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The fourth quarter of 2012 was extremely disappointing for Cambridge, Massachusetts-based Zalicus Inc. (ZLCS). The upcoming year may be a make or break time for this promising pharmaceutical company.

Zalicus

On September 10, 2012, Zalicus shares plummeted over 40% after the company announced that they were discontinuing further development of their highly touted rheumatoid arthritis (NYSE:RA) drug candidate, Synavive, (prednisolone/dipyramidamole).

A Phase 2b clinical trial found that RA patients treated with Synavive achieved a statistically significant improvement in the signs and symptoms of moderate to severe RA compared to placebo after 12 weeks of treatment. However, Synavive missed the key secondary endpoint of demonstrating a meaningful clinical benefit, compared to the individual components of Synavive (2.7mg of prednisolone and 360mg of dipyramidamole). Synavive also failed to performe well in comparison to 5mg of prednisone, a commonly-prescribed low-dose glucocorticoid.

In the absence of a clinically meaningful benefit with Synavive compared to its active glucocorticoid component, Zalicus will discontinue further clinical development with Synavive. These results are not only disappointing to Zalicus, but also to the many steroid-dependent patients who are seeking a safer treatment alternative," said Mark H.N. Corrigan, MD, CEO of Zalicus. "Going forward we will focus our resources and efforts on advancing the clinical development of our ion channel programs including Z160, our first-in-class treatment for neuropathic pain which recently advanced into the first of two Phase 2a clinical trials, and Z944, our novel, oral, T-type calcium channel blocker which is completing multiple Phase 1 studies and if successful will advance into Phase 2 development in the first half of 2013.

Zalicus shareholders put a very high value on Synavive without seeming to realize that the drug would not have to do well, but extraordinarily well, to be able to compete in the RA drug market. Although the RA therapy market is incredibly lucrative, it is also extremely competitive. If Synavive did go on the market, the drug would have faced intense competition from pharmaceutical giants like Pfizer,Bristol-Myers Squibb (NYSE:BMY), Roche (ROG.VX), Lexicon (NASDAQ:LXRX), Vertex (NASDAQ:VRTX),Incyte (NASDAQ:INCY) and Eli Lilly (NYSE:LLY), Abbott, and Janssen who have promising RA drugs in their developmental pipeline.

All is not lost for Zalicus. With Synavive out of the picture, the company is focusing on Z160, a nerve pain treatment, and Z944, another potential pain drug. The company has one US Food and Drug Administration (FDA) approved drug. Exalgo (hydromorphone) is marketed by Covidien PLC (NYSE:COV) as a treatment for moderate to severe pain. The company also has development partnerships with Sanofi (NYSE:SNY) and Novartis AG (NYSE:NVS), as well as a preclinical ion channel program

Z160

Z160 is a first in class, oral, state dependent, selective N-type calcium channel blocker. N-type calcium channels are recognized as important targets in controlling pain since they appear to play a key role in transmitting pain through the spinal nerves to the brain.

Z160 is a reformulation of a drug previously known as NMED-160. To understand Z160, one must also understand Zalicus corporate history. Prior to September 2010, Zalicus was known as CombinatoRx, Inc.. CombinatoRx and another Canadian company, Neuromed, merged in July 2009. Z160 was formerly known as NMED160, Neuromed's lead investigational drug.

Early on, there was a great deal of speculation that NMED-160 would become a blockbuster drug. In March 2006, Merck & Co. (NYSE:MRK) announced they would pay an initial $25 million for exclusive rights to Neuromed's experimental drugs, including Neuromed's lead compound, NMED-160. Merck agreed to pay Neuromed up to $475 million if the drug was approved for a second medical condition.

Merck's enthusiasm for NMED-160 did not last long. In August 2007, Neuromed and Merck Pharmaceuticals discontinued development of NMED-160. The companies stated that NMED-160 "does not demonstrate the ideal pharmaceutical characteristics considered necessary to advance the compound further in development."

