Like a Weed, This Marijuana Stock Catapulted Higher by 34% Last Week

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If you're an investor, chances are you're well aware that it's been tough to surpass the returns from marijuana stocks over the past year. In late June, the average trailing 12-month return of the dozen-largest marijuana stocks by market was better than 300%. While some of these stocks have since given up a portion of their gains, more pot stocks than not have at least doubled in value over the past year.

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At the heart of this strong performance among pot stocks is rapid sales growth and a major shift in how the American public views cannabis. According to Marijuana Business Daily's most recent report, titled "Marijuana Business Factbook 2017," the U.S. legal-weed market could grow by 300% between 2016 and 2021 to approximately $17 billion. That's a lot of money that investors rightly can't overlook.

Likewise, after 47 years of Gallup polling, the number of Americans who want to see weed legalized across the country has never been higher. An October 2016 poll found 60% support for such an idea, which is more than double the 25% support garnered for legalizing recreational marijuana back in 1995. 

Yet marijuana still remains a Schedule I substance at the federal level. This bifurcation between states and the federal government sets pot stocks up for some wild volatility, because there's no guarantee the weed industry will survive over the long run. However, this volatility worked in favor of one marijuana stock last week: Zynerba Pharmaceuticals (NASDAQ: ZYNE).

Third time's the charm

Shares of Zynerba Pharmaceuticals, a small-cap developer of cannabinoid-based drugs for a variety of ailments, sprouted like a weed last week and gained 34% overall, nearly doubling at one point from its intra-week low to its intra-week high. The catalyst? Look no further than positive phase 2 results from its leading experimental drug candidate, ZYN002, a gel containing cannabidiol, or CBD, the non-psychoactive component of cannabis.

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The open-label study in question, Fab-C, examined the use of ZYN002 in pediatric and adolescent patients with Fragile X syndrome. The primary endpoint was an improvement in the total score of Anxiety, Depression, and Mood Scale (ADAMS) at week 12 compared with baseline. Anxiety and behavioral difficulties are common with Fragile X syndrome. In the Fab-C study, patients exhibited a 46% improvement in their ADAMS score at week 12 over baseline.

Further, clinically meaningful improvements were observed in all measures of the Aberrant Behavior Checklist for Fragile X. These measures entail social avoidance, temper tantrums, repetitive movements, and hyperactivity.

Given these results, Zynerba anticipates meeting with the Food and Drug Administration in the first-half of 2018 to discuss the diagram of a phase 2/3 trial involving ZYN002 as a treatment for Fragile X syndrome. The company expects to begin enrollment in a phase 2/3 trial at some point in 2018.

The company was also granted the orphan drug designation from the FDA in Fragile X syndrome back in February 2016. While this designation won't help its chances of being approved, if it succeeds in late-stage studies, it could result in a quicker review process, and thus a faster path to recurring revenue for a company that has no approved products on the market.

A lot of questions remain

The Fab-C trial was a big sigh of relief for Zynerba's shareholders, who had, to put it mildly, been taken to the woodshed since August. Despite encouraging results in this open-label study, top-line data from two other recent studies, Star 1 and Stop, left a lot to be desired.

The midstage Star 1 study in adult patients with epilepsy was a complete mess. Two doses of ZYN002 were tested, with the lower dose leading to an 18.4% median reduction in focal seizures from baseline during the 12-week treatment period, the high dose leading to a 14% median reduction, and the placebo producing an 8.7% median reduction. Not only were the results not clinically significant, but with the higher dose underperforming the lower dose, which is the opposite of what we'd expect to see, it pretty much also meant a dead-end for ZYN002 in adult epilepsy.

The midstage Stop study was a tiny bit better but still didn't offer much for investors to be happy about. The study, which examined ZYN002 as a treatment for patients with osteoarthritis of the knee, also failed to meet its primary endpoint of reduction from baseline in the weekly mean of the 24-hour average worst pain score at week 12 for both doses tested. The saving grace was that a few secondary endpoints were hit, which management believes merits moving ZYN002 forward for additional testing. 

The issue with Zynerba moving forward is this: Just one of its three studies really succeeded, and its other clinical drug, ZYN001, is probably a year or longer away from delivering true efficacy data in phase 2 trials. What had been a story stock with a lot of catalysts has now turned into a one-trick pony for the time being. That's worrisome, considering that it had just $70.2 million in cash and cash equivalents on its balance sheet as of the end of June. 

Though Zynerba took a clear step in the right direction last week, we're going to need to see a whole lot more from its pipeline if this has any chance of moving sustainably higher.

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