Making The Case For Zynerba Pharmaceuticals (NASDAQ:ZYNE)

Advancing science as a biotechnology company rarely goes exactly as planned, and Zynerba Pharmaceuticals (ZYNE) is no exception. When they reported data from their pivotal CONNECT-FX trial, the market’s reaction was harsh, with the stock dropping 50%. CONNECT-FX studied Zynerba’s lead compound, Zygel, in 212 patients with Fragile X Syndrome (NYSEARCA:FXS). Zygel is a synthetic CBD gel that is rubbed into the upper arm of patients. The study missed the primary and secondary endpoints in the full analysis set, and while this is a disappointment, there is a significant silver lining. In a pre-planned ad hoc analysis of the data, the company clearly shows that in a specific subgroup of patients that the drug works. Based on this revelation, the company is going to the FDA to discuss the results and believes they have a great case to make that Zygel should be considered for approval only in this specific subset of patients. Through conversations with the company and my research, I believe Zynerba’s case is very strong indeed, and that there is a 60% chance of approval of Zygel based on the data in hand. Given this assumption, I believe the market significantly underappreciates Zynerba. If the results of the FDA meeting indicate, Zynerba should go ahead and file a new drug application; the stock should dramatically increase to reflect the latest facts on the ground.

Fragile X Syndrome

First, let us go over Fragile X syndrome briefly. It is a rare genetic, developmental disability and is the leading cause of both inherited intellectual disability and an autism spectrum disorder. Symptoms include hyperactivity, social avoidance, seizures, impulsive behavior, and anxiety. A mutation of the FMR1 gene causes fragile X Syndrome. According to Medline Plus,” The FMR1 gene provides instructions for making a protein called FMRP. This protein plays a crucial role in regulating the production of other proteins and plays a role in the development of synapses.” According to the companies investor presentation, they state that the “mutation manifests as multiple repeats of a DNA segment (CGG) in FMR1.” To keep it simple, understand that the more repeats, the more severe the symptoms.

Another way that the gene is affected is methylation. When FMR1 is greater than 90% methylated, it is considered full methylation (FMet), and FMR1 is effectively silenced. There is no FMRP produced, and systems and processes affected by it are dysregulated. FMet of the FMR1 gene is a biomarker for disease impact, as patients with this expression are typically the most autistic and have the worst symptoms. Zynerba estimates that about 60% of patients with the full mutation of FMR1 fall into the category of FMet and that there are 40,000 patients in the USA today. CBD works by modulating the endocannabinoid system and increases the availability of endocannabinoids such as anandamide and 2-AG. There have been several clinical trials attempting to find an effective treatment for FXS, and none have been successful to date. That is until we got the data from Zynerba’s CONNECT-FX trial.

Zynerba’s Scientific Discovery

Now that science background is out of the way; we can dive into Zynerba’s discovery. At some point throughout the study, before the data was unblinded, the company decided that it would be worthwhile to analyze a subgroup of the patient population. Specifically, they wanted to look at the patients with full methylation (FMet) of the FMR1 gene. This turned out to be a prudent move.

There were 212 total patients enrolled in the trial, and of that, 169 had FMet. For the full analysis set, there was no statistical significance. However, when you strip out the 43 patients who did not have FMet, the story changes dramatically. In this subgroup, there was clear statistical significance in the primary endpoint; the ABC-CFXS Social Avoidance subscale with a p-value of .020. The irritability subscale and CGI-I (secondary endpoints) were both trending towards significance. The fact that the removal of 43 patients with a specific and measurable difference in FXS severity, full methylation of the FMR1 gene, was able to reverse the negative results into positive results, shows how important and distinct this biomarker of FMet is. Accordingly, to help prove that the difference between the two groups is more than statistical noise, the company stated in their press release that the “interaction test of heterogeneity for the Social Avoidance subscale was statistically significant with a p-value of 0.002. (p=0.002), which means that the difference in treatment effects between the subgroups was statistically significant.”

The question that will likely be asked is, why does Zygel work in FMet patients and not the rest? This question was in fact asked in a recent investor conference, CEO Armando Anido had a succinct answer regarding the mechanism of action. He said that because FMet patients effectively cannot produce any FMRP, their symptoms are much more severe, while patients that are not FMet still produce some FMRP and can better deal with stimulus. As a reminder, FMRP plays an important role in forming synapses. It helps cells communicate and is important for learning and memory.

