July 20, 2017 - 4:24am EST by
2017 2018
Price: 19.19 EPS 0 0
Shares Out. (in M): 13 P/E 0 0
Market Cap (in $M): 253 P/FCF 0 0
Net Debt (in $M): -77 EBIT 0 0
TEV (in $M): 176 TEV/EBIT 0 0

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It’s a difficult market in which to find attractive investments.  Most investment candidates are correlated to market beta and if you feel the market as a whole is overvalued or expensive, it’s best to look in the road less traveled by value investors to the more arcane corners of the market. This investment represents mostly idiosyncratic risk, or to be more precise, binary risk, with 3 very near term catalysts -- 2 in July/August and 1 in September.  Obviously, with all early stage pharma/biotech investments, there is the risk of large capital loss when the binary risk goes against you, so we recommend sizing it appropriately within the context of a larger portfolio.  The recommendation is to purchase ZYNE in advance of the upcoming catalysts.


If you’re searching around in the marijuana/cannabis space for potential investment candidates, you may have come across Zynerba (ZYNE), along with GW Pharmaceuticals (GWPH) and a few other companies of that ilk. These pharmaceutical companies that are swept up into the cannabis bucket are not really in the cannabis space per se as they are using the two main active ingredients found in marijuana and hemp plants, THC (the psychoactive chemical) and CBD (the non psychoactive chemical), to treat patients across a variety of medical conditions.  The main risk associated with these pharmaceutical companies is scientific and FDA risk and not the consumer preference or DEA regulatory risk associated with most of the other cannabis stocks.  As such, Zynerba is not really a cannabis play and is not particularly levered to the changing regulatory landscape of medical and recreational cannabis, although it is benefiting from the increasing awareness of the use of cannabis and its active components for medical purposes.


Zynerba has 3 candidates in the pipeline for its synthetically manufactured CBD using a transdermal delivery mechanism (ZYN002).  In a nutshell, because CBD is not patentable, the company developed a proprietary (patentable) method of delivering CBD through the skin using a gel formulation. Its delivery mechanism allows CBD to penetrate the skin and deliver CBD into the blood stream.  Because CBD is a large molecule, if it were simply just applied to the skin, the amount of CBD that penetrates the skin and reaches the blood stream would be relatively modest compared to what’s achievable with the company’s formulation.  Zynerba also has 2 programs using a patented THC pro-drug patch (ZYN001).


The first trial, STAR 1 for epilepsy in adults with focal seizures, is the most critical to the investment thesis and currently represents most of the near term value of the company. Hence, to keep the writeup succinct, we will mainly focus on this trial.


The market for adult epilepsy with focal seizures is a large market with a large unmet need. There are 2.4 mil US adults with epilepsy. Of these 1.5 mil have focal seizures. The current anti-epileptic drug regimen of more than 12 drugs fail to control seizures in about â…“ of patients.  There is a large unmet need for new treatment options to improve the quality of life for these patients.


CBD has been shown to be effective in treating different forms of epilepsy. What’s gotten a lot of recent publicity and generated excitement among investors were the two Phase III CBD trials by GW Pharmaceuticals (GWPH), which demonstrated that CBD was effective in reducing seizures in children with Dravet syndrome and Lennox-Gastaut syndrome.  GWPH is now a $2.8bil company on the back of these two successful Phase III trials. GWPH used a non-proprietary oral formulation of CBD derived from plants for these two orphan epilepsy indications.  We believe that the transdermal delivery mechanism is superior to the oral formulation used by GWPH.  Whereas GWPH use a plant derived CBD formulation, Zynerba uses a synthetic CBD, which is produced through a synthetic chemical process in a manufacturing facility rather than derived from cannabis plants. This allows the company to manufacture pure CBD and allows for higher quality, consistency and scalability in manufacturing and not be subject to the vagaries of agriculture. Zynerba’s transdermal delivery (1) provides a more consistent, controlled and sustained plasma level of CBD, (2) avoids first-pass metabolism in the liver, (3) reduces the potential for drug-drug interactions, (4) avoids the GI tract, which lowers the incidence of gastrointestinal events and the potential for CBD to degrade into THC and cause adverse psychoactive side effects.


Here is a summary of third party CBD trials for epilepsy:




The Star 1 trial design is summarized below:


The median baseline seizure frequency is 11, with patients using a median of 3 anti-epileptic drugs (AEDs), which we see as fairly representative of the population. See the company slide below: