Zynerba sinks twice as cannabis trials flop; strike three looms, so where’s the Ouija board?

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The News:

Zynerba Pharmaceuticals Inc. (ZYNE) lost more than half its value last week to $7.03 after the drug developer said its synthetic cannabis-based gel for epilepsy failed a mid-stage study. Devon, PA-based Zynerba’s gel contains a synthetically processed formulation of cannabidiol (CBD), a non-psychoactive component of the cannabis plant.

Although many US states have sanctioned the medical and/or recreational use of cannabis, drugs derived from the plant could take longer than others to hit the market. Under US federal law, marijuana is considered a dangerous substance with no medicinal value, making additional approvals for marijuana-derived treatments necessary prior to launch.

Two doses of Zynerba’s ZYN002 gel were tested against a placebo in the study. Neither dose induced a statistically significant improvement in seizure frequency versus the placebo in patients who were already on up to three anti-epileptic medications.

Steve’s Take:

A week ago, Zynerba shares were trampled after the biotech said its mid-stage study for a cannabis-de­rived drug had failed to im­prove the lives of epilepsy pa­tients. Yesterday morn­ing (August 14, 2017), the outfit bludgeoned its investors with news of an­other Phase 2 flop–this time using the same cannabi­noid treatment, but this time for os­teoarthri­tis.

According to John Carroll at Endpoints, the biotech forthrightly con­ceded that both doses of ZYN002 used in the Phase 2 had failed to sig­nif­i­cantly re­duce knee pain caused by os­teoarthri­tis, foiled by the placebo re­sponse. In­ves­ti­ga­tors did get a hit on a com­pos­ite score for a greater than 30% re­duc­tion in daily pain scores, and that’s what they used to weave this study into a suc­cess story–leav­ing Zynerba management plan­ning for a pivotal Phase 3 trial. Re­searchers also conducted some data analy­sis to show that their drug worked ef­fec­tively in men, but, inexplicably, not women.

All of which translates to a Sisyphus scenario for Zynerba, and in­vestors were understandably stuck with the age-old quandary of whether to hold, add, fold or go short. Meanwhile, the biotech’s shares were flattened again, this time drop­ping another 12% to $6.21 in early Tuesday trad­ing. The stock is now trad­ing nearly 60% lower than at the be­gin­ning of this month, thrilling the shorts.

CEO Ar­mando Anido, though, in­sists that with the opi­oid cri­sis gain­ing mo­men­tum, especially with President Trump finally calling it a national crisis, and wor­ries about side ef­fects from NSAIDs or COX-2 in­hibitors, the firm’s ZYN002 has a vi­able fu­ture in a mar­ket in­volv­ing 31 mil­lion pa­tients in the US alone.
Noted Anido:

“Data from the STOP trial will help shape fu­ture stud­ies with ZYN002 in os­teoarthri­tis. We will re­quest an end of Phase 2 meet­ing with the US Food and Drug Ad­min­is­tra­tion, which we be­lieve will take place be­fore the end of this year, and plan to move quickly to our piv­otal Phase 3 pro­gram for ZYN002 in OA.”

So what’s an investor to do?

Cannabis stocks have been a major focus for the most aggressive, and forward thinking biotech investors over the past couple of years. Many have made money on Arena Pharmaceuticals (ARNA), GW Pharmaceuticals (GWPH), and Insys Therapeutics (INSY), because they are companies who actually have FDA-approved drugs in their portfolios.

The real buzz for this investor nook, however, comes from examining early stage clinical drug companies in the cannabis-based biotech space. These stocks can be extremely volatile, case in point: Cara Therapeutics (CARA), as the company fell 55% from its high on a subpar drug trial result.

Now Zynerba joins Cara in presenting investors with an Ouija board-type quandary. The fact remains that while everyone has access to the news, not everyone can interpret the news from an investor’s perspective. That’s where the “experts” are supposed to weigh-in with their track records as proof they know how to make more money than they lose.