Zalicus claims that Z160 has demonstrated efficacy in multiple animal models of neuropathic and inflammatory pain, suggesting that Z160 has the potential to treat a broad range of chronic pain conditions. In addition, the company contends that Z160 was well tolerated in previously conducted clinical trials involving over 200 subjects.

On February 9, 2012, Zalicus and Hydra Biosciences, Inc., announced that the two companies had entered into a collaboration to develop Zalicus' preclinical ion channel modulator pain treatment product candidates.

Since Hydra's expertise is in ion channel discovery and preclinical drug development, Zalicus agreed to pay Hydra an upfront payment. Zalicus would also fund research and development activities at Hydra for a two-year period. During this time, Hydra will conduct preclinical development activities necessary to advance Zalicus' preclinical ion channel product candidates toward clinical development, including Z-160, and Z944. Zalicus will retain all intellectual property and commercial rights to its product candidates. In addition to its collaboration with Zalicus, Hydra has a research collaboration and license agreement with Cubist Pharmaceuticals (NASDAQ:CBST). Hydra received $10 million in upfront and regulatory milestone payments from Zalicus. Hydra is also eligible for potential development milestones and royalties on products produced from the collaboration.

As a result of the collaboration, Zalicus discontinued its Vancouver, British Columbia-based ion channel discovery research operations, resulting in a workforce reduction of 16 employees, or approximately 28% of the company's workforce.

On March 5, 2012, Zalicus announced the "successful completion" of a Phase 1 clinical trial evaluating the pharmacokinetics and safety of their new formulation of Z160. The study found that Z160 demonstrated "substantial bioavailability and solubility improvements." Based on the data from this study, Zalicus advanced Z160 into Phase 2 clinical development for the treatment of neuropathic pain.

In September 2012, Zalicus announced that the company initiated the first of two Phase 2a clinical studies with Z160. The first Phase 2a study will enroll subjects with chronic neuropathic pain associated with Lumbosacral Radiculopathy (LSR).

LSR is a common neuropathic pain condition resulting from the compression or irritation of the nerve roots exiting the lumbar region of the spine. Symptoms include pain radiating from the lower back and down the legs, as well as numbness and tingling in the lower extremities. LSR is believed to affect 3% to 5% of the global population. Since there are no drug treatments specifically approved to treat this LSR, Zalicus believes there is a high unmet medical need and potentially lucrative market for a drug that could treat this disorder.

On January 3, 2013, Zalicus initiated a second Phase 2a neuropathic pain clinical study to evaluate Z160 for the treatment of Postherpetic Neuralgia (PHN), a neuropathic condition resulting from an outbreak of the herpes zoster virus, otherwise known as shingles. In the United States, approximately one million people develop herpes zoster every year. Of those individuals, approximately 20%, or 200,000 individuals, develop PHN.

The company announced that top line data for both studies is expected to be available late in the second half of 2013.

Z944

In June 2012, Zalicus announced that the company successfully completed a Phase 1 single ascending dose (SAD) clinical study with Z944, its novel, oral, T-type calcium channel blocker. The study results indicated that Z944 was generally well-tolerated and a maximum tolerated dose was achieved.

On July 10, 2012, Zalicus announced that the company initiated a Phase 1 multiple ascending dose (MAD) clinical study with Z944. Assuming Z944 successfully completes the MAD study, Z944 could enter Phase 2 clinical development in the first quarter of 2013. .

T-type, or transient-type (referring to the length of time activated), calcium channel blockers target low-voltage-activated, calcium channels. These channels have been recognized as critical components in numerous cell functions and have been implicated in the frequency and intensity of pain signals. Zalicus is investigating compounds to modulate T-type calcium channel signaling in the treatment of pain. Zalicus claims "our orally-administered T-type calcium channel blockers have shown efficacy in animal models of acute and chronic pain, as well as other indications."

Exalgo

Zalicus receives royalty and milestone revenue from Covidien/Mallinckrodt for Exalgo, (hydromorphone HCl) extended-release tablets, for the management of moderate to severe pain in opioid tolerant patients. Covidien/Mallinckrodt acquired the rights to Exalgo in June 2009 for $15 million in upfront payments, additional development funding of up to $16 million and a $40 million FDA approval milestone payment. Zalicus receives tiered royalties on net sales of Exalgo by Mallinckrodt.

