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Behind Zynerba's Big Rise

|About: Zynerba Pharmaceuticals, Inc. (ZYNE)

Government Philosophy: If it ain't broke, fix it 'till it is." - Anonymous

Yesterday we discussed the big rise in Busted IPO Forum model portfolio holding Iovance Biotherapeutics (IOVA).  Today, we will examine the even bigger rally this week of fellow Busted IPO Forum model portfolio holding Zynerba Pharmaceuticals (ZYNE).

Company Overview:

Zynerba is a small 'Tier 4' biotech concern based just outside of Philadelphia.   The company is focused on developing pharmaceutically-produced transdermal cannabinoid therapies for rare and near-rare neuropsychiatric disorders.  The shares currently trade just above $8.50 a share.  After this week's surge, the stock has a market capitalization of approximately $175 million. 

This Week's Catalysts:

The company announced that its CEO will be making a presentation at H.C. Wainwright Global Health Sciences Conference in London on April 9th earlier in the week.  Obviously, investors believe the data presented will be positive and are bidding up the shares of ZYNE in trading in recent session.   Later this year data from a Phase 2/3 clinical trial evaluating the company's compound ZYN002, a cannabinoid transdermal gel, in patients with Fragile X syndrome will be disclosed.  This should happen sometime in the second half of 2019.

Analyst Commentary & Balance Sheet:

Positive analyst commentary had been picking up on Zynerba in recent weeks before this week's big run.  On March 7th, Cantor Fitzgerald reiterated their Overweight rating and $11 price target on Zynerba with the following commentary.

We rate ZYNE Overweight. We focus our valuation on FXS, where we are encouraged by the open-label, long-term data, with meaningful and durable improvements that we see having predictive value for the pbo-controlled pivotal CONNECT-FX trial. On epilepsy indications, we await further data after a disappointment in focal epilepsy. Section may be found on pages 4 – 5.We use a discounted NPV revenue calculation that yields ~$8 for ZYN002 in the U.S. FXS market and ~$3 in the EU.

Five days later Ladenburg maintained their Buy rating and $26 price target on ZYNE.  The following week, H.C. Wainwright reissued their Buy rating with $18 price target and the following updated view on coming events.

We remain optimistic for positive data, though concede that investors will view this as extremely risky given only open-label data to date, and other companies’ failures in the indication. That said, on the Phase 3 primary “social avoidance” endpoint, open-label FAB-C Phase 2 showed a 55% improvement by week-12, which improved to over 75% at 12-months. Phase 3 will have steady-state dosing approximately double the length of at higher average dose per patient. CONNECT-FX is powered assuming placebo improvement of approximately 20% (higher than the 10-18% seen in the prior ganaxalone trial) and 40% improvement on Zygel (lower than seen in Phase 2). Ahead of FXS data, we expect open-label Phase 2 data for Zygel in rare developmental and epileptic encephalopathies (NYSEARCA:DEE), which is not yet even in our model.

Zynerba ended FY2018 with just over $60 million in cash on the balance sheet.  The firm is currently burning through approximately $8 million to $9 million a quarter.  It should also be noted that Zynerba has just over $30 million left on an Open Market Sales Agreement, or “at-the-market” (ATM) offering program with Jefferies that it initiated in the summer of 2017.  The company seems well-funded at the moment given this.

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Verdict:

ZYN002 should also have top line Phase 2 data to treat Developmental and Epileptic Encephalopathies from a separate trial out in the third quarter of this year.  Mid stage trials for two other indications will kick off soon as well.  Zynerba has had its share of setbacks in development over the years but retains multiple 'shots on goal' and seems to be advancing its pipeline at a healthy clip now.  With funding in place and increasingly positive analyst commentary, we continue to view the risk/reward profile on Zynerba as positive albeit high risk.

Option Strategy:

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An efficient way to add exposure to this name is via a Buy-Write order. Using the November $10 call strikes, fashion a Buy-Write order with a net debit in the $6.70 to $6.80 range (net stock price - option premium). This mitigates some downside risk and sets up a more than solid potential return for its approximate seven and a half month hold period. Option liquidity is very solid in this strike price.

Misfortune never comes alone. It's surrounded by bodyguards.” ― Ljupka Cvetanova, The New Land

Thank You & Happy Hunting,

Bret Jensen

Founder, The Biotech Forum, The Busted IPO Forum & The Insiders Forum

 

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Disclosure: I am/we are long iova,zyne.