So what is the discovery Zynerba made? They have identified a biomarker that is common in FXS patients, which, when present, is indicative of more severe autism, hyperactivity, social avoidance, and which we now know responds well to cannabidiols, specifically Zynerba’s Zygel. Zynerba has discovered that Zygel works in kids with FMet and that it simply does not work at all in the kids without it.

Caregiver Data Impresses

Further bolstering the silver lining of the positive clinician-reported FMet data is the caregiver reported data. This data is important because it shows the real-world benefit perceived by the caregiver (usually parents). While Fragile X Syndrome certainly impacts the patient, there are also hardships faced by the families. These include financial strain, emotional stress, anxiety, depression, lack of parenting confidence, feeling overwhelmed, and feelings of isolation are all much more common in parents with a child diagnosed with FXS. That said, it’s easy to appreciate the clinical significance of the data below.

Caregiver DataSource: Investor Presentation

As you can see, in all but overall behavior, the subgroup analysis of FMet kids on drug versus FMet kids on placebo yields statistical significance. Overall behavior only barely misses the mark and is trending towards significance. This data is reported by the caregiver, which translates to the tangible quality of life improvements that are perceived by those that have to take care of the children day in and day out.

As we can see from the data, from both the clinician perspective and caregiver data, there is a clear clinical benefit to FXS kids taking Zygel when they have full methylation of the FMR1 gene (FMet).

Safety Data

Zygel is remarkably safe. Out of the 211 patients in the trial, 54% experienced a treatment-emergent adverse event (TEAE). As a reminder, TEAE’s are any adverse events (AE) experienced whether related to the drug or not. If the adverse event occurs while the child is on the drug, then its a TEAE. For example, a child that experiences a fall and a broken arm would be considered a TEAE. All of the TEAE’s were mild or moderate. 50% of patients on placebo experienced a TEAE, and 58% of patients on Zygel experienced a TEAE. There were no serious adverse events (SAE). Only one patient discontinued due to an adverse event, and that patient was on placebo. There were seven psychiatric disorder TEAE’s, and five of those occurred in patients on placebo. Only 15 patients experienced a treatment-related AE. The most common was application site pain, which occurred in only 6.4% of Zygel patients. The bottom line is that the safety profile of Zygel is that it is very well tolerated with no serious issues.

Here’s why the FDA will Approve Zygel based on this data

There are many factors to consider when trying to judge whether the data Zynerba has is enough to warrant FDA approval. Some of the official FDA language seems to support it and many qualitative factors along with anecdotal evidence. Yes, technically, Zynerba flunked the overall pivotal trial. If this was a trial for a blood pressure medication, we would not be having this discussion. However, Fragile X Syndrome is a rare disease, and there is no FDA approved treatment that is indicated for it. Due to the significant impact that FXS has on both the patient and families, the financial strain, and the multiple and often unsuccessful avenues of attempted treatments, getting a therapeutic drug indicated for FXS to the market is an enormous unmet need.

In the FDA presentation titled “Rare Disease and Clinical Trials,” the FDA acknowledges that with orphan drug development, there needs to be flexibility. They acknowledge that conducting studies can take a long time and be extremely difficult to replicate due to the small pool of candidates. Think about it. We have heard anecdotally from the company that Fragile X associations and foundations are very excited by the data, the parents are excited by the data, and Fragile X physicians are excited by the data. If Zynerba were asked to do another trial with only FMet patients, there would be a raised set of expectations from both the caregiver and the clinicians that could affect placebo responses no matter how objective they try to be. The chances of a false negative in a do-over study would increase, in my opinion. In line with this thinking, in my conversations with the company before the data was released, I was told that the company purposely tried to keep the hype for the trial to a minimum to try and keep expectations muted. Studying this company and neuropsychiatric trials, I have learned that at times placebo effect is an erratic and unpredictable wildcard.

