Zynerba's Phase 2 Results Indicate A Major Short Opportunity

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About: Zynerba Pharmaceuticals (ZYNE), Includes: GWPH
by: Terry Chrisomalis
Summary

Phase 2 data misses on primary endpoint and all other endpoints in the study

ZYN002 missing all endpoints in the study shows that the technology for the delivery method is weak

Two other readouts with the same drug ZYN002 that fail to meet endpoints could cause the stock to collapse

Financials are sound in the near-term but that doesn't dismiss any future raise a year from now

Another company treating patients with epilepsy that also uses cannabinoid technology achieved positive results with its trial, making it a tough competitor to match

Recently, Zynerba Pharmaceuticals (ZYNE) announced phase 2 results for its cannabidiol gel treating adult epilepsy patients with focal seizures. The company reported that its drug ZYN002 failed to meet the primary endpoint of the study sending shares tumbling by more than 55%. In my opinion, these failed results present a good short opportunity. That is because the company's treatment ZYN002 failed to meet on all endpoints, indicating to me that the technology may not work as well as it should. Why is that substantial? That is because Zynerba is set to report results in the next two months for an osteoarthritis trial, and a fragile x syndrome (rare genetic disease) trial. With the failure of the company's technology in epilepsy patients with focal seizures, I don't see it obtaining positive results in these other indications.

Phase 2 Data

The phase 2 study was known as STAR 1, and it recruited a total of 188 epilepsy patients with focal seizures. The primary endpoint of the study looked at the median percentage change in seizure frequency over the 12 week treatment period, compared to the 8-week baseline period. Patients were randomized into three different groups. The first group received 195 mg of ZYN002 4.2% CBD gel every 12 hours. The second group received 97.5 mg of ZYN002 4.2% CBD gel every 12 hours. The final group received a placebo for treatment. All these treatments were given to these patients over a 12-week period. Patients recruited into the trial were also known to be on an average of 2.5 anti-epileptic drugs. This is where the data gets really bad. Not just because of the miss on the primary endpoint, but the fact that the lower dose of ZYN002 achieved better results than the higher dose. To me that doesn't make any sense at all. Typically, when clinical trials are done with dose escalations the higher dose should always have the better efficacy. In this case, it was quite the opposite and to me that raises a huge issue with the company's technology. Patients that took 195 mg of the gel treatment saw a median reduction in focal seizures of 14%. The lower dose of 97.5 mg achieved an 18.4% median reduction in focal seizures. The placebo achieved a median reduction of 8.7%. The primary endpoint of the study failed as neither dose fared better against placebo. To make matters worse, both doses of the drug were not even statistically significant on the secondary endpoints of the study either.

Technology Issue

The trial failing just shows that Zynerba's technology is not quite there yet. The biggest problem is that the company has taken a transdermal approach to its ZYN002 gel treatment. The reasoning the company states on its website that it uses transdermal delivery is that it passes the liver-metabolism that takes place in oral drugs. Secondly, it states that there is greater absorption of the drug through the skin as opposed to being given in an oral form. I feel as though the company took the wrong approach with respect to its treatment using cannabinoids. Sure, the treatment is safer but it doesn't seem that the bioavailability of the drug is improved through the skin over being given the drug as an oral pill. This can be somewhat shown when comparing this study compared to another study by another pharmaceutical company. This other pharmaceutical company goes by the name of GW Pharmaceuticals (GWPH), that is treating epilepsy patients with its drug Epidiolex. The reason for bringing up GW Pharmaceuticals is that it too uses cannabinoids in its drug, but delivers it to patients in an oral form. In addition, GW Pharmaceuticals has seen positive results with its cannabidiol treatment. If GW Pharmaceuticals can achieve success, then so should Zynerba as well. Why is this not the case? In my opinion it has to do with the delivery system. I don't feel that transdermal patches are appropriate to treat patients with epilepsy. To give an idea of how powerful GW pharmaceutical's oral formulation of cannabinoid is, I will show some results it obtained in a phase 3 clinical trial. The clinical trial involved a few types of pediatric epilepsy patients having both Dravet Syndrome and Lennox-Gastaut syndrome. The study showed that patients taking only 20 mg of Epidiolex had a reduction in monthly seizures of 42%, compared to 17% in the placebo group. Could Zynerba have achieved better results if it went with a different route of administration? It most certainly could have, unfortunately that's a moot point now.

Major Problem

There are two chances left for Zynerba. It is expected to readout two clinical trials towards the end of August and in September. One study to be readout will be ZYN002 treating patients with osteoarthritis. The other study is treating patients with a rare genetic disorder known as Fragile X Syndrome. Considering that ZYN002 failed to perform well in patients with epilepsy, I'm not expecting positive readouts in these other two indications either. I stated why the technology platform of the company is not ideal for optimal delivery above. That's why I believe that these trials will not succeed.

Missed Market Opportunity

There are about 2.4 million U.S. adults with epilepsy in the United States. Of those, 1.5 million have focal seizures. That means that 62% of epilepsy patients have focal seizures. The global epilepsy market is expected to reach $5.47 billion by 2024. Assuming the trial was successful and capturing 62% of the focal seizure market that would be a $3.3 billion market opportunity. In any case, the trial failing means a missed opportunity.

Risks

There is one big risk in shorting Zynerba's stock. The next set of results may come out positive. In that case, the stock could reach close to $15 to $20 per share. However, on poor results the stock could crater to $3 per share or lower. Although, considering that ZYN002 didn't even post positive results in any of the endpoints (neither primary endpoint nor secondary endpoints) in the STAR 1 study, I don't believe it will achieve success in these other indications.

Financials

According to the 10-Q SEC filing, Zynerba Pharmaceuticals has around $70 million in cash as of the period ending June 30, 2017. The company burns on average around $7.6 million each quarter, which means that there won't likely be any dilution in the near-term. That doesn't mean that the company won't have to dilute eventually. The company expects cash runway up until 2019, which means that investors should expect dilution at least 6 months out before then.

Conclusion

The phase 2 results paint a bearish outlook for the company's technology as a whole. GW Pharmaceuticals, which also uses cannabinoids as part of its technology posted positive results in patients with epilepsy making it a tough competitor. There is a small possibility that Zynerba could achieved a positive readout, but highly unlikely. In my opinion, I feel that the phase 2 data provided by Zynerba provides a great short opportunity.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.