Zynerba Pharmaceuticals (NASDAQ: ZYNE): An Overlooked Gem

  When I say marijuana in the context of the stock market, you probably immediately think “pot stocks” and the likes of Cronos Group, Canopy Growth Corporation, and Aurora Cannabis. Some of you may think of the bio-pharmaceutical company GW Pharmaceuticals (GWPH). I would guess not many of you would think of the micro-cap Zynerba Pharmaceuticals (ZYNE). So who is Zynerba? They are a micro-cap clinical stage company seeking to develop their transdermal, synthetic cannabidiol product called Zygel. Their goal is to develop this candidate for the treatment of rare and near rare neuropsychiatric disorders. At the close of the trading week, ZYNE was trading at $4.01, with a market cap of $100 million. So lets take a dive.

Cannabinoids

Cannabinoids work on the body’s endocannabinoid system. This system effects the body’s sleep, mood, and appetite, among many other purported effects. There are two major receptors in the endocannabinoid system, the CB1 and CB2 receptor. What we know to date, is that in marijuana, there are two major cannabinoids that get most of the attention: tetrahydrocannabinol (THC) and cannabidiol (CBD). THC is the only active psychoactive component of marijuana, which is typically the effect of marijuana that gives it its bad stigma. THC binds to the CB1 and CB2 receptors. On the other hand, CBD does not have any psychoactive effects, and does not interact with the CB1 and CB2 receptors. There has been much research on CBD, given its potential benefit without psychoactive effects. These efforts have revealed properties such as anti-anxiety, anti-convulsive, and anti-nausea. There are multiple ways to get CBD for FDA approved indications. Currently, there is one CBD product available, Epidiolex, which is marketed by GW Pharmaceuticals (GWPH). GW Pharmaceuticals manufactures Epidiolex by growing specific cannabis plants, which then has the CBD isolated from it and prepared as a liquid form for patients to take. The alternative approach to take is that for which Zynerba is taking, which is to synthesize the CBD in a laboratory, which is why you may their product referred to as a synthetic CBD. This laboratory manufacturing process is the traditional way in which medications are made. Why is the process potentially more beneficial? Well when it comes to the FDA approving a medication, they want to see purity and consistency in the product that will be distributed to patients. Thus laboratory manufacturing will allow for a more consistent product, without the variability that may be the result of relying on purifying a product from plants. This also removes the costs and logistical headwinds that are associated with growing and harvesting cannabis plants.

Pipeline

Zynerba has one product that they have built their pipeline around. This product is Zygel, a CBD gel that is rubbed onto the skin. This differs from GW Pharmaceutical’s product Epidiolex which is given orally. The most advanced indication that Zynerba is studying Zygel in is Fragile X Syndrome (FXS). This trial is in the pivotal or phase 3 stage of development, which is the last hurdle to clear prior to filing for FDA approval. Following behind this indication are investigations into the use of Zygel for developmental and epileptic encephalopathis (DEE), autism spectrum disorder (ASD), and 22q deletion syndrome (22q). These indications are in or have completed the phase 2 stage of development.

Upcoming Catalysts

This is where things get exciting in my eyes. Over the next 4 and half months, we expect to see readouts on 3 of their 4 programs, including the pivotal trial of Zygel in FXS (in the second quarter of 2020). This provides Zynerba several shots on goal, which what I perceive to be a high likelihood of success. In addition to these readouts, we can expect near term updates on their meetings with the FDA to define a pivotal trial for Zygel as treatment for DEE, which would mark the second pivotal trial of Zygel. Additionally, assuming a positive readout for the FXS trial, Zynerba expects to file the NDA with the FDA in the 4th quarter of 2020, with a timeline for potential approval in the second half of 2021.

Market Opportunity and Data

Zynerba is taking a difference approach for commercializing a CBD product than that which was taken by GW Pharmaceuticals. While GW Pharmaceuticals chose to focus on the anti-convulsive properties of CBD, Zynerba is focusing on utilizing Zygel to address the emotional, behavioral, and cognitive effects of various syndromes. The first indication would be FXS, which is a rare genetic disorder with no approved drugs. Current therapy for FXS is multi-modal, requiring use of several drugs to address the various symptoms. There are approximately 71,000 patients in the United States with FXS, so this is not a small addressable market. The phase 2 trial of Zygel in FXS showed extremely promising data, with improvement of behavioral symptoms across all subscales (Figure 1). This benefit was realized at month 3, and was sustained through month 12. Now this trial was a single arm trial, and the Phase 3 CONNECT-FX trial is a placebo controlled trial, which exposes Zynerba to some risk of a placebo showing some effect as well, however previous placebo controlled studies in FXS have not shown the same efficacy as Zygel. As such, I am not concerned about the effect of the placebo and am highly confident in the odds of the trial being successful. What is extremely encouraging is that 96% of patients enrolled in the open label expansion study, which essentially allows these patients to continue to receive study drug after the 3 month study period. Essentially, I read this as patients were experiencing a treatment effect and were not experiencing side effects, which prompted their parents to want to continue the medication.

