dec 31, 2022 | | :-------------------------------- | :----------------------- | :----------- | | Assets | | | | Cash and cash equivalents | $94,332 | $400,912 | | Short-term investments | $201,074 | $91,320 | | Total current assets | $374,634 | $544,706 | | Total assets | $556,366 | $648,725 | | Liabilities & Equity | | | | Total current liabilities | $72,847 | $95,625 | | Total liabilities | $132,022 | $155,769 | | Total stockholders' equity | $424,344 | $492,956 | | Total liabilities and stockholders' equity | $556,366 | $648,725 | - The company's cash and cash equivalents significantly decreased from $400,912 thousand at December 31, 2022, to $94,332 thousand at September 30, 2023, while short-term investments increased from $91,320 thousand to $201,074 thousand[24] Condensed Consolidated Statements of Loss and Comprehensive Loss This section details Zymeworks Inc.'s financial performance, including revenue, expenses, and net loss, for the three and nine months ended September 30, 2023 and 2022 Condensed Consolidated Statements of Loss and Comprehensive Loss (in thousands of U.S. dollars, unaudited) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $16,506 | $2,631 | $59,086 | $9,989 | | Research and development expenses | $32,775 | $37,097 | $118,095 | $155,629 | | General and administrative expenses | $16,968 | $15,892 | $55,623 | $43,227 | | Loss from operations | $(33,237) | $(50,358) | $(114,632) | $(188,867) | | Interest income | $5,026 | $1,125 | $14,656 | $1,863 | | Net loss | $(28,687) | $(47,846) | $(104,192) | $(185,090) | | Basic Net loss per common share | $(0.41) | $(0.72) | $(1.53) | $(2.86) | - Revenue from research and development collaborations significantly increased for both the three-month period (527% YoY) and nine-month period (491% YoY) ended September 30, 2023, primarily driven by payments from Jazz Pharmaceuticals[25] - Net loss decreased for both the three-month period (40% YoY) and nine-month period (43.7% YoY) ended September 30, 2023, largely due to increased revenue and reduced research and development expenses[25] Condensed Consolidated Statement of Changes in Stockholders' Equity This section outlines the changes in Zymeworks Inc.'s stockholders' equity, including common stock, additional paid-in capital, and accumulated deficit, from January 1 to September 30, 2023 Changes in Stockholders' Equity (in thousands of U.S. dollars, unaudited) | Metric | Balance at Jan 1, 2023 | Balance at Sep 30, 2023 | | :-------------------------------- | :--------------------- | :--------------------- | | Common stock | $886,322 | $932,138 | | Exchangeable shares | $20,442 | $9,345 | | Additional paid-in capital | $151,614 | $154,114 | | Accumulated other comprehensive loss | $(6,659) | $(8,298) | | Accumulated deficit | $(558,763) | $(662,955) | | Total stockholders' equity | $492,956 | $424,344 | - Total stockholders' equity decreased from $492,956 thousand at January 1, 2023, to $424,344 thousand at September 30, 2023, primarily due to net losses incurred during the period and unrealized losses on available-for-sale securities[26][27] - The company issued common stock through various mechanisms, including exercise of options, employee stock purchase plans, vesting of restricted stock units, and an at-the-market (ATM) program, contributing to an increase in common stock and additional paid-in capital[26] Condensed Consolidated Statements of Cash Flows This section presents Zymeworks Inc.'s cash flow activities, including operating, investing, and financing, for the nine months ended September 30, 2023 and 2022 Condensed Consolidated Statements of Cash Flows (in thousands of U.S. dollars, unaudited) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(132,257) | $(183,251) | | Net cash used in investing activities | $(205,916) | $(31,784) | | Net cash provided by financing activities | $31,236 | $108,959 | | Net change in cash and cash equivalents | $(306,580) | $(105,785) | | Cash and cash equivalents, end of period | $94,332 | $96,082 | - Net cash used in operating activities decreased by $50.99 million (27.8% YoY) for the nine months ended September 30, 2023, primarily due to reduced cash expenditures for operations following the transfer of the zanidatamab program to Jazz[28] - Net cash used in investing activities significantly increased by $174.13 million (548% YoY) for the nine months ended September 30, 2023, mainly due to higher net purchases of marketable securities[28] Notes to the Interim Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the interim condensed consolidated financial statements, covering accounting policies, investments, liabilities, and collaboration agreements 1. Nature of Operations This note describes Zymeworks Inc.'s core business as a clinical-stage biopharmaceutical company and details its redomicile transactions - Zymeworks Inc. is a clinical-stage biopharmaceutical company focused on developing next-generation multifunctional biotherapeutics, primarily through research and development activities, preclinical studies, and clinical trials[29][30] - The company completed Redomicile Transactions on October 13, 2022, transitioning from Zymeworks BC Inc. (a Canadian corporation) to Zymeworks Inc. (a Delaware corporation), involving a share exchange for common stock or exchangeable shares[31][32] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the interim condensed consolidated financial statements, adhering to U.S. GAAP and SEC regulations - The interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP and SEC regulations for interim financial information, reflecting normal recurring adjustments and using estimates and judgments for reported amounts[33][34][37] - All financial amounts are expressed in thousands of U.S. dollars, with certain prior period amounts reclassified for consistency without affecting reported results[35][36] 3. Recent Accounting Pronouncements This note addresses the impact of recent accounting pronouncements on the company's consolidated financial statements - The Company has reviewed recent accounting pronouncements and determined that they are either not applicable or are not expected to have a material effect on the consolidated financial statements upon future adoption[38] 4. Net