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Shares of Zymeworks Inc. ZYME-N rose by 15.7 per cent Wednesday after it announced an unusual licensing deal with Irish company Jazz Pharmaceuticals PLC JAZZ-Q that could be worth US$1.8-billion-plus to the Vancouver cancer drug developer – or which its partner could abandon by year’s end.

“This agreement creates significant value for Zymeworks and its stockholders,” chief executive officer Kenneth Galbraith said during a conference call to discuss the deal.

But the deal was criticized by one of Zymeworks’ largest shareholders, Dubai-based hedge fund All Blue Falcons FZE, which offered this year to buy the company for US$10.50 a share, or US$773-million, in a hostile, non-binding bid that the company has rebuffed.

“The board’s energies were misspent,” said All Blue’s Canadian-born managing director Matt Novak in a statement to The Globe and Mail. “Zymeworks shareholders would have benefited more by management engaging with us.” The Jazz agreement “is a bad deal for shareholders littered with contingencies. They sold their key asset for too cheap versus a sale to us.”

Zymeworks shares closed at US$6.49, up 88 cents, on the New York Stock Exchange.

Under the deal, Jazz will pay Zymeworks US$50-million upfront to develop and take its lead molecule zanidatamab – a tumour-fighting antibody for a range of cancers – to market in North America, Europe and some Asian markets. Jazz has agreed to pay another US$325-million later this year – essentially the second half of an upfront payment and entirely at its option – after Zymeworks publishes key efficacy data for the drug’s effect on biliary tract cancer in the coming weeks.

Zymeworks will then get up to another US$525-million if the drug clears a series of regulatory milestones, a further US$862.5-million if it hits commercial milestones, plus royalties of 10 per cent to 20 per cent of net sales if it gets to market. Jazz will cover all costs of further clinical and research and development studies.

The deal was reached nine months after Mr. Galbraith joined as CEO, replacing founder Ali Tehrani, who left after a year of setbacks for Zymeworks, which was once Canada’s most valuable biotechnology company. The new CEO promptly laid off half of the executive team and one-quarter of all staff and took other measures to improve its financial position, including completing a dilutive $107.5-million stock offering.

The stock, which dropped by 65 per cent in 2021, is down an additional 60 per cent so far this year, reflective of a broad selloff in the early-stage life sciences market. The stock is now trading for barely half its 2017 US$13-a-share initial public offering price.

The new CEO also had to contend with an unwanted bid from All Blue, which owns 7 per cent of the stock. The company rejected its bid as “opportunistic,” adopted a poison pill plan, and won shareholder approval to move its official domicile to Delaware from British Columbia, making it more challenging for a hostile bidder to succeed.

Zymeworks also pursued licensing deals for its drugs in development. Mr. Galbraith portrayed the Jazz deal as fulfilling a major strategic objective as the cost of developing zanidatamab – which accounted for a majority of Zymeworks’ expenditures this year – will shift to Jazz. It will also give Zymeworks enough cash to fund its business through 2026 (Zymeworks struck a smaller licensing zanidatamab deal for parts of the Asia-Pacific region with China’s BeiGene Ltd. in 2018). “It’s a pretty substantial change in our burn rate,” he said.

But analysts repeatedly questioned him about the two-tier upfront payments during the call. Mr. Galbraith responded that it was a “creative” structure that locked in a partnership with Jazz before the key biliary tract cancer data is available while giving the Irish company the opportunity to walk away without paying the US$325-million tranche if the results aren’t to its liking.

Mr. Galbraith admitted the deal did not include any trigger that would lock Jazz in if the trial data met minimum thresholds, adding: “We feel confident we can deliver the data and we felt confident they’ll still believe in zanidatamab and want to move forward with the agreement. Otherwise we would have waited.”

Mr. Novak at All Blue said while the deal “removes any financing overhang,” it “effectively moves Zymeworks back to a preclinical company.”

He said shareholders will be worse off than if All Blue had bought it – while leaving in place a board and management “conflicted in their endeavour to entrench themselves at the expense of shareholder value.”

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 3:46pm EDT.

SymbolName% changeLast
JAZZ-Q
Jazz Pharma Plc
+0.37%120.95

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