(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
Unearthing and investing in undervalued stocks is risky, challenging, and rewarding. Canadian micro-cap Cynapsus (OTCQX:CYNAF) appears decidedly undervalued.
Parkinson's disease (PD) is a progressive degenerative disease of the central nervous system that affects more than 5 million individuals in the developed world, with prevalence increasing as longer life spans bulk elderly populations. Great demand exists for improvements in Parkinson's treatment. Cynapsus is a clinical stage Canadian micro-cap company, presently conducting Phase 1b human trials of a sublingual form of the injectable Parkinson's disease drug apomorphine, with results due 4Q 2013. Apomorphine is a proven, safe, effective rescue medication marketed as Apokyn, which counters debilitating "freeze-up" or "off" episodes common in Parkinson's patients. "Off" episodes can be one of the most debilitating daily symptoms associated with Parkinson's.
Sales of Apokyn have been limited in no small part due to discomfort and side effects associated with daily self-injection or injection by caregivers. The advantages of a sublingual delivery system over an injectable one for semi-immobilized patients is obvious.
Cynapsus is led by a well-respected team that brings with them decades of experience in development stage biotechnology companies, specifically in the neurology space. Cynapsus' present Phase 1b titration trials for the product APL-130277 utilize healthy volunteers, with no Parkinson's patients needed to show proof of concept. APL-130277, patented as of April 2013, should be patent protected to 2031.
In this Phase 1 trial, Cynapsus must demonstrate effective blood levels of apomorphine without injection-site reactions. I believe these initial trial results will be positive, and an initial mover of the share price northward for Cynapsus, with now the time to enter the long side of the trade.
In July 2010, Cynapsus released results of a survey done on 50 neurologists who jointly treat about 12,000 PD patients. The results of the survey affirmed the APL-130277 product concept. In November 2010, another survey was conducted on Health Maintenance Organizations and insurers; favorable results indicated APL-130277 may be accepted by payers similarly to apomorphine injection. In December 2010, Cynapsus completed pre-clinical studies on rabbits which demonstrated that APL-130277 thin film strip was able to deliver apomorphine into the blood stream. In December of 2011, Cynapsus surveyed 500 neurologists who treat about 62,000 PD patients, with favorable results similar to the earlier physician study. In January 2012, Cynapsus announced positive data from the first human proof-of-concept study of APL-130277. The study showed a PK profile that compared to injected apomorphine.
Jason Napodano CFA, biotech analyst for Zacks Investment Research and Editor at Propthink, is renowned for his acumen in identifying winners in biotech. Napodano initiated coverage for Cynapsus on June 4, 2013 for Zacks and included an extensive report. He reiterated his recommendation at Zacks on August 6th. Napodano strongly recommended Cynapsus on August 1, 2013, as well as August 23, 2013 in the Life Sciences Report.
On August 1st, Napodano had this to say about CYNAF:
"If this were a U.S. stock, it would be four or five times the price it is now, but because it's in Canada, no one knows about it. Cynapsus reminds me a lot of Cipher when it was trading at $0.64 and no one was looking at it. All of a sudden, people started to take notice. That's where Cynapsus is right now."
In his article of June 4th, entitled "Cynapsus, an Undiscovered Gem," Napodano, who as a prognosticator is wise to under-promise and over-deliver, describes current fair value of CYNAF shares as $1.25. His bullet points included:
- The PD market is large, growing rapidly, and highly under-served.
- The company is not trying to reinvent the wheel with APL-130277. The product is an astutely designed reformulation of an existing approved and known-to-be effective product, Apokyn.
- The company held a pre-IND meeting with the agency confirming the path to approval its bioequivalence to the reference product, subcutaneous apomorphine via the 505(b)(2) pathway.
- The company seeks the same indication for use as Apokyn, reducing risk that the FDA comes back and asks for new efficacy studies. We see low clinical development risk here.
- Based on the patient filings and existing pharmacokinetic data from CTH-102, the formulation and intellectual property protection seem solid.
Napodano also notes "…the potential for an outright acquisition of Cynapsus by a larger pharma player. The Pfizer / Nextwave deal for $700 million, for example, pegs the Cynapsus valuation at nearly 40x the current valuation." With a float of under 40 million shares and a market cap of around $17 million, CYNAF has plenty of room on the upside.
Hugh Cleland manages Blumont Capital, which specializes in ground floor market opportunities, much like a venture capitalist. He invests in micro-cap and international stocks overlooked by mainstream institutional investors. Cleland's goal is to support worthwhile companies as well as reap outsized gains when worthy companies "hit the radar." Cleland holds CYNAF as a core holding, and had this to say about Cynapsus on June 27th:
"It has made huge strides… including closing a financing of $7.3M, which greatly reduces financing risk... very encouraging to see a specialty pharma company (Dexcel Pharma Ltd. [private]) as the lead investor, taking a 19.6% stake in Cynapsus."