loss per share This note details the calculation of basic and diluted net loss per common share for the reported periods, reflecting the company's financial performance Net Loss Per Common Share (unaudited) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss attributable to common stockholders (Basic) | $(28,687) | $(47,846) | $(104,192) | $(185,090) | | Basic Net loss per common share | $(0.41) | $(0.72) | $(1.53) | $(2.86) | | Diluted Net loss per common share | $(0.41) | $(0.72) | $(1.53) | $(2.86) | | Weighted-average common stock outstanding (Basic) | 70,575,773 | 66,477,016 | 68,212,756 | 64,751,271 | - Basic and diluted net loss per common share improved significantly, decreasing from $(0.72) to $(0.41) for the three months ended September 30, 2023, and from $(2.86) to $(1.53) for the nine months ended September 30, 2023, reflecting a reduction in net loss[39] 5. Investments This note describes the company's investment portfolio, primarily marketable securities classified as available-for-sale, and their fair value measurements - The company classifies marketable securities as available-for-sale, carried at fair value, with unrealized gains/losses recorded through other comprehensive income (loss)[42] Investment Portfolio (in thousands of U.S. dollars) | Investment Type | Amortized Cost (Sep 30, 2023) | Unrealized Gain (Loss) (Sep 30, 2023) | Fair Value (Sep 30, 2023) | | :---------------------- | :---------------------------- | :------------------------------------ | :------------------------ | | Short-term investments: | | | | | GICs and mutual funds | $74,064 | $0 | $74,064 | | U.S. Treasury notes | $38,077 | $(13) | $38,064 | | Corporate debt securities | $88,928 | $18 | $88,946 | | Long-term investments: | | | | | U.S. Treasury notes | $15,053 | $15 | $15,068 | | Corporate debt securities | $81,379 | $(1,659) | $79,720 | | Equity securities | $886 | $0 | $886 | | Total | $298,387 | $(1,639) | $296,748 | 6. IPR&D and Goodwill This note discusses the company's acquired in-process research and development (IPR&D) assets and goodwill, including their classification and impairment assessment - Acquired in-process research and development (IPR&D) assets, valued at $17,628 thousand, are classified as indefinite-lived intangible assets and are not amortized. No impairment indicators were identified for IPR&D or goodwill as of September 30, 2023[44][45] 7. Liabilities This note provides a breakdown of the company's liabilities, including accounts payable and accrued expenses, and their changes over the reporting period Accounts Payable and Accrued Expenses (in thousands of U.S. dollars) | Category | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Trade payables | $11,008 | $7,863 | | Accrued research and development expenses | $42,934 | $39,358 | | Goods and services tax payable | $0 | $16,244 | | Employee compensation and vacation accruals | $5,507 | $14,365 | | Accrued legal and professional fees | $6,280 | $7,799 | | Liability for contingent consideration | $1,271 | $0 | | Other | $789 | $1,839 | | Total | $67,789 | $87,468 | - Total accounts payable and accrued liabilities decreased from $87,468 thousand at December 31, 2022, to $67,789 thousand at September 30, 2023, primarily due to decreases in goods and services tax payable and employee compensation accruals[46] 8. Stockholders' Equity This note details changes in Zymeworks Inc.'s stockholders' equity, including equity offerings, authorized share capital, pre-funded warrants, and stock-based compensation a. Equity Offerings This sub-section outlines the company's equity financing activities, including common share sales through an at-the-market program and public offerings - In June 2023, the Company sold 3,350,000 common shares through an at-the-market (ATM) program, generating net proceeds of $26,233 thousand[47] - In January 2022, a public offering of 11,035,000 common shares and 3,340,000 pre-funded warrants generated net proceeds of $107,534 thousand[48] b. Authorized Share Capital and Preferred Stock This sub-section describes the company's authorized share capital, including common and preferred stock, and the status of exchangeable shares post-redomicile - The Company's authorized share capital includes 900,000,000 shares of common stock and 100,000,000 shares of preferred stock. As of September 30, 2023, 67,922,559 common shares were issued and outstanding[49][24] - In connection with the Redomicile Transactions, one share of Special Voting Preferred Stock was issued to a Share Trustee, enabling voting rights for Exchangeable Shareholders. The number of outstanding Exchangeable Shares decreased from 1,424,533 at December 31, 2022, to 651,219 at September 30, 2023[50][51] c. Pre-Funded Common Share Warrants This sub-section details the issuance and exercise of pre-funded warrants, granting holders the right to purchase common shares at a nominal price - A total of 8,581,961 pre-funded warrants were issued across public offerings in 2019, 2020, and 2022, granting holders the right to purchase common shares at $0.0001 per share[53] - As of September 30, 2023, 2,079,224 pre-funded warrants remained outstanding, with 8,581,868 common shares issued upon exercise of warrants by October 19, 2023[55][103] d. Stock-Based Compensation This sub-section describes the company's stock-based compensation plans, including available shares for grants and the recognized compensation expense - Stock-based compensation plans, including the Original Plan, New Plan, and Inducement Plan, were assumed by Zymeworks Inc. post-redomicile. As of September 30, 2023, 5,060,802 shares were available for future grants under the New Plan[56][58] Stock-Based Compensation Expense (in thousands of U.S. dollars, unaudited) | Category | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Research and development expense | $1,317 | $2,228 | $677 | $678 | | General and administrative expense | $647 | $2,502 | $3,790 | $(1,488) | | Finance (income) expense | $(19) | $2 | $(27) | $(30) | | Total Stock-based compensation expense (recovery) | $1,945 | $4,732 | $4,440 | $(840) | - The weighted-average expected volatility for stock options granted under the New Plan decreased from 77.3% in 2022 to 68.9% in 2023, while the risk-free