The FDA presentation notes that the statutory standards for approval are the same for drugs, both rare and common. That is, to be approved, there must be substantial evidence of efficacy. Substantial evidence is defined as “evidence from adequate and well-controlled trials on the basis of which it could fairly and responsibly be concluded that the drug will have the effect it purports to have under the conditions of use.” On this, I would argue that CONNECT-FX was adequate and well-controlled. The question, however, is will the FDA consider the 169 patient study for FMet kids that was carved out of the overall group adequate? I believe the answer is yes. It was pre-planned, so it was not cherry-picked after the fact but was based on a scientific hypothesis. Why else would they plan the analysis? Confirming the efficacy in the subgroup is the interaction test for heterogeneity. This means that Zygel works in FMet kids and simply does not work in the others. It implies specificity and enables more targeted treatment.

The FDA presentation also emphasizes the statute for flexibility. The statute allows for “flexibility and exercise of scientific judgment in the kinds and quantity of data required for a particular drug for an indication.” To this end, we know that Zynerba has been working in partnership with the FDA from the very beginning; we know that Zynerba has thus far followed the FDA’s guidance to a tee. We know from the company communications that the FDA guided that Zynerba would only need one pivotal trial in FXS, and that is what we have. In a research study by the University of Chicago, the authors promote flexibility to approve drugs. Specifically, they advocate allowing for FDA approval from subgroup data that is analyzed post hoc. This means the data was discovered after the initial data was released. This opens up the risk of bias, data-mining by the sponsor, spurious correlation, and false positives. The paper suggests that if outside consultants can confirm that data using techniques to show no bias or spurious correlation, then the data should be deemed adequate. Of course, this is not how it currently works. To date, no drug has been approved via a post hoc analysis. However, the paper states, “if subgroups are identified before trial, they may positively influence approval so long as the sponsor powers the study to address multiple testing concerns.” In Zynerba’s case, we know that they identified and planned the subgroup analysis before the data was unblinded. We know that the population of patients that were FMet was significant and may be deemed sufficiently powered by the FDA. From one perspective, the fact that statistical significance was achieved in a potentially underpowered study potentially bodes well when inferring what the results would be in a properly powered study.

What Zynerba has in hand is essentially a 169 patient trial with FMet subjects. Given the statistical significance in the interaction test for heterogeneity proving efficacy in FMet, Zynerba meets the FDA standard of substantial evidence of efficacy and safety, in my opinion. Because the analysis was pre-planned, it is safe to say that Zynerba is not cherry-picking or data mining attempting to turn garbage into gold. If the FDA were to ask Zynerba to run an entirely new trial, it would be identical to the trial they just, in essence, ran. A large trial with only FMet patients. If 212 patients were large enough for the FDA in a population of 70k cases of FXS, and FMet is estimated to be prevalent in 60% of the total, then arguably a 169 patient trial may be large enough to satisfy the FDA.

An Exercise in Common Sense

I have repeatedly asked myself since this data release on June 30, 2020, is why wouldn’t the FDA approve Zygel? I have attempted to be as objective as possible, but I simply cannot come up with one good reason why the FDA would reject Zygel. The only technical answer I can come up with is due to it not being the typical policy. Of course, the FDA could say something along the lines of “You missed the primary endpoint. Yes, you have some interesting data here, but you we want you to replicate that in another study.” The FDA has certainly made head-scratching decisions in the past, which is the biggest risk to Zynerba.

If the FDA asked Zynerba to run another large pivotal trial, the FDA would be running the risk of losing the best hope to date for children with Fragile X Syndrome. Zynerba has told investors how the FDA has been a true partner and how the FDA is eager to get a drug approved for FXS after many disappointments with attempts from other companies and compounds. Should the FDA ask Zynerba to do another trial, the risk of a tainted subject pool and increased placebo risk would raise the odds of failure, in my opinion.

Further, there may even be an ethical question mark. Forcing the children with Fragile X to wait at least another two years for a drug that has been proven to work in FMet children might be perceived as cruel and downright unnecessary. In another trial, every participant would be FMet, and every parent of the patient would surely have already seen the data. Expectations for success for their child would be high—perceived responses, whether placebo or not, would increase and risk trial failure. Essentially, replication would be no easy task, and Zynerba will be sure to make this case when meeting with the agency. Considering the safety profile, approving Zygel for children with FMet can only help the patients and families in need, not hurt.

Is there Precedence?

