Just as shares of Zynerba Pharmaceuticals (NASDAQ:ZYNE) were on the way to rebounding back to the $10 level, the stock fell on Friday after the company announced a share issuance. With a 25-percent cut in the ZYNE share price, is the sell-off in this micro-cap biotechnology firm overdone? To answer that, investors must weigh in the positive clinical results against the share dilution.
Zynerba announced a tiny, $32.5 million public offering of its shares: 4.062 million shares at $8 each. The stock sale gives the company ample cash to fund R&D and to cover quarterly expenses. Although it is a small share issuance, the amount still represents nearly 25 percent of the company’s $142 million market cap. Prior to the share sale, the company had enough cash to cover operations through the second half of 2019.
Clinical Study Results Mixed
Zynerba’s previous two clinical study results send mixed signals. On July 5, the company canceled ZYN001, a prodrug of tetrahydrocannabinol (THC) that is delivered via a transdermal patch. In the Phase 1 study, the results failed to meet the objective of achieving THC blood levels at the 5-15 ng/mL range.
The study involved 60 subjects. Unfortunately, the patch does not work, leaving the company to focus on epilepsy. The study’s failure also shifts Zynerba’s attention to ZYN002. This study involves the treatment of subjects having Fragile X syndrome, developmental and epileptic encephalopathy and adult refractory epilepsy.
On July 12, Zynerba Pharmaceuticals announced results for its new FAB-C Phase 2 Open-Label Data in Patients with Fragile X Syndrome. The company presented data for its 12- and 38-week study, citing improvements in the behavioral systems for subjects in the continued use of ZYN002. The study involved adolescents and children with FXS. Just as important to the data is the safety profile, in which it was well-tolerated and patients exhibited no serious adverse events.
Stock Offering Hurts ZYNE Stock
Zynerba’s ample cash position suggested that the company did not need to sell shares. So when it did so, raising the $32.5 million, the markets were caught off guard. The company’s pricing of shares at over 20 percent below the recent closing price added to the selling pressure on the stock. Investors who sold shares at over $10 could buy the stock at a public offering price of $8. On top of the 4 million share sale, underwriters have an over-allotment to sell another 609,400 shares.
ZYNE Stock Valuation
Before the stock’s drop, analysts pegged a price target of between $18-$23, according to TipRanks. Analyst Arlinda Lee of Canaccord Genuity set the $18 price target. But the analyst’s track record is not great: Of the 239 calls made, only 108, or 45 percent, made money. The average return on the calls is only 1.8 percent over a two-year period.
On average, the price target on ZYNE stock is $20.33.
For the quarter that ended March 31, Zynerba lost $12.3 million, up from $7.3 million a year earlier. Cash and cash equivalents fell from $77.5 million to $52.1 million.
Bottom Line on ZYNE Stock
Zynerba’s drop created better value for investors but it also corrected for a bullish future, so much so that any negative news would scare away shareholders. Bears also benefit from the drop. More specifically, the stock has a 21.52 percent short float. With the stock’s 52-week low at $5.42, the stock could have more downside until the company reports an update on its clinical study. With no data due soon, the rebound in the stock may not happen for a while.
As of this writing, the author did not hold a position in any of the aforementioned securities.