With a float of under 40 million shares and a market cap of around 17 million, CYNAF has plenty of room on the upside.
Nathan Cali, Senior Research Analyst, Biotechnology and Specialty Pharmaceuticals, at Noble Financial Capital Markets initiated coverage of CYNAF on July 13, 2013, with a price target of $1.75. He believes "APL-130277 could expand market, global potential exceeds two billion, high-value near-term clinical data expected Q4 2013... significant partnerships/acquisition 2014/2015."
In August 2012, the Michael J. Fox Foundation (MJFF), a prominent force in PD research, awarded Cynapsus Therapeutics with a grant in the amount of $947,925 to help fund further research in the development of APL-130277. This Fox Foundation grant will be funding Cynapsus Phase II trials, likely to begin in early 2014. The Fox Foundation clearly stands behind APL-130277.
In parallel, AcelRx Pharmaceuticals (ACRX) has developed an improved delivery system, similar to sublingual, for an already approved pain medication. As proof of bioequivalency and efficacy are being achieved in stages, shares of ACRX have risen from the $3 range in early 2013 to the $11 range, and are considered by many to hold continued upside potential. Several medications delivered in sublingual form now have billion-dollar sales volume, and the list of FDA approved sublingual drugs continues to grow.
Ori Hershkovitz, managing editor of Tel-Aviv based Sphera Global Healthcare Fund, described Cynapsus on May 30, 2013 as "very small company that is very early in the game with a very good and relatively derisked idea…Sometimes investors should invest early, and every now and then we come across a very early-stage story." He notes of CYNAF, "If apomorphine could be reformulated as a noninjectable product, it could be a billion-dollar therapy." In that article, Hershkovitz recommended Arrowhead Research (ARWR) at $2.35 (Arrowhead as of September has crossed the $6 mark), Onyx Pharmaceuticals (ONXX), which has risen from $90 to over $124, and Salix Pharmaceuticals (SLXP), which has traded up twenty percent. Hershkovitz displays evident talent for picking winners.
Micro-cap investing is by nature risky, and micro-cap biotech investing even more so. Unexpected problems or delays can arise during clinical trials, which can be difficult or devastating for shareholders of a stock such as CYNAF, which is dependent upon one product. An adverse event during a trial can erase capital faster than an investor can react.
Cynapsus initiated trade on the OTCQX as of July 18, 2013, and is a fully reporting company. Currently, however, it is thinly traded, and when volume appears in thinly traded OTC stocks, sudden and unexpected movements in share price can occur.
While Cynapsus appears well-financed and is garnering institutional support at present, dilution may occur downstream as trials progress through the necessary stages towards FDA approval. Cynapsus' drug is being developed through the FDA's 505(b)(2) regulatory pathway, under which older drugs are reformulated, as opposed to the new molecular entity (NME) or new chemical entity pathways proceeding through to new drug applications (NDAs). While the latter receive greater investor attention, the less glamorous pathway allows for an affordable entry into CYNAF.
It is mission critical the Phase 1b trial prove the sublingual formulation can maintain a level of apomorphine equivalent to the injection of apomorphine over a set period of time, with fewer side-effects than injection. Development of alternative formulations of apomorphine have thus far met with little success; stomach enzymes interfere with uptake of apomorphine tablets and necessitate excessively high dosage to achieve efficacy, and intranasal administration has produced undesirable topical side effects such as burning of the nasal mucosa. One must trust as an investor that Cynapsus has the know-how to transcend these challenges, perhaps placing dissolvable emollients or waxes on the strip, (emollients which may not have dispersed well in a nasal spray). An oral dissolvable delivery system will allow wash down of the mucosa with saliva and imbibed fluids, preventing burning of the tissue.
To the noteworthy analysts quoted above, Cynapsus appear to be heading in the right direction, and represents a worthy investment. Cynapsus has already completed two pharmacokinetic, bioavailability dose escalation studies. Based upon the company's film strip delivery compared to Apokyn, APL-130277 achieved comparable safety and has extrapolated equivalent dose strength formulations to potentially achieve efficacy and safety under an FDA approved 505b2 clinical development pathway. Importantly, the side effect profile was similar to that of Apokyn except for site irritation in Cynapsus sublingual application. No site irritation was evident in either Cynapsus study while taking the APL-130277 film strip, and that is "the right answer."