interest rate increased from 1.98% to 3.86% for the nine months ended September 30[65] e. Employee Stock Purchase Plan This sub-section details the Employee Stock Purchase Plan (ESPP), including its compensatory nature and the recognized compensation expense - The Employee Stock Purchase Plan (ESPP), effective April 2017, is compensatory, with compensation expense recognized using the Black-Scholes option pricing model. For the nine months ended September 30, 2023, the company recorded $293 thousand in compensation expense, compared to $357 thousand in the prior year[66][67] 9. Research, Collaboration and Licensing Agreements This note outlines revenue generated from strategic partnerships and details key amendments and terminations of collaboration and licensing agreements Revenue from Strategic Partnerships (in thousands of U.S. dollars, unaudited) | Partner/Category | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Jazz Pharmaceuticals (Development support & Drug supply) | $15,428 | $0 | $76,415 | $0 | | Credit for program amendments (Jazz) | $0 | $0 | $(20,100) | $0 | | Atreca, Inc. (Research license fee) | $0 | $0 | $0 | $5,000 | | Research support and other payments | $1,078 | $2,631 | $2,771 | $4,989 | | Total Revenue | $16,506 | $2,631 | $59,086 | $9,989 | - Revenue from research and development collaborations increased significantly, primarily due to $15.4 million from Jazz Pharmaceuticals for development support and drug supply in Q3 2023, and $76.4 million for the nine months ended September 30, 2023, partially offset by a $20.1 million credit to Jazz for contractual amendments[68][70] - Key changes include the amendment of the Jazz Collaboration Agreement, termination of the 2016 Daiichi Collaboration Agreement (no financial impact), and termination of the BeiGene Zanidatamab Zovodotin License and Collaboration Agreement, alongside an amendment to the BeiGene Zanidatamab License Agreement reducing royalty rates by 0.5% until a low double-digit million dollar cap is reached[68][74][75][78] 10. Other income (expense), net This note presents the company's other income and expenses, primarily influenced by foreign exchange fluctuations, for the reported periods Other Income (Expense), Net (in thousands of U.S. dollars, unaudited) | Category | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Foreign exchange gain (loss), net | $264 | $1,456 | $(631) | $1,817 | | Other | $370 | $(98) | $569 | $(15) | | Total | $634 | $1,358 | $(62) | $1,802 | - Other income (expense), net, decreased for the three months ended September 30, 2023, to $634 thousand from $1,358 thousand in 2022, and shifted to a net expense of $(62) thousand for the nine months ended September 30, 2023, from a net income of $1,802 thousand in 2022, primarily due to foreign exchange fluctuations[82] 11. Leases This note details the company's operating lease commitments for office spaces, including liabilities and expenses, and their maturity profile - The Company leases office spaces in Vancouver, Bellevue, and Seattle, with terms expiring between December 2024 and February 2032. Total operating lease liabilities were $26,249 thousand as of September 30, 2023[83][84] Operating Lease Liabilities Maturities (in thousands of U.S. dollars, as of Sep 30, 2023) | Period | Operating leases | | :------------- | :--------------- | | Within 1 year | $5,070 | | 1 to 2 years | $4,820 | | 2 to 3 years | $4,609 | | 3 to 4 years | $4,130 | | 4 to 5 years | $3,108 | | Thereafter | $9,300 | | Total operating lease payments | $31,037 | | Less: Imputed interest | $(4,788) | | Operating lease liabilities | $26,249 | - Operating lease expense for the nine months ended September 30, 2023, was $6,010 thousand, an increase from $5,316 thousand in the prior year, with a weighted average remaining lease term of 7.0 years[87][86] 12. Financial Instruments This note describes the company's financial instruments, their fair value measurements using a three-level hierarchy, and exposure to credit risk - The Company measures certain financial instruments at fair value using a three-level hierarchy, with contingent consideration liabilities categorized as Level 3 due to unobservable inputs[88][89][91] Fair Value Measurements of Assets and Liabilities (in thousands of U.S. dollars, as of Sep 30, 2023) | Category | Total | Level 1 | Level 2 | Level 3 | | :-------------------------------- | :------ | :------ | :------ | :------ | | Assets | | | | | | Cash and cash equivalents | $94,332 | $94,332 | $0 | $0 | | Investments (GICs, mutual funds, U.S. Treasury notes) | $127,196 | $127,196 | $0 | $0 | | Investments (Corporate debt securities) | $168,666 | $0 | $168,666 | $0 | | Total Assets | $390,194 | $221,528 | $168,666 | $0 | | Liabilities | | | | | | Liability for contingent consideration | $1,579 | $0 | $0 | $1,579 | | Total Liabilities | $1,579 | $0 | $0 | $1,579 | - The Company's maximum exposure to credit risk for accounts receivable was $67,273 thousand at September 30, 2023, with 96% from Jazz Pharmaceuticals. Liquidity is managed through cash, investments, and collaboration agreements, expected to fund operations for at least the next 12 months[95][96] 13. Commitments and Contingencies This note outlines the company's contractual commitments, potential milestone and royalty payments, and legal contingencies - The Company has research collaboration agreements with strategic partners that include potential milestone and royalty payments. The maximum potential future indemnification is unlimited, but the Company holds commercial and product liability insurance[99][100] - Contingent consideration related to the 2016 Kairos acquisition, estimated at $1,579 thousand as of September 30, 2023, is a financial liability measured at fair value, with changes recorded in R&D expenses[101] - The Company does not believe it is currently subject to any material legal proceedings or claims that would reasonably be expected to have a material adverse effect[102] 14. Subsequent Events This note discloses significant events occurring after the reporting period, including warrant exercises and the termination of a research and license agreement - On October 19, 2023, the Company issued 2,079,193 common shares upon the cashless exercise