On August 27, 2012, the FDA approved the supplemental new drug application (sNDA) filed by Mallinckrodt for the 32 mg dose strength of Exalgo for the management of moderate to severe pain in opioid-tolerant patients requiring continuous, around-the-clock opioid analgesia for an extended period of time.

The FDA approved the three existing doses of Exalgo (8, 12 and 16 mg) in March 2010.

Exalgo has tamper resisting properties. Exalgo is formulated in a way that makes it difficult to extract the active ingredient illicit drug abusers crave through common forms of physical and chemical tampering, including chewing, crushing and dissolving.

Tamper resistance issues are important considerations for opioids such as Exalgo. On December 10, 2012, the FDA's Anesthetic and Analgesic Drug Products Advisory Committee (AADPAC) voted against the approval of Zogenix's Zohydro, a hydrocodone-based chronic pain reliever, because the committee felt the drug could be easily altered for illicit use.

Prednisporin/FOV1101

In January 2006, Zalicus entered into a research and license agreement with Fovea Pharmaceuticals SA, now a division of Sanofi. Sanofi agreed to fund and develop selected Zalicus product candidates for ophthalmic diseases including Prednisporin (FOV1101), a product candidate being developed by Sanofi to treat allergic conjunctivitis.

Under the agreement, Sanofi received an exclusive worldwide license to Prednisporin and certain other drug combinations to treat allergic and inflammatory diseases of the front of the eye. Sanofi has advanced Prednisporin into Phase 2b clinical development for persistent allergic conjunctivitis.

On October 25, 2012, during the course of Sanofi's quarterly financial and research and development pipeline update, Sanofi disclosed that based on a recent review of prior Phase 2b results for Prednisporin, Sanofi has reassessed the commercial profile for Prednisporin and has made the decision to continue the development of the drug under a sublicense agreement to be entered into with a third party to be identified by Sanofi.

The terms of the agreement between Zalicus and Sanofi allows Sanofi to sublicense its rights to develop and commercialize Prednisporin on a global basis. The agreement also establishes the milestones and royalties due to Zalicus for successful development and commercialization of Prednisporin. These payments would continue to apply in the event Sanofi sublicenses the rights to Prednisporin.

Zalicus has received payments totaling $1.5 million for Prednisporin, and is eligible to receive up to $39 million in development and regulatory milestone payments. Zalicus is also eligible to receive royalties on net sales of Prednisporin by Sanofi.

Novartis Oncology Collaboration

In May 2009, Zalicus and Novartis entered into a strategic alliance focused on the discovery of novel anti-cancer combinations. The collaboration explores combination effects in cell lines representing a broad spectrum of cancers to provide a "robust and systematic understanding of combination therapy opportunities". The alliance also explores differences in response by cancer type, including genotype and other mutational differences. The anti-cancer effects of compounds are being analyzed by utilizing the Zalicus proprietary combination high throughput screening (cHTS) platform and Chalice analyzer software.

Under the agreement, Zalicus received a $4 million upfront payment and funding for research support for two years. In addition, for each combination advanced to the market from the collaboration, Zalicus is eligible to receive up to $58 million in clinical, regulatory and commercial milestones. The alliance had an initial two-year term that may be extended by Novartis for three additional one-year periods. The agreement has been renewed into May 2013. Zalicus retains the right to conduct oncology research on its own behalf as well as partner with others in the field of oncology.

U.S. Army Medical Research Institute for Infectious Diseases

Zalicus has received approximately $3.5 million in funded research grants from the U.S. Army Medical Research Institute for Infectious Diseases (USAMRIID) to research and develop treatments for several biothreat agents, including viral hemorrhagic fevers (VHFs) such as Ebola and encephalitic alphavirus infections. Many of these viruses cause severe, life-threatening disease. The Alphavirus genus includes Venezuelan equine encephalitis virus (VEE), Eastern equine encephalitis virus (EEE) and Western equine encephalitis virus (WEE), which are mosquito-borne viruses that can cause severe and fatal encephalitis in humans.

