Pomerantz Defeats Zynerba Pharamaceuticals Motion to Dismiss

On November 25, 2020, Pomerantz scored a victory for injured Zynerba Pharmaceuticals, Inc. (“Zynerba”)  shareholders when Judge Nitza I. Quiñones Alejandro of the United States District Court in the Eastern District of Pennsylvania, issued an order in Whiteley v. Zynerba Pharmaceuticals, Inc. et al (2:19-cv-04959-NIQA) denying the defendants’ motion to dismiss the class action complaint.

Zynerba, which does not have FDA approved drug products on the market, operates as a clinical stage specialty pharmaceutical company. It focuses on developing pharmaceutically produced transdermal cannabinoid (“CBD”) therapies for rare and near-rare neuropsychiatric disorders. CBD is the primary non-psychoactive component of Cannabis. Zynerba has a single product currently under evaluation — Zygel, a transdermal CBD gel, intended for the treatment of Fragile X Syndrome, developmental and epileptic encephalopathies (“DEE”), 22q Deletion Syndrome, and Autism Spectrum Disorder — four different progressive neuropsychiatric disorders. Zynerba initiated a Phase II clinical trial of Zygel in April 2018, called the BELIEVE I Trial, a six-month open label multi-dose clinical trial designed to evaluate the efficacy and safety of Zygel in children and adolescents (ages three to seventeen years) with DEE as classified by the International League Against Epilepsy.

The complaint alleges that the defendants issued misleading statements touting Zygel and the BELIEVE I Trial, and representing Zygel as addressing safety issues with current treatment options, while failing to disclose that: (i) nearly all patients treated with Zygel in the BELIEVE I Trial suffered treatment emergent adverse events, a majority also suffered treatment related adverse events and more than one fifth suffered serious adverse events; and (ii) the foregoing created a heightened risk to the Company’s ability to continue developing Zygel and that Zynerba, which has a history of failed trials, would fail to secure the necessary regulatory approvals for commercializing Zygel for the treatment of DEE in children and adolescents.

In the order denying the defendants motion to dismiss, the Court rejected the argument that the plaintiffs failed to allege facts sufficient to plausibly show (i) an actionable statement or omission or (ii) scienter, stating:

“This Court disagrees. In the amended complaint, Plaintiffs aver that Defendants made various public statements on Zynerba’s website and in Zynerba’s various filings with the Securities and Exchange Commission (“SEC”) with respect to the safety and benefits of its only product in development, Zygel, which was, at the time, in Phase 2 of the clinical trial process required for Food and Drug Administration approval. Specifically, Plaintiffs allege that Defendants represented in Zynerba’s March 11, 2019 Form 10-K Annual Report, filed with the SEC, that in April 2018, Zynerba had:

 initiated the Phase 2 BELIEVE 1 . . . clinical trial, a six-month open label multi-dose clinical trial designed to evaluate the efficacy and safety of Zygel in children and adolescents (three to 17 years) with DEE . . . Enrollment in this study was complete in December 2018 and 48 patients with confirmed DEE are being dosed in the clinical trial, 27% of whom have either Dravet or Lennox-Gastaut syndrome. Enrolled patients will receive weight-based initial doses of 250 mg daily or 500 mg daily and during the maintenance phase patients may receive up to 1000 mg daily of Zygel. The primary endpoint is change in seizure frequency from baseline.

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 We believe that Zygel may provide an effective treatment for epilepsy based on the

anticonvulsant effects of CBD due to its ability to reduce neuronal hyperexcitability shown in multiple in vivo models of epilepsy and clinical trials conducted by third parties. Epilepsy specialists and patient organizations have shown considerable interest in the potential therapeutic role of CBD in adults with epilepsy and especially, children with DEE.

Plaintiffs further allege that, at the time Defendants made these representations to investors, “Defendants knew but failed to disclose that almost all patients enrolled in the BELIEVE 1 Trial suffered treatment emergent adverse events . . . .” Further, on September 18, 2019, when Defendants publicly revealed the adverse events observed during the BELIEVE 1 clinical trial, the value of Zynerba’s stock fell 21.77%. This Court finds that these allegations, accepted as true, are sufficient at this stage of the proceedings to state a claim for securities fraud. Accordingly, Defendants’ motion to dismiss is denied.”

Partner Tamar Weinrib is Lead Counsel for Pomerantz LLP in Whiteley v. Zynerba Pharmaceuticals, Inc. et al.