of 2,079,224 pre-funded warrants[103] - LEO Pharma A/S provided written notice on October 27, 2023, to terminate their Research and License Agreement, effective January 25, 2024, due to the closure of LEO's bispecific antibody program. This termination will result in LEO reimbursing Zymeworks BC for non-cancellable costs and assigning related intellectual property to Zymeworks BC[104][109] - Under the terminated LEO agreement, Zymeworks BC was eligible for significant preclinical, development, and commercial milestone payments (up to $74.0 million and $157.0 million for the first product, and up to $86.5 million and $157.0 million for the second product, respectively) and tiered royalties, none of which were received[106][107] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Zymeworks' business, recent clinical and preclinical developments, financial performance for the three and nine months ended September 30, 2023, and an analysis of its liquidity and capital resources Overview This section introduces Zymeworks as a clinical-stage biopharmaceutical company, highlighting its lead product candidates and overall financial position - Zymeworks is a clinical-stage biopharmaceutical company focused on developing novel, multifunctional biotherapeutics for difficult-to-treat cancers, leveraging complementary therapeutic platforms and an integrated drug development engine[112][118] - The lead product candidate, zanidatamab, is a bispecific antibody targeting HER2, with exclusive development and commercialization rights granted to BeiGene and Jazz in different territories. It has shown promising antitumor activity in HER2-expressing cancers[113] - The second product candidate, zanidatamab zovodotin, is a HER2-targeting ADC. The company is advancing a pipeline of preclinical candidates (ZW191, ZW171, ZW220, ZW251) with IND/foreign equivalent applications expected in 2024-2025[114][115] - The company reported a net loss of $104.2 million for the nine months ended September 30, 2023, with an accumulated deficit of $663.0 million. Existing cash resources and anticipated milestone payments are expected to fund operations for at least the next twelve months[122][121] Recent Developments This section highlights key advancements in Zymeworks' clinical and preclinical programs and significant changes in its licensing and collaboration agreements Zanidatamab Clinical Program This sub-section provides updates on the clinical trials and results for zanidatamab, a bispecific antibody targeting HER2 - At ESMO 2023, BeiGene presented Phase 1b/2 study results for zanidatamab plus chemo and tislelizumab in HER2-positive G/GEJC, showing a Confirmed ORR of 75.8% and median PFS of 16.7 months. A Phase 3 trial (HERIZON-GEA-01) is ongoing with top-line data expected in 2024[123] - Jazz presented quality of life outcomes from the Phase 2b HERIZON-BTC-01 study for zanidatamab in HER2-positive BTC, indicating improved HRQoL for responders. The study previously reported a confirmed ORR of 41.3% and median PFS of 5.5 months[124][125] Zanidatamab Zovodotin Clinical Program This sub-section details the clinical development of zanidatamab zovodotin, a HER2-targeting ADC, including its recommended dose and response rates - Clinical data for zanidatamab zovodotin from a Phase 1 study identified 2.5 mg/kg Q3W IV as the recommended dose, demonstrating an acceptable tolerability profile and a 30% overall response rate in heavily pretreated HER2+ cancers. A Phase 2 study in NSCLC is being pursued[126][114] Preclinical Programs This sub-section highlights the progress of Zymeworks' preclinical candidates, including IND selections and data presentations for various ADCs and T-cell engagers - ZW220, an ADC targeting NaPi2b-expressing NSCLC and ovarian cancer, was selected as an IND candidate with filing anticipated in H1 2025. ZW251, a GPC3-targeting ADC for HCC, was also selected as an IND candidate with filing anticipated in H2 2025[127][129] - Additional preclinical data were presented for ZW251 and ZW220 at the 14th Annual World ADC San Diego, and for tri-specific T-cell engager (TriTCE) programs at the SITC annual meeting in October and November 2023, respectively[128] Licensing and Collaboration Agreements This sub-section details significant changes to Zymeworks' licensing and collaboration agreements, including terminations, amendments, and potential future milestone payments - The License and Collaboration Agreement with BeiGene for zanidatamab zovodotin was terminated on September 18, 2023. Concurrently, the Zanidatamab License and Collaboration Agreement with BeiGene was amended to reduce tiered royalties by 0.5% until a low double-digit million dollar cap is reached[130][133][134] - LEO Pharma A/S notified the Company on October 27, 2023, of its decision to terminate the Research and License Agreement, effective January 25, 2024, due to the closure of its bispecific antibody program. This termination includes reimbursement for non-cancellable costs and assignment of LEO's intellectual property to Zymeworks BC[135][138] - Through September 30, 2023, the Company received over $435 million in non-refundable upfront and milestone payments from Jazz and BeiGene for zanidatamab and zanidatamab zovodotin, with eligibility for up to $1.56 billion in potential future milestones and tiered royalties[142] Financial Operations Overview This section provides an overview of Zymeworks' revenue, operating expenses, and other income/expense components, outlining their primary drivers - Operating expenses are mainly research and development (R&D) and general and administrative (G&A) expenses, with personnel costs (salaries, benefits, bonuses, stock-based compensation) being a significant component[153] Revenue This sub-section describes the primary sources of Zymeworks' revenue, mainly from non-recurring fees and milestone payments from strategic partnerships - Revenue primarily consists of non-recurring upfront fees, expansion payments, and milestone payments from licensing and collaboration agreements, with strategic partnerships expected to be the main source of revenue for the foreseeable future[152] Operating Expenses This sub-section details the components of Zymeworks' operating expenses, including research