Description

An investment in Zynerba Pharmaceuticals offers one the unique chance to make a bet on a 1H24 phase 3 clinical trial readout and earn an 8% return if the trial fails. If the trial meets its primary endpoint—and there is reason to believe that it can—one can earn an annualized 51% return over the next year and up to a 2.5X in the coming years.

Harmony Biosciences (HRMY) is purchasing Zynerba Pharmaceuticals (ZYNE) for $1.11 plus a CVR. ZYNE is developing ZYN002, a transdermal formulation of cannabidiol for the treatment of Fragile X Syndrome (FXS), and generated somewhat positive data in a prior phase 3. The company is running a second phase 3 and has guided to its completion in 1H24. The first tranche of CVR payments, $0.27, is due upon trial completion—a virtual certainty in this case. ZYNE shares trade at $1.28 at the time of this writing.

There is of course deal risk, but there’s no reason to believe this is a bad deal for either party.

In this writeup, I discuss 1) the structure of the deal and implications for ZYNE shareholders, 2) FXS pathology, 3) how the endocannabinoid system may be a targetable pathway in FXS, 4) ZYN002 and published data on its use in treating FXS.

Deal Terms/Valuation

Under the terms of the acquisition, ZYNE shareholders will receive $1.11 in cash, plus a CVR which yields in the following:

• $0.27 upon the last visit from the last patient on ZYNE’s ongoing phase 3 trial of ZYN002 in FXS (RECONNECT).

• $0.55 if RECONNECT data are “positive” (8-K defines “positive” as statistical significance on primary endpoint only) before end of 2024.

• $0.37 if RECONNECT data are “positive” before end of June 2025.

• $0.18 if RECONNECT data are “positive” after end of June 2025.

• $0.64 if ZYN002 is approved in FXS

• $0.27 if ZYN002 is approved in a second indication. ZYNE has positive data from an open-label phase 2 trial in 22q—not terribly impressive in the absence of placebo.

• $0.27 if cumulative sales of ZYN002 reach $250M by the end of 2030.

• $0.54 if cumulative sales of ZYN002 reach $500M by the end of 2030.

Zynerba has guided to RECONNECT completion in the first half of 2024. Cannabidiol is generally regarded as safe, and this formulation has been trialed in hundreds of patients—the risk of a safety signal arising that could impede trial completion is very low. As such, I am considering HRMY’s purchase price to be $1.38 ($1.11 plus $0.27). At a market price $1.28, with $1.38 due in the first half of 2024, one can expect an return of 8% in the downside scenario. Assuming no delays and data are positive, shareholders are due a $0.55 milestone payment in the third quarter of 2024, yielding total return of 51%. Sell-side sales estimates are consistent with the achievement of both sales milestones, which would lead to a cumulative payment of $1.45.

Fragile X Syndrome (FXS)

FXS, a condition affecting an estimated 80,000 patients in the US, is the most common form of inherited intellectual disability. FXS causes a spectrum of developmental and behavioral problems. Presentation ranges from mild anxiety and social difficulties with normal cognitive functioning, to severe behavior problems with cognitive deficits.

FXS is caused by a trinucleotide (CGG) repeat in the 5’-UTR of the FMR1 gene located on the X-chromosome. Patients are considered to have a full mutation (FM) if they have >200 repeats. FM is often accompanied by DNA-methylation in the promotor region of FMR1, which results in gene-silencing and the absence, or significant reduction, of FMRP. In general, patients with a greater degree of DNA-methylation in FMR1’s promotor region exhibit a more severe phenotype, meaning greater cognitive deficits and behavioral problems. Patients with >90% methylation produce low levels of FMR1 mRNA and little to no FMRP.

FMRP is an RNA-binding protein with a diverse array of functions, including the regulation of protein synthesis. FMRP’s regulon includes many proteins required for proper synaptic functioning and plasticity.

Due to FMRP’s pleiotropy, it’s highly unlikely that the modulation of any single downstream pathway can completely reverse FXS pathology. However, that is not to say that modulation of a single pathway couldn’t produce a measurable effect. In this case, that’s all that matters.

Endocannabinoid System (ECS) and relation to FXS

The ECS includes two primary G-protein coupled receptors, CB1 and CB2, and two primary ligands, anandamide (AEA) and 2-arachidonoylglycerol (2-AG). AEA and 2-AG are produced “on-demand” by postsynaptic membrane bound phospholipidsin in response to neuronal signaling, and act as retrograde signaling molecules to stimulate presynaptic CB1, which attenuates further neurotransmission. This retrograde synaptic modulation occurs throughout the CNS, and has a widespread influence on cognition and behavior.

DAGL is an enzyme involved in EC synthesis. It’s established that FMRP binds DAGL mRNA and blocks translation until the mRNA is trafficked to the post-synaptic dendritic terminal, where it belongs. Through DAGL, the absence of FMRP sets off a cascade resulting in the breakdown of ECS modulation of glutamatergic and GABAergic neurotransmission.

ZYN002

Cannabidiol is a molecule that may be able to attenuate the mis-regulation of endocannabinoid singling in FXS, through allosteric modulation of CB1 receptors, and its effect on the availability of endocannabinoids. ZYN002 is a transdermal gel containing 4.2% cannabidiol (w/w). Zynerba does not have composition of matter for Cannabidiol, but IP risk only applies to a few tranches of the CVR—IP risk is really HRMY’s problem.

ZYNE conducted an open-label phase 1/2 trial of ZYN002 in FXS patients, in which they observed clinically meaningful improvements on all ABC-CFXS subscales – not terribly impressive in the absence of a placebo arm.

On this basis, Zynerba conducted a phase 3 randomized-controlled trial in 212 patients with FXS, aged 3 through 17, that displayed varying degrees of DNA-methylation. The primary endpoint was change from baseline (week 12) on the social avoidance (SA) subscale of ABC-CFXS—the same primary endpoint being measured in the RECONNECT trial (though RECONNECT is measuring at week 18). Additionally, the company performed pre-specified ad hoc analysis on patients with >90% DNA methylation, and 100% DNA methylation (which comprised 80% and 65% of the study population, respectively).

In the total population, statistical significance on the primary endpoint was not met. However, the company observed encouraging results in patients with >90% DNA methylation: a statistically significant, placebo-adjusted improvement was observed in the ZYN002 arm (-2.99 vs. -1.99 on ABC-CFXS; p = 0.02). Additionally, on the SA subscale of ABC-CFXS, there was a significantly greater number of patients achieving clinically meaningful response in the ZYN002 arm than the placebo arm (p = 0.031). The mode change in ABC-CFXS SA subscale was -4 in the ZYN002 arm, vs. 0 in the placebo arm. On Caregiver Global Impression-Change (CGI-C), the ZYN002 arm achieved a statistically significant improvement on all three items and neared statistical significance on overall behavior (p = 0.052): SA/isolation, social interactions, and irritable/disruptive behavior (all p < 0.05).

The company saw approximately similar results in the 100% methylation group.

Ongoing Phase 3

Importantly, the primary endpoint of Zynerba’s ongoing phase 3 trial is being measured only in those patients with 100% DNA methylation. The measurement is the same— change from baseline in the SA subscale of ABC-CFXS— though it is being measured 18 weeks as opposed to 12. Aside from adding 6 weeks to the trial, the dosing regimen appears identical.

I wouldn’t say this trial is a slam-dunk, but the results of pre-specified analysis in the prior phase 3 place this trial’s probability of success far from zero. It’s certainly worth betting on if the downside outcome yields a 8% return. 

Catalyst

1H24 RECONNECT trial completion and readout
ZYN002 approval in FXS
Sales milestones being met