What happens when you combine a hot biotech initial public offering (IPO) market with a NASDAQ traded cannabis stock focused on treatments that have a multi-billion dollar Total Addressable Market (TAM)? Just take a look at Zynerba Pharmaceuticals (ZYNE).
On August 5th, ZYNE conducted its IPO on the NASDAQ exchange and the result was nothing short of a success. ZYNE commenced trading at $14 and less than a week later shares traded as high as $42.85!
Investors and financial institutions have been patiently waiting for a new cannabis-related company to commence trading on a national exchange. GW Pharmaceuticals (GWPH) and Insys Therapeutics, Inc. (INSY) are two NASDAQ traded biotech companies that are focused on developing treatments derived from cannabis. During the last two years, GWPH and INSY are up 1014% and 334% respectively and they are currently trading at very rich valuations.
What are the upcoming catalysts?
Zynerba operates in a capital intensive industry where success is validated through FDA approvals. Biotech stocks trade on approvals, not earnings. ZYNE expects to initiate Phase 1 clinical trials for ZYN002 by the end of this year and ZYN001 by mid-2016.
It will take a while before Zynerba announces any meaningful catalysts and investors need to be prepared to hold shares for 24-36 months. The biggest near term catalyst for ZYNE is favorable Wall Street coverage. Last week, Morgan Stanley (MS) initiated coverage on GWPH with an overweight rating and $150 price target and shares rallied 10%!
What are the risks?
Although the drug development complex is a risky business, with big risk comes big reward. Zynerba faces a number of risks common to all biotech companies. The risks investors need to be aware of include:
Unexpected Delays: In a September 2014 investor presentation, ZYNE said they expected to initiate Phase 1 trials in the second quarter of 2015. That’s now been pushed back into the second half of 2015 and additional delays are not out of the question.
Dilution: Drug development is expensive. In order to reach commercialization, Zynerba will need to raise a lot more money which will be dilutive to shareholders.
Competition: Zynerba is focused on indications that are also being targeted by GW Pharmaceuticals, specifically epilepsy and peripheral neuropathic pain. The company said, “A significant number of products are currently available, under development, and may become commercially available in the future, for the treatment of indications for which we may try to develop product candidates.”
You heard it here first
At the San Francisco Moneyshow in mid-July, investors learned about Zynerba’s upcoming IPO during the cannabis investment panel.
Many investors missed out on the massive runs by GWPH and INSY. Zynerba represents a new, early stage opportunity for investors interested in biotech companies focused on developing cannabis based treatments. Whether or not ZYNE proves to be the next GWPH or INSY, investors should plan accordingly and recognize the company as a long-term investment, not a trade.