and development and general and administrative costs Research and Development Expense This sub-section outlines the components of R&D expenses, including third-party program costs and internal personnel costs, and their expected future trends - R&D expenses include third-party program costs, internal personnel costs, and other indirect costs for clinical trials, preclinical studies, manufacturing, and regulatory affairs. These expenses are expected to increase, excluding the zanidatamab program, as product candidates advance[154][155] General and Administrative Expense This sub-section describes the components of G&A expenses, covering personnel costs, professional fees, and infrastructure, and their potential for future increases - G&A expenses cover salaries, benefits, and stock-based compensation for executive, finance, legal, IP, business development, and HR functions, along with professional fees, insurance, facilities, and IT costs. These expenses may increase with infrastructure expansion[156] Other Income (Expense) This sub-section identifies the primary components of other income and expense, mainly interest income and foreign exchange gains or losses - Other income (expense) primarily comprises interest income and foreign exchange gains or losses[157] Critical Accounting Policies and Significant Judgments and Estimates This section discusses the critical accounting policies involving significant judgments and estimates, noting no material changes during the reporting period - The Company's critical accounting policies involve significant judgments and estimates, particularly for revenue recognition, expense accruals, stock-based compensation, deferred taxes, and contingencies. No material changes occurred in these policies during the three and nine months ended September 30, 2023[158][159][160] Recent Accounting Pronouncements This section refers to the summary of recent accounting pronouncements in the financial statements, indicating no material expected impact - A summary of recent accounting pronouncements is presented in note 3 of the interim condensed consolidated financial statements, indicating no material effect is expected from future adoption[161] Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 This section analyzes Zymeworks' financial performance, including revenue, R&D, G&A, and other income, for the three and nine months ended September 30, 2023 and 2022 Revenue Analysis This sub-section analyzes the significant increase in Zymeworks' revenue, primarily driven by development support and drug supply from Jazz Pharmaceuticals Revenue from Research and Collaborations (in millions of U.S. dollars) | Period | 2023 | 2022 | Increase/(Decrease) | % Change | | :-------------------------------- | :--- | :--- | :------------------ | :------- | | Three Months Ended Sep 30 | $16.5 | $2.6 | $13.9 | 535 % | | Nine Months Ended Sep 30 | $59.1 | $10.0 | $49.1 | 491 % | - Total revenue increased significantly by $13.9 million (535%) for the three months and $49.1 million (491%) for the nine months ended September 30, 2023, primarily driven by development support and drug supply revenue from Jazz Pharmaceuticals, partially offset by a $20.1 million credit to Jazz for contractual amendments[163][164] - Future revenue from Jazz for development support is expected to decrease significantly due to the transfer of program responsibility to Jazz, though Zymeworks BC remains eligible for reimbursement of certain activities[165][166] Research and Development Expense Analysis This sub-section analyzes the decrease in R&D expenses, mainly due to the transfer of the zanidatamab program to Jazz, partially offset by increased preclinical spending Research and Development Expense (in millions of U.S. dollars) | Category | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | % Change | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | % Change | | :-------------------------------- | :------------------------------ | :------------------------------ | :------- | :----------------------------- | :----------------------------- | :------- | | Zanidatamab | $1.7 | $15.7 | (89)% | $43.2 | $90.5 | (52)% | | Zanidatamab zovodotin | $1.7 | $1.3 | 31% | $4.8 | $2.2 | 118% | | Preclinical and other research | $15.1 | $2.9 | 421% | $26.5 | $4.9 | 441% | | Salaries and benefits | $6.7 | $10.1 | (34)% | $26.7 | $41.2 | (35)% | | Stock-based compensation expense | $1.3 | $2.2 | (41)% | $0.7 | $0.7 | 0% | | Other unallocated expenses | $6.3 | $4.9 | 29% | $16.2 | $16.1 | 1% | | Total R&D Expense | $32.8 | $37.1 | (12)% | $118.1 | $155.6 | (24)% | - R&D expense decreased by $4.3 million (12% YoY) for the three months and $37.5 million (24% YoY) for the nine months ended September 30, 2023. This was primarily due to a significant decrease in zanidatamab expenses following its transfer to Jazz, partially offset by increased preclinical expenses for ZW171 and ZW191[167][168] - Salaries and benefits expenses decreased due to lower headcount in 2023, and stock-based compensation expense also saw a decrease for the three-month period[167][168] General and Administrative Expense Analysis This sub-section analyzes the increase in G&A expenses, driven by higher depreciation and technology spend, despite lower salaries and benefits General and Administrative Expense (in millions of U.S. dollars) | Category | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | % Change | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | % Change | | :-------------------------------- | :------------------------------ | :------------------------------ | :------- | :----------------------------- | :----------------------------- | :------- | | Salaries and benefits | $3.9 | $4.3 | (9)% | $13.1 | $17.4 | (25)% | | Stock-based compensation expense (recovery) | $0.6 | $2.5 | (76)% | $3.8 | $(1.5) | 353% | | Professional fees, consulting and business insurance | $6.0 | $6.9 | (13)% | $22.2 | $16.7 | 33% | | Other general and administrative expenses | $6.5 | $2.2 | 195% | $16.5 | $10.6 | 56% | | Total G&A Expense | $17.0 | $15.9 | 7% | $55.6 | $43.2 | 29% | - G&A expense increased by $1.1 million (7% YoY) for the three months and $12.4 million (29% YoY) for the nine months ended September 30, 2023. This was