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  • Writer's pictureIshfaaq Peerally

Zynerba Pharmaceuticals Stock Analysis

Zynerba Pharmaceuticals $ZYNE has been very volatile lately with the stock doubling in value in the last 3 months. It has been particularly interesting to traders as the daily volume of shares traded is now about 7% of the total shares outstanding, with 24% of these shares being shorted. The recent interest in Zynerba is because the company is awaiting pivotal data about its drug effects on FXS patients. But about investing in this stock for the long-term?

The thesis for an investment is that Zynerba made a drug (a gel) based on CBD (Cannabidiol) called Zygel. Zygel is the first and only pharmaceutically-produced CBD formulated as a permeation‐enhanced gel for transdermal delivery, and the formulation is patent protected through 2030. Four additional patents are directed to methods of use relating to Zygel, including methods of treating FXS and ASD, and will expire in 2038. In layman terms, Zygel is the ONLY CBD gel that can be applied on the skin and enters the bloodstream. This drug is targeting FXS, ASD, 22q and DDE patients. All of this are genetic disorders, affecting over 200 thousand people in the US. Currently, there's no drug for FXS and 22q patients.

This is a very interesting products and so far clinical trials have been successful. If this success continues, it could be a revolutionary drug.

The problem, however, is that Zynerba, so far, did not sell any of this drug. It is still experimental. They had some revenues but it comes only from grants. They are spending a lot of money on R&D with $20 million in 2019. If the drugs are successful, then we will expect an increase in SG&A as well. In 2019, the SG&A expenses were $13 million. So far the company employs only 28 people.

As far as the balance sheet is concerned, the company has no debts and about $70 million in cash and cash equivalents. This will be enough for about two years of expenses. The book value of the company is currently about $66 million. With a market cap of $157 million (EV of $97 million), this will give Zynerba a PB ratio of about 2. This is pretty good and if the drug is a success, there will be a big boost in intangible assets as well.

In the bull case, Zynerba's drug is approved by the FDA and they can market it. They will need a bigger pharmaceutical company to make it for them and they will only collect the royalties. It is still hard to estimate how much the drugs are going to cost and how much their sales are going to be. If we look at the competitor GW Pharmaceuticals $GWPH , they were in the same stage in 2010 with their drug Sativex targeting patients suffering from multiple sclerosis(MS). They used Bayer $BAYN.DE for production. By 2015, they had $40 million in sales. Can Zynerba achieve $40 million in sales by 2025? First, we need to understand that more people suffer from MS than FXS, 22q, etc. And secondly, it all depends on how much they are going to sell the drug for. As far as profitability is concerned, this is not in the foreseeable future.

In the bear case, the drug takes years to get approval and they still do not make any sales.

With the good balance sheet that they have and the good prospect of this drug (protected by patents until 2030), it may look like a good investment but it is too dependent on this one drug. Remember what happened to AbbVie $ABBV with its dependence on Humira? And what happens if the drug doesn't get approval? The reward can be big but as far as the risks are concerned, they are still unknown (the company doesn't have a product yet, it is an idea).

As long as this drug is not approved and they don’t have their first sales, it will be speculating. Maybe this is a good stock for trading but as far as a long-term investment is concerned, we need to wait for more data. Full analysis on my research partnership:

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