By Jason Napodano, CFA
One - Growing Revenues
On March 6, Zalicus (ZLCS) reported financial results for the fourth quarter and full year 2012. Total revenues in the quarter were $3.8 million. Revenues consisted of $2.4 million in collaborative payments and $1.4 million in royalties on sales of Exalgo at partner Mallinckrodt. Revenues from Exalgo were in-line with my model, whereas collaborative payments exceeded my expectations for the second quarter in a row.
For the full year 2012, total revenues were $12.6 million, comprised of $5.2 million in royalties from Mallinckrodt on Exalgo and $7.4 million in collaborative payments from partner Novartis in oncology and early-stage work with partners utilizing the company's combination High Throughput Screening (cHTS) platform. Revenues were up 53% from 2011. As noted above, collaborative payments have been exceeding my expectations of late. In fact, Zalicus grew collaborative revenues every quarter in 2012.
For 2013, management is guiding for further increases, with a goal of signing one major partnership for early-stage discovery work in 2013. I am pleased to see the company taking advantage of its technology by forming research and discovery collaborations.
For 2013, I model total revenues of approximately $17.0 million, comprised of $7.0 million in royalties on Exalgo and $10.0 million in collaborative payments that utilize the company's vast cHTS platform and ion channel discover engine. I think the potential for Zalicus to strike additional alliances and collaborations is highly discounted by investors.
Here's an interesting way to view Zalicus' valuation - the current market capitalization of $82 million is less than 5X my projected 2013 revenues of $17.0 million, and the company is sitting on $36.5 million in cash and investments.
Two - Shrinking Costs
Net loss for the fourth quarter 2012 was $8.3 million, or $0.07 per share. This was essentially in-line with my estimate for net loss of $0.09 per share on the higher revenues noted above but also higher than expected R&D. Net loss was driven by $1.8 million in G&A, $8.9 million R&D, and $1.0 million in amortization and restructuring. For the full year 2012, net loss totaled $44.8 million, or $0.38 per share. Total expenses in 2012 were comprised of $9.0 million G&A, $41.4 million R&D, and 5.0 million amortization and restructuring.
For 2013, I am expecting R&D costs to decline now that the phase 2b SYNERGY trial has been completed and the company has closed down operations at the Vancouver facility. Zalicus exited 2012 with $36.5 million in cash, investments and restricted cash. I find the current cash balance to be sufficient to fund operations into the first half of 2014, consistent with management's guidance.
Three - Blockbusters In The Pipeline
Zalicus has two key drugs in the pipeline, Z160 and Z944. Z160, the company's N-type (Cav2.2) state-dependent calcium channel blocker, is a potential blockbuster. I wrote about Z160 back in January 2013 for PropThink (see the article here) following a face-to-face meeting with Zalicus management.
The excitement around Z160 stems from the validated mechanism of action and superior dosing and tolerability profile of the drug. Zalicus is currently studying Z160 in two phase 2 trials, one in lumbosacral radiculopathy (LSR) (Clinicaltrials.gov Identifier: NCT01655849) and another in post-herpetic neuralgia (PHN) (Clinicaltrials.gov Identifier: NCT01757873). Data from both trials is expected during the fourth quarter 2013. These data have the potential to vastly re-value the shares to multiples above the current valuation.
The second candidate, Z944, is a novel oral T-type calcium channel blocker with demonstrated preclinical potential for the treatment of acute and inflammatory pain in animal pain models. Zalicus has initiated multiple phase 1b dosing studies with Z944 in the United Kingdom and plans to file the U.S. investigation new drug (IND) application in the U.S. shortly to being phase 2 proof-of-concept work. In February 2013, the company was granted a composition of matter patent on Z944 that will protect the molecule until April 2029. If phase 2 is successful, I expect Zalicus will look to partner Z944 with a larger pharmaceutical company.
Four - Attractive Valuation
The valuation of Zalicus remains attractive in my view. As noted above, the market capitalization of $82 million is less than 5X above my projected 2013 sales figure - a fair multiple for a growing biotech company, and I note that 45% of the market value is supported by the current cash balance of $36.5 million. On a net enterprise value, the market is only assigning $45.5 million to the company's growing royalty revenues on Exalgo and collaborative revenues on both its cHTS technology and ion channel discovery platform, and the company's two phase 2 candidates in Z160 and Z944.
Traders will be entering the name later in 2013 in anticipation of the two phase 2 study results on Z160. However, I think buy-and-hold biotech investors should begin to look at the stock today based on the fact that the revenues are growing, the costs are shrinking, there's cash into 2014, and the valuation is attractive at less than 5X my 2013 estimate. My target is $1.00.
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