Innovation

How Zymeworks is building the next great Canadian drug company

Ali Tehrani watched his biotech peers crash and burn. Now he’s leading a drug developer designed to last

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Zymeworks founder Ali Tehrani

Zymeworks founder Ali Tehrani. (Portrait by Trevor Brady)

Ali Tehrani ought to be exhausted, considering what his company, Zymeworks Inc., has accomplished in the past few months. Instead, he seems like someone who has been building toward this moment all his life, and now that it’s arrived, he is enveloped in a bubble of calm rationality, as if he’s thought it all through in advance. “You have to make calculated decisions, but you have to be on the aggressive side,” he muses about life in the biotechnology industry. “You have to take chances.”

Tehrani’s approach led the Vancouver-based firm to secure US$61.5 million in venture capital financing in January, one of the largest ever for a Canadian biotech company. That was followed by the takeover of Kairos Therapeutics, a Vancouver startup re-engineering human antibodies to fight cancer. In December, Tehrani signed a deal with GlaxoSmithKline that will allow the pharmaceutical giant to test at least four of its drug candidates on a Zymeworks-designed platform, which combines a computer simulation with a way of engineering protein molecules and allows products to be refined before they move to expensive clinical trials. Zymeworks stands to earn up to US$110 million in milestone payments per drug—plus royalties should any of them make it to market. Add to that other platform licensing deals Tehrani’s business has lined up with Merck & Co., Eli Lilly and Co. and Celgene Corp. in recent years, and Zymeworks is set to receive a revenue stream of up to $4 billion, plus royalties. Never mind that the company doesn’t even have a single drug of its own in clinical trials.

Biotech is a “crazy” industry, in that there’s no easy way to measure a company’s worth, because actually helping patients is at least 10 years away, explains Brian Bloom, president of Bloom, Burton & Co., a Toronto-based investment bank focused on the health-care sector. “We’re in the business of spending money, not making it,” he laughs. All investors have to go on is validation by third parties. In that, though, Zymeworks is setting new benchmarks. “There are two ways to receive validation: from partnerships with big pharma and from smart investors,” Bloom says. “Zymeworks has both.”

It all lends credence to Tehrani’s claim that, from the outset 15 years ago, he sought to build a different kind of biotechnology firm—“a truly rational drug development company,” as he puts it. Instead of focusing on developing a blockbuster drug only to have it fail in trials, Tehrani’s company would concentrate on the process of innovation. It would build expertise and develop technology platforms to support drug development, while pursuing a new class of large-molecule biological drugs tailored to certain conditions, enabling the long-sought dream of personalized medicine. And it would collaborate with its peers instead of competing with them. Zymeworks’ recent winning streak is a sign—perhaps the most emblematic yet—of a revival in the Canadian biotech sector, this time promising more sustainable growth than in the past.

The country’s life sciences scene has suffered a series of spectacular flame-outs. In B.C. especially, companies such as QLT Inc., Angiotech Pharmaceuticals and Cardiome Pharma Corp. saw their valuations soar in the early 2000s, only to come crashing to earth by the end of the decade as a result of competitive pressures, regulatory snags, strategic blunders and deals gone awry. Tehrani, who sat on the board of an industry association at the time, had a front-row seat as these companies rose to prominence. Angiotech and QLT hit multibillion-dollar market capitalizations, hired hundreds of employees and built flashy head offices—and then came undone. Having watched his peers crash and burn, Tehrani is vowing not to repeat their mistakes.

As graduate student at the University of British Columbia, Tehrani knew he wanted to do something different. He had been following the emerging science of immunotherapy, which is the use and augmentation of the human immune system to fight disease. On its own, the immune system boasts different molecules that detect harmful intruders, eradicate small infections and work to contain larger outbreaks. The problem with some intractable diseases, especially cancer, is that they inhabit the body’s own cells, which the immune system is hard-wired to leave alone. However, research was showing that with biological medicine, it could be possible to take the foot soldiers of the immune system—antibodies—and modify them so they could distinguish between healthy and mutated cells, and only attack the latter. “We are training the immune system, in essence, and engineering it to do what it cannot do,” Tehrani says.

That’s the kind of disruptive thinking that turned the heads of three angel investors—Haig Farris, Nick Bedford (Zymeworks’ current chairman) and Andrew Wright—in 2001. Tehrani had just obtained his PhD in microbiology and immunology, and teamed up with an IT specialist, Anthony Fejes, to flesh out a business plan when each investor pitched in $40,000 to capitalize Zymeworks. It had no intellectual property; the investors put money down on personality alone.

