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Vancouver drug developer Zymeworks Inc. ZYME-N has adopted a poison pill in its effort to ward off a hostile bid by Dubai-based hedge fund All Blue Falcons FZE.

Zymeworks said in a news release Friday it had adopted a shareholder rights plan that “is intended to enable all shareholders to realize the full value of their investment in Zymeworks” by reducing the likelihood that any one person, entity or group can gain control of the company “through open market accumulation without paying all shareholders an appropriate control premium.”

Under the plan, which expires next June 8, existing shareholders gain the right to purchase shares at a discount “if any entity, person or group acquires beneficial ownership of 10 per cent” of Zymeworks shares, or if certain unspecified “passive investors” gain 20 per cent of the stock. This would make a takeover costlier or more complicated for a buyer.

The move appears to be a response to All Blue’s efforts to rally existing Zymeworks investors to support its unsolicited, non-binding US$10.50-a-share takeover proposal. Zymeworks last month rejected the proposal, which values the company at US$773-million. Its stock closed down 4.2 per cent Friday at US$6.12 a share on the New York Stock Exchange.

The company said in its news release that, since less than 10 per cent of its stock is held by Canadian shareholders, any formal offer would be governed by U.S. securities laws, which give greater latitude to public companies to fend off unwanted bids than laws in Canada.

“It’s unfortunate that the board has spent shareholder capital putting together a rights plan to defend against All Blue’s proposition,” said Matt Novak, the Canadian-born managing director of All Blue, an arm of All Blue Capital. “Our proposal would have provided significant shareholder value, and instead only achieved the objective of prolonging a potential acquisition battle by way of a proxy fight, particularly in a market where biotechnology has had an accelerated valuation reset.” All Blue has yet to launch a formal bid.

The unfolding drama follows a tumultuous year for Zymeworks, once Canada’s most valuable drug developer. Its stock price has dropped 90 per cent since early 2021, owing to setbacks related to its two leading drug candidates for fighting cancer and tumours. The company has also been affected by a general swoon in stock prices in the biotech sector.

In January, Zymeworks replaced its chief executive officer and founder, Ali Tehrani, with industry veteran Kenneth Galbraith, who promptly slashed the size of the company’s staff by 25 per cent and raised US$107.5-million in a dilutive offering at $8 a share. The share price had fallen to under $5 before All Blue’s bid surfaced.

Mr. Galbraith has said the bid was timed opportunistically during a period of market torpor and prior to “several important near-term events for the company expected in 2022,″ including publication of key trial data. The bid price is below the US$14.97-per-share strike price on the 500,000 options granted to Mr. Galbraith when he joined, which would be worthless if a deal happened on All Blue’s terms. All Blue owns 6.9 per cent of Zymeworks, according to its most recent regulatory filling.

The poison pill plan gives Mr. Galbraith and the Zymeworks board more time to find an alternative buyer. In the release, the company said the rights plan “does not prevent the board from engaging with parties or accepting an acquisition proposal if the board believes that it is in the best interests of Zymeworks and its shareholders.”

“This action does nothing to hide the reality that the Zymeworks board is determined to entrench itself and not seriously consider our compelling offer,” Mr. Novak said. “We urge Zymeworks shareholders to make it clear to their board that such tactics will fail.”

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