mainly due to higher depreciation on facilities and increased technology spend, partially offset by lower salaries and benefits due to reduced headcount[170][171] Other Income, Net Analysis This sub-section analyzes the increase in other income, net, primarily attributable to higher interest income from a larger cash balance and increased rates of return Other Income, Net (in millions of U.S. dollars) | Period | 2023 | 2022 | Increase/(Decrease) | % Change | | :-------------------------------- | :--- | :--- | :------------------ | :------- | | Three Months Ended Sep 30 | $5.7 | $2.5 | $3.2 | 128 % | | Nine Months Ended Sep 30 | $14.6 | $3.7 | $10.9 | 295 % | - Other income, net, increased by $3.2 million (128% YoY) for the three months and $10.9 million (295% YoY) for the nine months ended September 30, 2023, primarily driven by higher interest income due to a larger cash balance and higher rates of return[172][173] Liquidity and Capital Resources This section assesses Zymeworks' ability to meet its financial obligations, detailing sources of liquidity, cash flow activities, and future funding requirements Sources of Liquidity This sub-section identifies Zymeworks' primary funding sources, including public equity offerings and strategic collaborations, and its current cash and investment holdings - Since its IPO in 2017, Zymeworks has funded operations primarily through public equity offerings and payments from strategic collaborations. As of September 30, 2023, the company held $390.2 million in cash, cash equivalents, and marketable securities[174][177] - In June 2023, the company sold 3,350,000 common shares through an at-the-market (ATM) program, generating net proceeds of $26.2 million[176] Cash Flows This sub-section analyzes Zymeworks' cash flow activities, highlighting changes in operating, investing, and financing cash flows for the nine months ended September 30, 2023 Summary of Cash Flows (in millions of U.S. dollars) | Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(132.3) | $(183.3) | | Net cash used in investing activities | $(205.9) | $(31.8) | | Net cash provided by financing activities | $31.2 | $109.0 | | Net change in cash and cash equivalents | $(306.6) | $(105.8) | - Net cash used in operating activities decreased by $51.0 million (27.8% YoY) for the nine months ended September 30, 2023, mainly due to reduced cash expenditures after transferring the zanidatamab program to Jazz, partially offset by increased preclinical product candidate spending[179] - Net cash used in investing activities increased significantly to $205.9 million, primarily due to net purchases of marketable securities ($203.6 million). Net cash provided by financing activities decreased to $31.2 million, mainly from ATM program proceeds and stock option exercises[180][181] Funding Requirements This sub-section outlines Zymeworks' future funding needs, emphasizing reliance on existing resources and potential additional capital for long-term operations - The Company anticipates existing cash, cash equivalents, short-term investments, and anticipated milestone payments from collaborations will fund operating and capital expenditures for at least the next twelve months[183] - Substantial additional funding will be required for continuing operations and long-term business plans, dependent on factors like clinical trial progress, regulatory approvals, commercialization costs, and strategic partnerships[184] - Failure to secure adequate funding on favorable terms may necessitate reducing operating expenses, delaying product development, or relinquishing rights to technologies, potentially diluting existing stockholders' ownership[184][185] Segment Reporting This section states that Zymeworks operates and manages its business as a single segment focused on developing multifunctional biotherapeutics - The Company operates and manages its business as a single segment, focused on the development of next-generation multifunctional biotherapeutics[186] Outstanding Share Data This section provides details on Zymeworks' outstanding common stock, exercisable stock options, restricted stock units, and exchangeable shares as of November 6, 2023 - As of November 6, 2023, there were 70,001,987 shares of common stock issued and outstanding. Additionally, 3,974,766 exercisable stock options and 792,763 restricted stock units were outstanding[187] - In connection with the Plan of Arrangement, 1,424,533 Exchangeable Shares were issued to former Zymeworks BC shareholders. As of November 6, 2023, 773,314 Exchangeable Shares have been exchanged for common stock, with 651,219 remaining outstanding and exchangeable on a one-to-one basis[188][189] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Zymeworks Inc. is exempt from providing quantitative and qualitative disclosures about market risk under Item 305 of Regulation S-K - Zymeworks Inc. qualifies as a 'smaller reporting company' and is therefore not required to provide quantitative and qualitative disclosures about market risk[190] Item 4. Controls and Procedures This section details the evaluation of the Company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section confirms management's conclusion that Zymeworks' disclosure controls and procedures were effective as of September 30, 2023 - As of September 30, 2023, management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective at a reasonable assurance level, designed to ensure timely and accurate reporting of information[191][192] Changes in Internal Control Over Financial Reporting This section reports that no material changes occurred in Zymeworks' internal control over financial reporting during the fiscal quarter ended September 30, 2023 - There were no changes in internal control over financial reporting during the fiscal quarter ended September 30, 2023, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[193] PART II. OTHER INFORMATION This section provides additional information beyond the financial statements, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section states that Zymeworks Inc. is not currently a party to any legal proceedings that are expected to have a material adverse effect on its business, financial condition, operating results, or cash flows - As