“I invested in Ali, basically,” confirms Farris, 77, the godfather of B.C. venture capitalists, with a string of technology startups to his credit going back 45 years. Tehrani was a student in Farris’s entrepreneurship course at UBC, and the two stayed in touch. Farris was impressed by Tehrani’s networking skills—“By the time he graduated, he was known by first name to every senior official in the university, from the chancellor on down”—and his ability to explain baffling biomedical concepts to the uninitiated. Plus, he had that ineffable quality of character. He was no science nerd. Philosophical and widely read, he would drop esoteric references into his conversations. He fled with his family from Iran to Greece at the age of 13. By the time he completed his undergraduate studies in Massachusetts, he was a competitive karate master and played drums in a pop band.

“I just thought he was worth backing no matter what he did,” says Farris, who compares Tehrani to another entrepreneur he funded from the outset, Geordie Rose of quantum computer maker D-Wave Systems. Both had a knack for attracting talent, Farris says. And, of course, both had big, hairy ideas to revolutionize their industries.

At first the plan for Zymeworks was entirely practical and had nothing to do with medicine: designing enzymes for industrial applications. The computing power needed to model the complex interaction of biological compounds for drug development was not yet readily available, but that was always in the back of Tehrani’s mind. Once the technology to virtually test drugs caught up, Zymeworks made the leap to the more familiar and potentially lucrative biomedical realm. Here, Tehrani thought, the company could distinguish itself from its peers and make the process of drug development more deliberate, like building a bridge or an airplane.

Traditional medicine, Tehrani explains, relies on a combination of guesswork and statistical probabilities. Your doctor prescribes you a medication based on the fact that a large percentage of people with the same symptoms found relief from it. But what if you looked at disease for what it really is: a condition unique to the person at the time? What if you tested various hypotheses in a computational simulation to narrow the number of therapeutic formulas down to just a few?

Zymeworks would use its knowledge of computing to develop and license platforms: the software engines with which other companies could test their compounds virtually so as to stand a better chance of success in the laboratory. In the past, most Canadian biotechs were product focused—they attempted to commercialize a particular drug compound or device, with the inherent risks that it would fail in clinical trials or get upstaged by a competing product. Platforms, however, allow for “multiple shots on goal,” Bloom says.

Nonetheless, building a platform has its challenges. It’s expensive and time-consuming, and early on, Zymeworks had to survive the departure of its first platform architect. In 2006, Fejes left the company to further his IT studies. (The split was amicable, Tehrani says, and Fejes remains a shareholder.) Zymeworks, meanwhile, went through a number of lean years; investors in Canada were still more comfortable with a development model that produced widely applicable chemical drugs. There was a point in 2008 when the firm had $300 in its bank account, Tehrani says. Zymeworks had a payroll with 25 names on it, many of them with advanced degrees, and was even trying to hire a few more people at the time. Still, Tehrani pressed on. The company was in the midst of negotiating a new round of financing and awaiting a cheque from the federal government’s Scientific Research and Experimental Development program—both of which eventually came through.

Tehrani had spent years knocking on the doors of pharmaceutical companies to drum up business for Zymeworks’ platforms. Finally, in 2011, the firm signed Merck to a non-exclusive licence to one of its platforms for up to US$187 million. “We were geeks, unknowns, until Merck paid attention to us,” Tehrani says. “As soon as the cool kid pays attention to you, the rest of the school takes notice.” Tehrani targeted the most conservative companies in the business, ones that had no presence in a particular class of disease targets, to entice those who might jump on the bandwagon later. “Others are coming to us now. You could say we’ve gone from geek to chic,” he says.

But it would be the Celgene deal in early 2015 that started getting the people wearing suits, not just lab coats, interested in Zymeworks. The New Jersey–based company has a recent history of anointing the next big thing in biotech. As Forbes columnist Luke Timmerman put it afterwards, “Celgene’s list of partners has to be considered the envy of the pharmaceutical industry.” Celgene bet early (and big) on companies like Agios Pharmaceuticals and Bluebird Bio before they went public, Timmerman wrote. Those firms are worth US$1.7 billion and US$1.8 billion respectively, and Bluebird’s shares are up 87% since an IPO in 2013.

The advantage of Zymeworks’ strategy is that licensing platforms to big pharma entitles it to a combination of cash up front, milestone payments as the clients’ research proceeds and potential royalties once one of the drugs developed on the platform reaches the market. There’s still the risk of these giant partners changing course or getting the better part of the deal—outcomes familiar to once-promising Canadian biotechs. But Farris, a lawyer by training, remains confident in Zymeworks’ position. “I spent my life dealing with nasty big companies,” he says. With each deal it has made—and there will be more to come—Zymeworks has been able to negotiate more favourable terms, he notes.

While several Canadian biotechs now can be said to have platforms, Zymeworks has honed the model like nobody else, says Bloom. “There hasn’t really been a platform company in Canada that has been financed and validated by as many pharmaceutical companies,” he says. Having those multiple partners is key, because one of the big risks any small biotech faces is that the partner decides to walk away from its development program—not surprising, since most drug development programs fail. Zymeworks has set itself up so that it can tolerate a lot of failure yet retain significant shareholder value. Still, Tehrani doesn’t want to stop there.

