Analysis

Some of the biggest biotechnology winners of 2017 so far are cannabis stocks. GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH), a $3 billion pharmaceutical cannabis company and probably the most well known company in this subsector of healthcare, is up around 7% since the start of the year. Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE), a $250 million company, is up 22% year to date and close to 80% across the last twelve months.

Both of these companies have something in common – they are working to bring synthetic cannabinoids through clinical development in the US to treat conditions with a high unmet need, and in turn, a large potential market.

While we expect both to continue to appreciate throughout 2017 and beyond, as their respective pipelines mature towards commercialization, the already registered advance in each limits the upside somewhat.

There’s another company, however, with a very similar development strategy (synthetic cannabinoids) to those of GW Pharmaceuticals and Zynerba, but which has yet to benefit from the upside revaluation described above.

The company is Therapix BioSciences (NASDAQ:TRPX) and the reason it’s not yet revalued in line with its strategic peers is simple – it conducted its IPO today.

Before we get into the company, a bit of background on the space.

The medicinal benefits of cannabis are well established in a large number of different diseases and conditions. There’s evidence to suggest that sufferers of everything from neurodegenerative conditions (Alzheimer’s, dementia, etc.) to pain management to oncology and chemotherapy induced nausea can benefit from cannabis consumption in various forms, and this is the foundation of the medical marijuana industry in the United States. There are some inherent problems with using cannabis to treat these conditions, however, and the primary of these issues are side effects, consumption method and dosing. It’s incredibly difficult to ensure consistent dosing when a patient is smoking cannabis as an administration method. It’s also often undesirable (there are patients who don’t want to smoke) and creates obvious side effects, many of which are unwanted – cerebral high, respiratory issues, cancer, etc.

Synthetic cannabinoids are the focus of the above discussed companies, and many more, because they allow for the creation of cannabis based therapies, i.e. those that employ cannabinoids, or synthetic versions of cannabinoids, that don’t bring about the unwanted side effects that the natural product might, and can be administered in a controlled, measured format.

With GW Pharmacetucals, it’s a sublingual spray. With Zynerba, it’s a CBD based gel. Other companies, companies like Cannabics Pharmaceuticals Inc (OTCMKTS:CNBX), are developing topical administration, cannabis based creams.

Therapix’s answer is a sublingual tablet.

The company is developing a lead asset called THX-TS01, in a primary indication of Tourette’s syndrome. Tourette’s is a neuropsychiatric disorder that causes twitching, involuntary sounds and noises, blinking, and various other ticks, and the current standard care in the space is drug called haloperidol. It’s only really used in the most severe cases, however, as it brings with it some pretty nasty side effects, and it doesn’t really do anything about the tics side of the condition. Many Tourette’s sufferers use cannabis to ease the physical symptoms, and there’s a growing body of evidence that this is an effective method of treatment and control.

However, as mentioned above, many don’t want to smoke cannabis just to treat their symptoms. They either don’t want the high or don’t want to risk the respiratory and oncologic issues associated with smoking.

This is where THX-TS01 comes in.

The drug is a combination of synthetic THC (the active compound in cannabis) and what’s called PEA. PEA is a natural compound found in many substances (milk, fruits, etc.). It isn’t strictly a cannabinoid, but it shares many properties with cannabinoids, and – and here’s an important point – can enhance the impact of synthetic cannabinoids on the central nervous system (CNS) through what’s called the Entourage Effect, without enhancing its effect on the brain.

This Entourage Effect means Therapix has been able to take a small amount of synthetic THC (an amount not potent enough to bring about the cannabis associated high) and boost its impact on the CNS to a degree where it can improve the physical and tic-related symptoms of Tourette’s syndrome.

That’s the theory, at least, and it’s this theory that the company is out to prove subsequent to today’s IPO.

With both synthetic THC (probably more commonly known as dronabinol in the pharmaceutical space) and PEA already used in other approved drugs, there’s no need for Therapix to carry out preclinical or phase I studies for THX-TS01. Instead the company can take it through a phase II trial, and on succesfull completion of the phase II, directly into a pivotal investigation.

The first of these, the phase II (actually a phase IIa) is already underway, having initiated in December 2016. It’s enrolling at Yale University right now, and 4 out of a planned 20 patients are already on board. The trial should wrap up early third quarter 2017, and the company intends to put out topline in the same quarter. This paves the way for a pivotal trial (likely a phase IIb/III) kicking off before the end of the year.

It’s also eligible for Orphan Designation in the US, and Therapix intends to file for this designation once it has the data form the ongoing phase IIa in hand.

Beyond the Tourette’s indication, Therapix is targeting a host of other conditions, with the next in line being mild cognitive impairment (MCI). This is a bigger market than Tourette’s (although it won’t qualify for Orphan Designation) and Therapix expects to initiate a phase IIa study – the equivalent of the study that’s ongoing in Tourette’s right now – during the third quarter of this year.

With just 3.1 million shares outstanding, this company has a low float and high insider ownership – circa 60% as things stand. The company has $12 million cash, which it expects will carry it through to end 2018. Based on its mid point offering price of $6, the company was expected to hit markets with a market capitalization of $18.6 million.

The company opened at $6.30, and at time of writing, morning US session, is trading at $8.60. Based on the 3.1 million expected outstanding share count, this gives the company a current market capitalization of just $26.6 million – above expected, but still low given Therapix’s underlying operations.

Not only is this a low valuation compared to some of the mid cap players with comparable programs, like the above mentioned Zynerba, but it also falls far short of other cannabis stocks with far less promising, or far less developed, programs.

The above mentioned Cannabics Pharmaceuticals, which we noted above as developing topical administration assets, is pre clinical and has a market capitalization of $330 million. OWC Pharmaceutical Research Corp (OTCMKTS:OWCP), a company working to develop cannabis based oncology therapies, is, again, preclinical, and had a market capitalization of more than $178 million at last close.

Bottom line here is that this is a company that is only valued at its current market capitalization because it’s yet to enjoy the exposure to public market capital in the US that some of its strategic and operational peers have.

Now it’s a NASDAQ company, chances are this discrepancy will quickly disappear.