of September 30, 2023, Zymeworks is not involved in any legal proceedings that management believes would have a material adverse effect on its business, financial condition, operating results, or cash flows[196] Item 1A. Risk Factors This section outlines various risks that could materially and adversely affect Zymeworks' business, financial condition, results of operations, and prospects, spanning product development, financial stability, and intellectual property Summary of Risk Factors This section provides a high-level overview of key risks, including those related to product development, financial stability, and intellectual property protection - Key risks include the limited number of product candidates in early development, the high cost and uncertainty of clinical trials, the potential for undesirable side effects, intense competition, and the need for broad market acceptance for approved products[199] - Financial risks involve significant historical losses, the need for substantial additional funding, and dependence on strategic partnerships. Intellectual property protection, security breaches, and compliance with healthcare laws also pose significant challenges[199] Risks Related to Our Business and the Development and Commercialization of Our Product Candidates This section details risks associated with Zymeworks' product development and commercialization, including regulatory approvals, clinical trial outcomes, competition, and market acceptance - The Company has no approved products and faces significant risks in obtaining regulatory approval for its preclinical and clinical-stage candidates, including the high cost, time-consuming nature, and uncertain outcomes of clinical trials. Delays or failures in trials, or unforeseen side effects, could materially harm the business[201][204][208][236] - Competition is intense, with many larger pharmaceutical and biotechnology companies developing similar treatments. If competitors offer safer, more effective, or less expensive products, Zymeworks' commercial opportunities will be negatively impacted. Market acceptance of approved products is also uncertain and depends on various factors including pricing, reimbursement, and physician adoption[238][240][244] - Regulatory processes are complex and subject to change, with potential for delays, limited indications, or post-marketing requirements. Fast Track and Breakthrough Therapy designations do not guarantee faster approval. Development of combination therapies introduces additional risks related to the other therapies' approval and supply[204][227][229] Risks Related to Our Financial Position and Need for Additional Capital This section addresses Zymeworks' financial risks, including historical losses, the need for substantial additional funding, and potential dilution from future capital raises - Zymeworks has incurred significant losses since inception, with an accumulated deficit of $663.0 million as of September 30, 2023, and anticipates continued losses due to ongoing R&D and commercialization efforts. Profitability is uncertain and depends on successful product development and market penetration[325][327] - The company requires substantial additional funding to complete development and commercialization of product candidates. Future funding needs are dependent on clinical trial progress, regulatory approvals, manufacturing costs, and strategic partnerships. Inadequate funding could lead to delays, reduced scope of programs, or relinquishing rights[329][330][331] - Raising additional capital through equity or convertible debt could dilute stockholders' ownership and impose restrictive covenants. The management team has broad discretion over the use of proceeds from financing and collaborations, which may not always align with stockholder expectations or yield favorable returns[331][452] Risks Related to Our Dependence on Third Parties This section highlights Zymeworks' reliance on third-party collaborators and manufacturers, and the associated risks of non-performance, delays, or agreement terminations - Zymeworks heavily relies on its collaborative relationship with Jazz for the development and commercialization of zanidatamab. The success of zanidatamab is largely dependent on Jazz's performance, and any adverse decisions, disagreements, or termination by Jazz could materially harm Zymeworks' business[332][333][334][335] - Existing and future strategic partnerships are crucial for drug development and non-dilutive funding. Risks include partners not performing as expected, delaying trials, pursuing competing products, or terminating agreements, which could lead to delays in development or a need for additional resources[337][339][341] - The Company relies on third-party manufacturers for product candidates and other third parties for clinical trial monitoring, support, and operational/administrative services. Difficulties with these third parties, including manufacturing issues, regulatory non-compliance, or service disruptions, could delay clinical trials, impair commercialization, or adversely affect business operations[344][346][349][351][356] Risks Related to Our Intellectual Property This section addresses risks concerning Zymeworks' intellectual property, including potential infringement, challenges to patent validity, and the impact of evolving patent laws - Commercial success depends on operating without infringing third-party patents. There is a risk that existing or future patents held by others could limit the ability to develop, manufacture, or commercialize product candidates, potentially leading to costly litigation, damages, or the need for licenses on unfavorable terms[361][362][364][365] - The Company's ability to obtain, maintain, and enforce its own patent and trade secret protection is uncertain. Patents may be challenged, narrowed, invalidated, or circumvented, and trade secrets may be disclosed or misappropriated, which could diminish their value and competitive advantage[366][367][368][384][387] - Changes in patent laws or jurisprudence, such as the America Invents Act (AIA) and recent U.S. Supreme Court rulings, introduce uncertainty and could weaken patent protection. Global variations in intellectual property laws and geopolitical