So let’s take a brief look at what one of my go-to’s thinks about Zynerba and whether their call makes good strategic sense now that the two bombs have blasted this name to high heaven.

Seeking Alpha points out the obvious, namely, the Phase 2 study data for osteoarthritis of the knee missing the primary endpoint reinforces the bearish case for the stock.

The financials are in good order at the moment, but dilution could take place sometime in mid-2018. That’s almost certain to happen but such is the typical trajectory of these types of equities at similar points in their early lives.

The brokerage contends that the Zynerba technology of using a transdermal approach for treating patients was insufficient,

“…compared to using an oral route of administration. That reinforces the bearish tone. There is still one more trial to be reported in the coming months, and that is ZYN002 treating patients with Fragile X syndrome.”

(Fragile X syndrome is an autism spectrum disorder resulting in intellectual disabilities, social anxiety and memory difficulties.)

Seeking Alpha notes that Zynerba will have an end-of-Phase 2 meeting with the FDA by close of 2017. The company will discuss plans with the FDA to initiate a Phase 3 trial as soon as possible.

What’s the potential, despite the flops to date? Osteoarthritis of the knee accounts for greater than $185 billion in annual US healthcare expenditures. It will be the fourth-leading cause of disability by the 2020’s. There are around 100 million patients in the US that suffer from osteoarthritis. At least 50 million or more account for osteoarthritis of the knee.

A big risk in shorting Zynerba is if the FDA allows the company to go with a better primary endpoint compared to the one in the STOP trial. That could send the stock skyward. Another risk would be if the Phase 2 Fragile X syndrome study comes out with positive results. That would also boost the share price higher. But considering that the company’s treatment already failed two studies in a row, the odds aren’t in favor that a third will be successful.

Bottom Line:

Zynerba failing its second trial using its ZYN002 treatment doesn’t augur well for the next osteoarthritis trial, scheduled to be reported in the coming months. This means that there is a good chance for further downside should the final trial fail to meet the primary endpoint. The company is all right in the near-term on cash, but by mid 2018 it’s likely going to have to dilute shareholders for more cash.

Zynerba’s clinical trial failure underscores several key points that cannabis investors should carefully consider when choosing their next investments, says MarketWired.com.

First, investors should exercise caution when investing in companies with small clinical pipelines. Zynerba’s only other clinical program is ZYN001, which is a THC prodrug patch that has yet to clear Phase 1 clinical trials. That’s why the failure of ZYN002 in Phase 2 clinical trials blew the stock price to kingdom come.

Secondly, working with cannabinoids may be more problematic than many companies and researchers had initially thought. Cannabinoids have complex interactions with the human body and don’t always behave as researchers would expect. Investors should look for companies that have deep roots and experience in medicine, as well as positive signs of efficacy in earlier Phase 1 and pre-clinical trials.

Thirdly, it may be tempting to conclude that cannabinoids have been over-hyped following Zynerba’s failure, but investors shouldn’t dump the entire space. Zynerba’s clinical trial did show that CBD is safe and well-tolerated, while GW Pharmaceuticals’ clinical programs have confirmed that both THC and CBD have broad promise in treating underlying conditions.

The key to success clearly appears to be safely and effectively delivering the compound–topically versus orally–and at the correct dosages. The solution to this task is playing out quite briskly in front of our eyes among the very small group of contenders.

Steve's Take: Will @ZynerbaPharma last long enough to prove its synthetic #cannabidiol gel works? Click To Tweet

Will Zynerba, with its minuscule pipeline, be able to last long enough to prove its gel works? Another clinical trial failure could see its stock plummet to around $4—about 36% lower that it’s currently trading. On the other hand, a success or two could send shares as high as $35, according to analysts at the Financial Times. That’s an upside of 560%. We’ll have a much clearer idea of what to do in a handful of months.

Steve Walker has no position in any stocks mentioned. MedContent Inc. has no position in any stocks mentioned. MondayMorning.com has a disclosure policy.

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