The benefits in the behavioral components of FXS have led to the development of Zygel for other syndromes with behavioral manifestations. These include ASD and 22q. ASD affects nearly 1 million patients, and can include symptoms such as anxiety, repetitive patterns of behavior, impairment in social communication, and social impairment. There are limited products approved for ASD as of present time. The BRIGHT study is a 14 week trial evaluating Zygel in ASD patients. The trial is a single arm trial that will evaluate the effect of Zygel on several aspects of behavior and anxiety. Results of this trial are expected in the second quarter. Finally, we have 22q, which affects around 81,000 patients in the United States. This disorder results in neuropsychiatric illnesses including anxiety. Presently, there are no approved drugs for the treatment of 22q, which paves the way for Zygel to be a first to market product. The INSPIRE trial is evaluating the use of Zygel for patients with 22q11.2 deletion syndrome, and will look at the neuropsychiatric effect at 14 weeks, similar to the BRIGHT trial. Results of this trial are expected in the third quarter of 2020. So lets look at the market opportunity here. The current WAC price of Epidiolex is around $32,500 annually. We will use a similar price point for our estimates. Using the market opportunities as estimated by Zynerba, we arrive at these conservative annual revenue for Zygel:

• FXS (10% market penetration): $210 million annually
• ASD (2% market penetration): $585 million annually
• 22q (10% market penetration): $240 million annually

These estimates do not include any potential revenue from a DEE indication either. As you can see, these potential revenues far exceed the current valuation (market cap of $100 million). So where is the disconnect? Well when Zynerba released their most recent DEE, the stock sold off sharply on what is perceived to be safety concerns. Most people will point to the infection-related adverse events. First, in clinical trials, all adverse events are reported, whether they are related to trial drug or not (runny nose, ingrown toenail, scrapes, etc.). So the absolute rate of adverse events is misleading. Furthermore, what people need to understand is that these patients are medically fragile. Many of these patients have co-morbid conditions such as cerebral palsy, chronic respiratory infections, tracheostomies (breathing tubes), and feeding tubes. Many of these conditions predispose patients to frequent health care visits (risk factor for infection) and infections (breathing tubes). To be honest, it is not surprising these patients had infections, but it is more likely related to their other conditions and not related to treatment with Zygel. All of this concern overshadowed the fact that Zygel resulted in a 44% median reduction in seizures by month 2. Furthermore, only one patient discontinued therapy with Zygel (due to application site reaction).

Financials

Finally, let’s look at the financials for Zynerba. Zynerba recently reported their first quarter of 2020 financial results. At the end of the quarter, Zynerba had $60.6 million in cash and cash equivalents. They believe this provides them a runway into the second half of 2021, after several readouts, expected submission of the Zygel NDA for FXS, and potential approval. However, I do anticipate they will raise capital after positive trial results, which will minimize dilution to shareholders (currently 25 million shares outstanding). Importantly, Zynerba has no debt and Zygel is wholly owned, which provides them flexibility when seeking any potential partnerships. I will underscore that the commercial viability of a CBD product has already been proven by Epidiolex, which raked in $116 million in sales for the first quarter of 2020 and ~$300 million in the full year for 2019. This further derisks the commercial launch of Zygel.

Final Thoughts

Zynerba has the potential to provide a therapy for many patients with an unmet need. The upside of Zynerba is massive after considering the potential revenue opportunity compared to its current valuation (market cap of $100 million). I believe that the misunderstanding on the safety of Zygel has created a severe disconnect between the current valuation and potential valuation. This disconnect will likely be rectified in the coming weeks to months with several data readouts due. I anticipate these data readouts will be positive, resulting in price appreciation. At some point, I anticipate they will raise capital, however in the short and long term, I am very bullish on ZYNE. For an outline of expected catalysts, please see Figure 2, and best of luck to all investors!

This is not a recommendation to buy/sell securities. I/we long ZYNE.