Neurological drug developer Harmony Biosciences markets a narcolepsy product that isn’t scheduled as a controlled substance like others for the sleeping disorder. Its acquisition agreement for Zynerba Pharmaceuticals fits the same mold. The biotech’s lead program is a non-euphoric cannabinoid not expected to need Drug Enforcement Administration review if it wins a regulatory nod for treating a rare inherited cognitive disorder that currently has no approved therapies.

According to deal terms announced Monday, Plymouth Meeting, Pennsylvania-based Harmony is paying $60 million cash up front to acquire Zynerba. Shareholders of the biotech could receive up to $140 million more under a contingent value right, a series of per share payments tied to the progress of the drug candidate, Zygel.

Zynerba, based in Devon, Pennsylvania, develops cannabinoid therapies administered as topical gels that penetrate the skin to reach the circulatory system. Zygel does not contain ingredients extracted from the cannabis plant. The synthetic drug has no THC, the compound that leads to euphoric effects.

A Phase 3 test is underway testing Zygel in Fragile X syndrome, a disorder that stems from a mutation in the FMR1 gene, which encodes a protein important for proper cell function. This mutation leads to abnormally low levels or the complete loss of this protein. The rare disease leads to intellectual disability and developmental problems.

Zygel failed to beat a placebo in a 14-week Phase 2 clinical trial whose main goal was to show improvement according to a scale used to assess patients with developmental disabilities. Despite that disappointing 2020 result, the company said a pre-planned post-hoc analysis of patients with the most severely impacted FMR1 genes showed that those who received Zygel achieved statistical significance measured on the main study goal.

In 2021, Zynerba set out to replicate the results of the post-hoc analysis. The Phase 3 clinical trial is an 18-week study with a targeted enrollment of 200 participants between the ages of 3 and 22. The company has said it expects preliminary results in the first half of 2024.

Zygel has also been tested in 22q11.2 deletion syndrome (22q), another rare disorder that leads to developmental delays. In results from an open-label Phase 2 test last year, the company reported statistically significant improvement according to a scale used to assess anxiety, depression, and mood. The results also showed statistically significant improvement according to scales that measure behavior and pediatric anxiety. While Zynerba has discussed with the FDA the design of a pivotal study for Zygel in 22q, it said in regulatory filings that it does not expect to start this study until after the Phase 3 results are available for the drug in Fragile X syndrome.

The acquisition comes at a key time for Zynerba. Its most recent financial report lists a cash position of $35.9 million as of June 30, which the company expects will be enough to last until mid-2024. Harmony is in better financial shape. While narcolepsy drug Wakix is its only approved product, the drug is turning a profit, accounting for $34.3 million in net income on revenue of $134.2 million in the second quarter, both increases compared to the same period last year. Harmony is financing the Zynerba acquisition with cash on hand. As of June 30, it reported its cash holdings and investments totaled $429.6. The company is also developing Wakix for idiopathic hypersomnia, another sleep disorder.

In the announcement of the Zynerba acquisition, Harmony President and CEO Jeffrey Dayno said the deal fits his company’s strategy of building a diversified portfolio that addresses unmet medical needs.

“This acquisition affords us the opportunity to advance the development and delivery of a potentially transformative treatment for the symptoms of Fragile X syndrome and other rare neuropsychiatric disorders,” he said in a prepared statement. “In addition to the strength of our core business in narcolepsy and our current life cycle management programs, led by idiopathic hypersomnia, we are excited to continue to diversify our portfolio beyond sleep/wake by adding Zynerba’s clinical development programs to our pipeline.”

The deal calls for Harmony to pay $1.1059 cash for each Zynerba share, a more than 226% premium to its closing price last Friday. The contingent value right will pay up to an additional $2.54 per share, bringing the total potential shareholder payout to about $200 million. The development milestones break down to $15 million for completion of the Phase 3 study; $30 million if the study is completed on or before Dec. 31, 2024; $20 million if the study is completed on or before June 30, 2025; $10 million if it’s completed after June 30, 2025. The regulatory milestones are $35 million upon FDA approval of Zygel; $15 million upon FDA approval in a second indication. The commercial milestones are $15 million if the drug achieves $250 million in aggregate net sales; $30 million if sales reach the $500 million threshold.

The acquisition requires the majority of Zynerba shareholders to tender their shares. The boards of Harmony and Zynerba have approved the transaction, which is expected to close by the fourth quarter.

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