Finances

As of September 30, 2012, Zalicus had cash, cash equivalents, restricted cash and short-term investments of approximately $45.0 million compared to $44.1 million on June 30, 2012.

For the quarter ended September 30, 2012, revenue was $3.5 million, compared to $2.4 million for the quarter ended September 30, 2011. The increase in revenue from the 2011 to the 2012 period was primarily due to increased Exalgo royalties from Covidien and increased collaborative revenue from Novartis. Zalicus recognized $1.4 million in royalty revenue from Covidien based on Exalgo sales for the quarter ended September 30, 2012. This represents an 11% increase in revenue from Exalgo compared to the quarter ended June 30, 2012.

For the quarter ended September 30, 2012, net loss was $12.2 million, or $0.10 per share, compared to a net loss of $9.3 million, or $0.09 per share, in the quarter ended September 30, 2011.

Research and development expenses were $12.1 million in the quarter ended September 30, 2012, compared to $8.9 million in the quarter ended September 30, 2011. The increase in R&D expense from the 2011 period to the 2012 period was primarily due to increased development expenses related to Z160, Synavive and Z944.

Zalicus terminated all development activities related to Synavive in the quarter ended September 30, 2012 and as a result, the company expects research and development expenses to decrease for the quarter ending December 31, 2012 and for the year ending December 31, 2013.

General and administrative expenses were $2.2 million in the quarter ended September 30, 2012, compared to $2.6 million for the quarter ended September 30, 2011. Zalicus expects general and administrative expenses for the quarter ending December 31, 2012 to be consistent with such expenses during the quarter ended September 30, 2012.

Analyst Coverage

On September 10, 2012, analysts at McNicoll Lewis & Vlak downgraded shares of Zalicus to a "Hold" rating and set a price target of $1.00 following the disappointing trial results from Synavive in a research note to investors.

On September10, 2012, MLV and Company downgraded Zalicus from "Buy" to "Hold."

On September 11, 2012, Rodman & Renshaw analysts downgraded shares of Zalicus from an "Outperform" rating to a "Market Perform" rating in a research note to investors.

On September 11, analysts at Canaccord Genuity reiterated their buy rating on Zalicus.

In September 2012, Wedbush Securities maintained Zalicus at "Outperform", but lowered their price target on the stock from $5 to $3.

On October 10, 2012, MLV and Company downgraded Zalicus again from "Hold" to "Sell." The firm currently has $0.50 price target on the stock.

As of December 29, 2012, Zacks rated Zalicus a "Buy".

There is more to Zalicus than Synavive. Z160 and Z944 are two potent pain killing compounds that may be able to help patients with far less potential for illicit use than many opioids.

The company has advanced Z160 into Phase 2 clinical trials. Zalicus has also initiated a Phase 1 clinical study with Z944. If Z944 successfully completes the study, the drug could enter Phase 2 clinical development in the first quarter of 2013.

Zalicus has created an integrated and automated system of customized hardware and software for combination high throughput screening (cHTS) in phenotypic mammalian cell based assays

Novartis has extended their alliance with Zalicus for an additional contract year, through April 2013, based on the success of the cHTS discovery collaboration up to this point. This is Novartis' second extension, further validating the value of the cHTS discovery technology to discover treatments for cancer.

The company should also be able to Exalgo collect royalties from Sanofi and Prednisporin royalties from Coviden.

Zalicus stock has remained under $1 since the company announced the disappointing results from the Synavive trial. The stock fell to a low of 43 cents on November 12, 2012.

At current levels, Zalicus looks like a bargain, even though it is as high risk penny stock.

All investments involve risk, but investing in micro-cap companies like Zalicus is especially risky. These stocks are often extremely volatile, may be illiquid, and are subject to manipulation. The Security and Exchange Commission (SEC) has a significant amount of information about the dangers of investing in micro-cap companies and penny stocks. You can find it here.

For the reasons stated above, 2013 may be a better year for Zalicus.

Source: Will 2013 Be A Better Year For Zalicus?