For nearly all of 2017, Zynerba Pharmaceuticals (ZYNE) handily outperformed GW Pharmaceuticals (GWPH) stock. The operative word in that statement, though, is "nearly." Zynerba lost almost 70% of its market cap over the last three weeks.

On August 7, the biotech announced tremendously disappointing results from its phase 2 study of its cannabidiol (CBD) product, ZYN002, in treating adult epilepsy patients with focal seizures. Zynerba stock had already begun to slip in the days leading up to the clinical update, but it really tanked on the news about the study.

The pain for Zynerba could turn out to be a gain for GW Pharmaceuticals, though. Here's why.

Marijuana buds on table with bottoms of beakers with green liquid shown

Image source: Getty Images.

Why Zynerba's CBD flopped

Zynerba's phase 2 study involved 188 adult epilepsy patients with focal seizures, which are caused by abnormal electrical disturbances in part of the brain. The patients were split into three groups, one of which was administered a higher 195 mg dosage of ZYN002, another received a 957.5 mg dosage of ZYN002, and the third group received placebo. 

The primary endpoint of the study was median percentage change in seizure frequency over the 12-week treatment period compared to the 8-week baseline period. Patients on the higher dosage of ZYN002 achieved a 14% median reduction in focal seizures. Patients on the lower dosage of the CBD product experienced a better mean reduction in focal seizures of 18.4%. While both groups had better results than patients on placebo (who achieved an 8.7% mean reduction in focal seizures), the reductions weren't enough to be statistically significant.

CBD has proven to be quite promising in other studies treating other forms of epilepsy. GW Pharma, for example, had great results in multiple late-stage studies of its CBD product, Epidiolex, in treating Lennox-Gastaut syndrome (LGS) and Dravet syndrome, both of which are types of epilepsy. So, why did things go so badly for Zynerba?

The answer could be that the problem isn't with CBD itself, but is instead with Zynerba's delivery mechanism. ZYN002 is delivered through a transdermal gel. In theory, transdermal delivery should offer several benefits, including rapid absorption and potentially fewer drug-drug interactions. However, GW and other companies developing cannabinoids have used oral formulations rather than transdermal delivery -- and have largely been successful in clinical studies. 

All clear for GW Pharma?

There are a couple of reasons GW Pharma should benefit from Zynerba's big setback. First, it puts GW in the catbird's seat for CBD development. Leerink Partners analyst Paul Matteis considered the stumble for Zynerba as good news for GW Pharma. Matteis said his company believed "that the failure of the [Zynerba] study reinforces much of one overhang on [GW Pharmaceuticals] stock, and fundamentally it reinforces our view that barriers to entry for a follow-on CBD product are high." 

Another reason Zynberba's ZYN002 flop could be positive for GW Pharma is that GW is also hoping to treat epilepsy in adults. The company plans to announce results from a phase 2 study of its cannabidivarin (CBDV) product in treating partial-onset epilepsy in adults by early 2018. 

With Zynerba's pain appearing to have at least the potential to be GW Pharma's gain, you might think that GW Pharmaceuticals stock would have enjoyed a nice bump from the ZYN002 failure. However, while GW Pharma shares did rise a little after the Zynerba announcement, the boost was short-lived.

One factor could be uncertainty about exactly why ZYN002 wasn't successful. Although its delivery mechanism could be the culprit, there's still a possibility that CBD isn't as effective in treating adult epilepsy as many expect. Also, GW Pharma still faces the possibility of another rival stepping up to the plate

Zogenix (ZGNX) expects to announce late-stage results for its experimental drug ZX008 in treating Dravet syndrome by the end of September. However, ZX008 is a low dose of fenfluramine, the "fen" in the infamous drug Fen-Phen, which caused serious cardiac problems and was yanked from the market in 1997. It's possible that even if it's successful in clinical studies and wins approval, the FDA could require cardiac monitoring for ZX008. That would give GW Pharma a significant competitive advantage. 

Looking ahead

Zynerba's experience with ZYN002 underscores the risks associated with clinical-stage biotechs. Everything can look promising one day, but bad the next -- and sometimes even worse a few days later. Zynerba followed up the bad news from the epilepsy study with an announcement the next week that ZYN002 also failed to meet its primary endpoint in a phase 2 study targeting treatment of osteoarthritis. Although the biotech also reported better results for the drug on secondary endpoints, the update didn't give investors a warm-and-fuzzy feeling. 

GW Pharmaceuticals, on the other hand, seems to be rolling along to FDA approval for Epidiolex in treating LGS and Dravet syndrome. It's still possible, though, that something will happen to derail that march. There's always a chance that we could be talking about how GW's pain could be Zogenix's gain in 2018. That's the way the biopharmaceutical world goes sometimes.