By Jason Napodano, CFA
On January 8, 2013, I sat down with Mark Corrigan, MD (CEO) and Justin Renz (NASDAQ:CFO) of Zalicus (ZLCS). The primary topic of discussion was Z160, the company's N-type (Cav2.2) state-dependent calcium channel blocker currently in two phase 2a clinical trials for neuropathic pain.
We remind investors that Z160 was formerly known as MK6721 through a partnership with Merck & Co. (NYSE:MRK) and privately-held Neuromed. Neuromed merged with CombinatoRx in December 2009 to form Zalicus. Back in March 2006, Merck licensed the compound (originally named NMED-160) from Neuromed for $25 million upfront and potentially as much as $450 million in milestones and royalties on sales. Unfortunately, Merck returned the rights to NMED-160 back to Neuromed in August 2007 because phase 2 clinical studies, "Did not demonstrate the ideal pharmaceutical characteristics considered necessary to advance the compound further into development." Interestingly enough, Merck did note that no serious adverse events with NMED-160 were observed in clinical trials testing the safety and effectiveness even at doses as high as 1600 mg per day.
Despite Merck walking from the collaboration, scientists at Neuromed knew they had an effective drug if they could improve the formulation. That is exactly what Zalicus has spent the past several years doing. Phase 1 data was released in March 2012. The data below shows a greater than 8-fold improvement in CMax and 5-fold improvement in AUC for the new formulation of Z160 vs. the old NMED-160 compound that Merck previously believed was a blockbuster drug.
What's All The Excitement About?
The mechanism of action for Z160 has been validated by ziconotide, marketed by Jazz Pharmaceuticals (JAZZ) as Prialt. Prialt has well-documented clinical efficacy. The product is the only non-opioid analgesic (synthetic peptide) approved for the management of severe chronic pain in patients who are intolerant of or refractory to other treatment options. The problem with Prialt is that it must be given through intrathecal injections - or directly into the sub-arachnoid area of the spinal canal so it reaches the cerebrospinal fluid. The Prialt label also includes a boxed warning that severe psychiatric and neurological impairment may occur during treatment with ziconotide intrathecal infusion. Therefore, patients with history of psychosis should not be treated with Prialt. As a result, we estimate that Jazz sold only around $21 million of Prialt in 2012.
The key difference between Z160 and Prialt, is that Z160 is an oral tablet with proposed dosing at around 375 mg BID; that's less than half of the dose that Merck noted was well-tolerated without conveying serious adverse events in previous clinical studies. Prialt is also an irreversible binder of Cav2.2, whereas Z160 is state-dependent - meaning it is designed to only target and modulate those neurons transmitting pain signals. Preclinical and clinical data to date with Z160 suggest that this state-dependent mechanism of action alleviates the severe psychiatric and neurological side effects, including akathsia. The drug also seems to lack the somnolence and dizziness associated with calcium channel blocker, gabapentin, which Pfizer (PFE) turned into a blockbuster with Neurontin. Neurontin sales peaked at over $2.7 billion worldwide in 2004 before patents expired.
Preclinical data for Z160 is suggestive of efficacy on par with ziconotide, gabapentin, and morphine. The data below is from a spinal serve ligation (Chung) model, one of the most commonly used neuropathic pain models for preclinical testing. Zalicus has confirmed that Z160 exposure in humans exceeds the minimum efficacy levels for this neuropathic pain model.
Spinal Nerve Ligation (Chung) Model
Clinical Studies Underway
In September 2012, Zalicus initiated the first phase 2a study (Clinicaltrials.gov Identifier: NCT01655849) with Z160 in 140 patients 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. Common symptoms include pain radiating from the lower back and down the legs, as well as numbness and tingling in the lower extremities. We expect enrollment will take place at approximately 20-30 centers around the U.S. Patients will be randomized to receive either 375 mg Z160 BID or placebo for six weeks. The primary endpoint of the study is change in weekly mean pain scores on the pain intensity - numeric rating scale (PI-NRS). Secondary endpoints including other pain and functional measures, and safety. We expect data in the fourth quarter of 2013.
On January 3, 2013, Zalicus initiated the second phase 2a study (Clinicaltrials.gov Identifier: NCT01757873) with Z160 in 140 patients with post-herpetic neuralgia (PHN). The design of the study is similar to the previously initiated program in LSR. The primary endpoint is the change from baseline to week six in the weekly average pain score based on PI-NRS. Clinical trials in PHN are an industry-accepted standard condition for establishing clinical proof-of-concept in neuropathic pain. It is also a potential orphan indication because the prevalence is less than 200,000 patients in the U.S. Data from this phase 2a study in PHN is expected in early 2014.
We see LSR as a significant unmet medical need and an attractive market opportunity. The prevalence of LSR is high, affecting 3-5% of the global population, and to date there are no drug treatments specifically approved to treat the condition. In LSR alone, Z160 could have $500 million or more peak sales potential. Other possible indications for Z160 include post-herpetic neuralgia (PHN), and off-label uses in diabetic peripheral neuropathy (DPN), fibromyalgia, and peripheral nerve pain. PHN is a painful neuropathic condition resulting from an outbreak of the herpes zoster virus, otherwise known as shingles. We see a $250 million opportunity in PHN for Z160. Larger indications such as DPN and fibromyalgia may offer another $250 million or more peak potential.
Therefore, on a conservative basis, we think Z160 is a $500 to $750 million product, with significant upside depending on the efficacy and tolerability Zalicus or a development partner can show in pivotal trials. The peak market opportunity for the drug may be more in-line with what Pfizer was able to do with Neurontin (gabapentin), peaking at $2.7 billion worldwide in 2004, or what they are currently doing with Lyrica (pregablin), a drug most believe is no better than generic gabapentin. We expect Pfizer to post over $4 billion in revenues from Lyrica when they report year-end 2012 financials later this month.
We suspect that Zalicus will look to partner Z160 in a deal similar to the previous collaboration with Merck following results of the two ongoing phase 2a trials. Management told us that partners are already knocking on the door for Z160. We think with two positive Phase 2a trials in hand, Zalicus will be able to secure a very lucrative deal. For the sake of argument, let's assume Z160 is a $1 billion drug, with a 20% chance to make it to the market in 2018. That could be worth $50 million upfront to a big pharmaceutical company in early 2014, along with $250 million in reasonable back-end potential plus a mid-teen to low-twenty percent royalty on sales. With a current market capitalization of only $80 million, we think it is fair to say that this sort of transaction is certainly not priced into the shares today.
CEO Selling Shares
This article was ready to publish last week until we noticed a Form-4 filing with the SEC by CEO Mark Corrigan on January 17, 2013. Dr. Corrigan sold 112,850 shares of stock at $0.77 on January 15, 2013. This immediately spooked investors. We even saw an erroneous article noting that Dr. Corrigan sold almost his entire holding in the company - the article has since been retracted.
Dr. Corrigan continues to hold 844,090 shares of Zalicus stock. When Dr. Corrigan was hired as CEO back in January 2010, he received a 750,000 restricted stock unit incentive package. One-quarter of the shares vest each January 15th, starting in 2011 and ending in 2014. The vesting of these shares creates an immediate taxable event, which has to be paid in cash. As investors can clearly notice, Dr. Corrigan filed a similar Form 4 back in January 2012 and January 2011 to cover this tax liability. Dr. Corrigan has increased his position in Zalicus from the original 750,000 shares to 844,090 shares. We are unconcerned with this selling and believe this misinformation has created a meaningful buying opportunity in the stock (Zalicus traded at $0.80 on January 14, 2012).
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