This is the first in an ongoing series of stories about beaten down stocks that may have a solid shot at recovering at least some of their lost market cap. There are two key things I look for to identify these issues: a share price that has tumbled 80% or more from its 52-week top, and a compelling story that could once again whet the appetite of traders and investors. It helps if there’s a positive business development that acts as a potential share price catalyst, but many times a technical move higher off that 52-week bottom is all it takes.
The subject of today’s story is Zynerba Pharmaceuticals, Inc. (ZYNE), a specialty pharmaceutical company founded in 2007 that is developing and commercializing proprietary synthetic cannabinoid therapeutics formulated for transdermal delivery. Its products candidates include ZYN002 and ZYN001—synthetic transdermal cannabinoid therapeutics for indications, including refractory epilepsy, Fragile X syndrome, osteoarthritis, fibromyalgia, and peripheral neuropathic pain.
The company has already secured patents related to ZYN002 and ZYN001, with two issued patents in the United States, five issued patents in France, Germany, Ireland, Switzerland and the United Kingdom and two pending patent applications in Canada and Japan. The issued patents will expire between 2026 and 2029, and any patents that issue from currently pending patent applications will expire in 2030.
In August, 2015, ZYNE shares came to market at an IPO offering price of $14, amid a fair amount of fanfare, in the wake of the growing trend among U.S. voters and lawmakers to usher in laws allowing the use of medical marijuana by adults, as well as legalization in Colorado, Oregon and other jurisdictions. The appeal was obvious: an increasing number of studies, as well as countless anecdotal stories, documented the many beneficial effects of CBDs—one of the active ingredients in pot— for helping a wide variety of conditions.
[emaillocker id=”7090″] With a mini public float of 3 million shares, which gave the company an initial market cap of $48 million, the issue surged to an opening day to of $22.25 before closing at $16.25. Then shares closed at $19.32 on the following day and $22.54 the next. By the time the buying frenzy peaked soon after the IPO’s debut, ZYNE had touched a 52-week top of $43 per share. There’s little doubt that the small float, coupled with bull market conditions, helped put ZYNE on traders’ radar, with the $43 mark unsustainable and arguably irrational—as it gave Zynerba a momentary market cap of about $350 million.
By October profit taking had led ZYNE shares down to about $15, where they held support for a time. But typical of any development-stage pharmaceutical company, stockholders grew tired of shouldering the risk, especially with bear market conditions emerging at the beginning of 2016. Eventually, the stock found a 52-week bottom at $4.64 per share, touched on February 11, 2016. From there it bounced all the back to $7, pulled back to $5.25, and subsequently worked its way up to $6, where it sits right now.
Last week the company released good news. The U.S. Food and Drug Association granted orphan-drug designation to ZYN002 cannabidiol (CBD) gel, for the treatment of Fragile X syndrome. Fragile X syndrome is a genetic condition that causes intellectual disability, anxiety disorders, behavioral and learning challenges and various physical characteristics. Orphan-drug designation by the FDA is granted to novel drugs that treat a rare disease or condition affecting fewer than 200,000 patients in the U.S., securing the drug developer a seven year period of U.S. marketing exclusivity upon approval for the designated indication, tax credits for clinical research costs, grant funding opportunities, clinical research trial design assistance and the waiver of prescription drug user fees.
Of course, one thing the orphan-drug designation doesn’t do is provide companies with revenues or earnings, which is what investors crave the most. That’s where the “story” part Zynerba comes in. It’s currently one of less than a handful of “cannabis” stocks that are publically traded on any major exchange, giving it a leg up on the competition in the extremely promising realm of CBD-based therapies. Zynerba also passed an acid test: proving that it can navigate the often serpentine process of gaining FDA legitimacy.[/emaillocker]
Moreover, there’s the potential for more significant catalysts down the road. ZYN002 is currently being evaluated in a Phase 1 multiple rising dose trial in healthy volunteers and patients with epilepsy. Zynerba expects to report results from that Phase 1 study in the first half of 2016. In addition, the company’s proprietary transdermal technology, if successfully developed, would be the first product on the market providing sustained, consistent and controlled delivery of therapeutic levels of two cannabinoids: cannabidiol (CBD), a non-psychoactive cannabinoid, and THC.
By way of full disclosure, I have traded in and out of ZYNE shares over the past few weeks, and it can be wickedly volatile given the mini-float. I don’t currently own any shares, but I believe this is a worthy price bounce candidate based on both its current beaten-down status, and the company’s potential to be a trailblazer in the wide open field of CBDs and related delivery systems.