Consider the case Sarepta Therapeutics. Their drug for Duchenne muscular dystrophy, Exondys51, controversially won approval in 2016 after data failed to demonstrate a clinical benefit. An advisory committee initially voted 7-6 against approval, but the agency ultimately approved it anyways. There was said to be a lot of pressure on the agency from patients, and parent’s who swore by the efficacy of the drug. Long story short, in rare diseases with high unmet need, the FDA can employ flexibility. Comparing that situation to Zynerba’s position is not apples to apples, but arguably favors Zynerba. Exondys51 has a much worse side effect profile than Zygel.

Zygel is effective in FMet, while Exondys51 efficacy is murky, with trial results that only trended towards significance. The FDA had to rely on a surrogate endpoint to help inform their approval of Exondys51. One similarity is the fact that there is a lot of support for Zygel. The company has told us that the trial investigators, the parents, the FXS associations, and the physicians are all excited about the drug and are willing to bat for Zynerba in front of the FDA. Politics are on Zynerba’s side, and there will be many unhappy parties if the FDA forces Zynerba into another trial.

Another intersting case is that of Biogen’s (BIIB) drug for Alzeihmers, Aducanumab. After announcing that they were canceling the program, they discovered efficacy in sub-group post hoc analysis. They have since sumbitted an NDA for regulatory approval. This is again not an apples to apples comparison as Biogen ran two identical phase 3 trials, one of which was succesful in meeting the primary endpoint. Two phase 3 trials is the standard for a mass market drug, however. If the FDA approves Aducanumab with the help of a post hoc analysis, that would be good precedent for Zynerba who is going up to bat with a pre-planned ad hoc analysis. The PDUFA date for Aducanumab is March 7th, 2021, so we won’t know the outcome for Aducanumab before we learn the next steps for Zygel in the fourth quarter of 2020. Nontheless, it will be an interesting case to watch.

A Word on the Stock

For a moment, I would like to touch on the stock. It is trading at $3.70, a market cap of about $110 million. I have been unable to justify why the stock trades at such a low valuation relative to the potential market size of the indications they are studying. Assuming they get FDA approval for Zygel in FMet, we are looking at a situation where uptake will be quick. Parents of children with Fragile X Syndrome are waiting patiently for Zygel, and likely won’t hesitate to put their child on Zygel when available. Importantly, Zynerba will not need a massive marketing infrastructure and can ramp towards profitability quickly. In my opionion, the market’s skepticism on Zynerba has never been on the business model once approved. I think this is one of the most attractive aspects of the investment. The company will likely price Zygel similar to GW Pharmaceuticals (GWPH) CBD drug, Epidiolex, at around 30K per year.

With 70k cases of FXS, of which 60% are FMet, that leaves a market of 42,000 with Fragile X. Thus, the TAM is approximately $1.2B. Let us conservatively estimate that Zynerba will reach 15% of the market at the peak within two full years on the market. Zynerba is looking at almost $200 million in sales. Zynerba’s R&D spend will not be massive, and cash burn will likely continue at a similar run-rate to what it currently is at about $50 million per year. With a current cash balance of $77 million as of June 30, 2020, the company expects its cash to last them into the fourth quarter of 2021.

I would expect the largest rerating of the stock to begin when Zynerba releases the results of their discussion with the FDA in the fourth quarter of this year. If we learn that the FDA advises Zynerba to submit an NDA, the stock should start reflecting much-improved odds of success. My price target is $15. This would represent a market cap of just $450 million, which is a conservative 2.25x peak sales estimate of 200m. With Zynerba being a perennial underdog with nothing ever coming easy for them, I would not be surprised if the market does not reward shareholders until Zygel is actually approved by the FDA. Assuming the FDA clears the way for an NDA filing in the fourth quarter of 2020, Zynerba will likely have the opportunity to have Zygel approved by the end of 2021.


My prediction is that the FDA will give Zynerba the okay to submit an NDA, at which point we see the rerating of the stock commence and ultimately reach $15 per share if Zygel is ultimately approved. Given that the ad hoc analysis was pre-planned, the efficacy, safety, the unmet need, and the support of advocacy groups, parents, and physicians, it is difficult to come up with a reason why the FDA would request another trial before Zygel can be considered for approval. Fragile X patients are as close as they have ever been to a proper FDA-approved medicine that is going to immensely improve their lives as well as of the lives of their families.

Disclosure: I am/we are long ZYNE. 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.

Additional disclosure: This is not specific investment advice and reflects only my opinions.

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