actions (e.g., Russia's decree) further complicate protection and enforcement, potentially limiting market opportunities[394][395][397][399][402] Risks Related to the Redomicile Transactions This section discusses risks associated with the Redomicile Transactions, including unrealized benefits, potential stock price volatility, and operational inefficiencies - The anticipated benefits of the Redomicile Transactions, such as enhanced stockholder value and marketability in the U.S., may not materialize, especially if the common stock is not included in U.S. stock market indices, potentially leading to increased selling pressure and stock price volatility[409][410] - The Redomicile Transactions may cause certain stockholders or investment funds to sell their shares due to internal guidelines, increasing selling pressure. Uncertainty surrounding the transactions could also disrupt relationships with employees, suppliers, and partners, and lead to unforeseen expenses or less favorable new arrangements[412][414][415] - The current organizational structure post-Redomicile may result in tax and operational inefficiencies, as the company is evaluating alternatives to previously contemplated Post-Arrangement Transactions due to negative tax consequences[419] Risks Related to the Exchangeable Shares This section addresses risks specific to Exchangeable Shares, including limited liquidity, potential delays in exchange, and uncertain tax implications for holders - Exchangeable Shares are not listed on any stock exchange, limiting liquidity and the ability of holders to sell them. Holders may experience delays in receiving common stock upon exchange, affecting the value received[423][424] - Holders of Exchangeable Shares may face taxable events beyond their control, such as redemption by ExchangeCo. The tax treatment of Exchangeable Shares for non-Canadian tax purposes is uncertain, requiring holders to consult tax advisors[425][426][427] Risks Related to Additional Legal and Compliance Matters This section covers legal and compliance risks, including employee misconduct, adherence to healthcare laws, and environmental regulations, and their potential financial and reputational impacts - The Company is exposed to risks of employee misconduct, including noncompliance with regulatory standards (FDA, healthcare fraud and abuse laws), insider trading, and internal policies. Such misconduct could lead to regulatory sanctions, significant fines, reputational harm, and costly litigation[428][429][431][437] - Compliance with federal and state healthcare laws (e.g., Anti-Kickback Statute, False Claims Act, HIPAA, Physician Payments Sunshine Act) is critical. Violations could result in civil or criminal penalties, exclusion from government programs, and significant administrative burdens[318][431][434][435] - Operations involve hazardous materials and chemicals, subjecting the company to environmental, health, and safety laws. Non-compliance could lead to substantial damages, fines, or penalties, and current insurance may not provide adequate coverage for all liabilities[439] Risks Related to Employee Matters and Managing Growth This section addresses risks related to human capital, including retaining key personnel, managing workforce reductions, and handling organizational growth effectively - The Company's future success depends on retaining key executives and attracting/motivating qualified personnel, especially scientific, technical, clinical, manufacturing, and sales/marketing staff. Loss of key personnel or inability to recruit could impede R&D and commercialization objectives[441][442] - The 2022 workforce reduction may negatively impact employee morale and retention, hindering the achievement of key priorities. Future organizational growth or modifications could also be difficult to manage, potentially leading to operational errors, loss of opportunities, and increased expenses[440][443] Risks Related to Our Common Stock This section discusses risks associated with Zymeworks' common stock, including price volatility, liquidity concerns, potential dilution, and the absence of cash dividends - The Company's stock price is highly volatile and may drop significantly due to clinical trial results, regulatory developments, competition, manufacturing issues, changes in analyst recommendations, and broader market conditions. Investors may experience significant losses[444][445][447] - An active trading market for common stock may not be sustained, potentially making it difficult for stockholders to sell shares without depressing the market price. Failure to meet Nasdaq listing requirements could lead to delisting, impairing liquidity and market price[448][449] - Substantial future sales of common stock or the perception of such sales could depress the market price. The Company does not anticipate paying cash dividends, requiring stockholders to rely solely on stock appreciation for returns[451][454] General Risk Factors This section covers general risks, including securities litigation, analyst coverage, and corporate governance provisions that may affect control and stock price - The Company is at risk of securities class action litigation, which could result in substantial costs and divert management's attention. Inaccurate or unfavorable research by securities analysts could also cause the stock price and trading volume to decline[474][475] - Delaware law and provisions in the Company's organizational documents may delay, discourage, or prevent a change in corporate control or management, potentially depressing the market price of common stock[466][468] - The Company's bylaws designate Delaware state or federal courts as the exclusive forum for most disputes and federal district courts for Securities Act claims, which may limit stockholders' choice of judicial forum and could incur significant costs if challenged[469][471][473] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports that there were no unregistered sales of equity securities or use of proceeds during the period - The Company reported no unregistered sales of equity securities or use of proceeds for the period[477] Item 3. Defaults upon Senior Securities This section confirms that there were no defaults upon seni