Simply building platforms for others to test their drugs on, Tehrani and his board soon realized, would have failed to capitalize on the expertise the firm was developing in the process. “We quickly saw that that’s a lifestyle company,” he says. “We didn’t want to be a glorified contract research organization.” To create real value for shareholders, patients and themselves, the founders decided to leverage that expertise by developing their own line of therapeutics.

It helped that the large-molecule biological drugs the company was working with turned out to be where the smart money was going. Not only is the science around them advancing quickly, but the drugs are so complex that they are hard for generic producers to copy—an attractive prospect for big pharma.

Developing a drug pipeline posed new challenges for the small company, of course. Zymeworks already had some heavy hitters on its board, but no one with deep experience in biotech. Tehrani and Farris recruited new directors, and Tehrani took full advantage of their expertise. “Some people tend to bury problems and the board hears about them too late to do anything about it,” Farris says. “Ali’s a good listener. He takes advice.”

Though Tehrani had never been formally trained in business, the strategic side of his job seemed to come naturally to him. “There are scientists who do science, and scientists who enable other scientists,” Tehrani says. “I saw my true strength was to enable other scientists, because often they don’t like to talk or sell. I realized I could speak their language and do all those other things they don’t like to do.”

He’s also willing to collaborate, a strategy evident in the merger with Kairos Therapeutics, another Vancouver-based biotech. John Babcook, Kairos’ founder—now senior vice-president of discovery research at Zymeworks—says he and Tehrani had been talking for years about some sort of partnership. Their visions of the kind of company they wanted to create were similar. By merging, Babcook says, “we can increase our probability of becoming an anchor company for Canada and a fully integrated biopharmaceutical company over the long term.”

Importantly, Babcook had experience doing something Tehrani hadn’t: building a company. In 1998, he spun ImmGenics Pharmaceuticals out of research at UBC and raised $20 million before the firm was acquired by Abgenix Inc., a collaborator out of California. No sooner had Babcook’s team convinced Abgenix to move all its R&D to a new purpose-built facility in Burnaby, B.C., than that company was bought by Amgen in 2006. Babcook wanted to do it again, but this time “create more return on investment in Canada,” he says.

Born out of the UBC-based Centre for Drug Research and Development (CDRD), an incubator dedicated to commercializing biomedical discoveries at Canadian universities, Kairos evolved in parallel to Zymeworks in that it too developed a software and protein engineering platform to tackle drug development. “They have an engine; we have an engine,” Tehrani says. “The engines together are that much more potent [and] versatile.”

Karimah Es Sabar, president and CEO of CDRD, remembers coming to B.C. 13 years ago, when there were around 100 biotechs in the province. By the end of 2010, she says, there were maybe 10. During the boom years, those companies were brought to market too soon and scattered their resources in a race against one another, she says. The merged Zymeworks and Kairos, by contrast—in which CDRD retains an equity stake—were built with multiple inputs from academia and industry, and multiple sources of funding. “This is the model of the future—based on partnership and collaboration,” Es Sabar says.

Zymeworks will be putting its two leading drug candidates, both targeted at breast cancer, into clinical trials in the next few months. ZW25 is what’s known as an engineered bi-specific antibody. In a naturally occurring antibody, the two “arms” of the molecule are identical. Synthesizing an antibody with two different arms actually makes it more deadly to the disease target. ZW33, meanwhile, is an antibody-drug conjugate: a biological molecule carrying a cytotoxic chemical payload. Instead of being injected into the bloodstream and exposed to the rest of the body’s tissue—with all the unpleasant side effects, as is the case with chemotherapy—these agents only target cancer cells.

Zymeworks’ roster of platform deals and recent financing will help pay for clinical trials and have mitigated the need for an initial public offering for the moment. “But we are an opportunistic company,” Tehrani says. Indeed, he has ambitious growth plans. With 77 employees now, Zymeworks has some 50 positions currently open. Having previously contracted out its lab work, the firm also intends to open its own facility this year.

If anything, Zymeworks is the antithesis of IP aggregators like Valeant Pharmaceuticals International, which seems to treat R&D as an unwanted burden. Zymeworks sees research not as a cost but as a self-perpetuating font of shareholder value. As for Canada’s old-style biotechs, by the time they brought a product to market, our understanding of the disease, the technology and the competitive landscape had moved on. But the biological remedies Zymeworks is pursuing, aided by the power of computing, is shifting medicine from a numbers game to a more precise exercise. Tehrani likens his model to the old Bell Labs, whose inventions became the building blocks of the consumer electronics industry. Describe Zymeworks as a drug development company, in fact, and he might just correct you: “We are an innovation shop.”

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