By Jason Napodano, CFA
Make no mistake about it, Zalicus, Inc. (ZLCS) has a potential blockbuster on its hands if eagerly awaited data on pain drug Z160 hits in a few weeks. Z160 is an N-type calcium channel (Cav2.2) blocker currently in two Phase IIa studies, one for post-herpetic neuralgia (PHN) and another for lumbosacral radiculopathy (LSR). These trials completed enrollment in early September 2013. Both are of similar design - 140 patients, 6-weeks, looking for signs of reductions in pain on a numeric rating scale, along with safety and tolerability. If we assume the company needs 4-5 weeks to analyze the data after the last patient enrolled, results should be coming by the middle of November.
We've written at great length about Z160, putting the company on notice for PropThink readers back in May 2012. In August, we wrote an article outlining the history of Z160, formerly Merck's (MRK) MK6721, and how Zalicus has spent the last several years reformulating the drug. The mechanism of action for Z160 has been validated by ziconotide, marketed by Jazz Pharmaceuticals (JAZZ) as Prialt; only Z160 is an oral tablet and Prialt is a direct injection into a patients spinal cord. Preclinical data (spinal nerve ligation) on Z160 is suggestive of efficacy on par with ziconotide, gabapentin, and morphine. Positive Phase I data was released in March 2012.
Management describes their goal with Z160 as, "Lyrica-like efficacy with significantly improved safety and tolerability." Lyrica is a monster drug for Pfizer (PFE). The drug did $4.2 billion in sales in 2012. Lyrica's label includes neuropathic pain associated with diabetic peripheral neuropathy, post-herpetic neuralgia, fibromyalgia, and neuropathic pain associated with spinal cord injury. However, meaningful side-effects and tolerability issues include somnolence (13-16%) and dizziness (23-29%). We believe that Lyrica's side-effect profile, which is only modestly better than generic gabapentin, is due to the drug's non-selective binding at the alpha2-delta Type 1 protein.
Management believes Z160, however, is far more selective, and unlike the irreversible binding of ziconotide at Cav2.2, Z160 is state-dependent. This means the drug 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. Additional data in this regard was presented in May 2013 at the 32nd Annual Meeting of the American Pain Society via a poster entitled, "Z160: A potent and state-dependent, small molecule blocker of N-type calcium channels effective in nonclinical models of neuropathic pain."
What Does This All Mean?
Lycia posted worldwide sales of $4.2 billion in 2012. Gabapentin, marketed by Pfizer as Neurontin until generics arrived in 2004, posted worldwide sales at peak of over $2.7 billion. The reason Zalicus did two Phase IIa studies is to potentially show efficacy in a classic model of neuropathic pain (i.e. PHN) and compression / irritation neuropathic pain (i.e. LSR). We think that's smart, because it makes the molecule highly attractive to larger pharmaceutical partners if both trials succeed. And, Zalicus is doing all the right things to attract big pharma, like gaining patent extensions and orphan drug indications for the compound. Quite simply, Z160 is potentially an enormous drug if it works in both PHN and LSR.
For example, going 2-for-2 in these Phase IIa studies means the drug can probably capture 25% of the market from Lyrica and generic gabapentin. That pegs peak worldwide sales in the area of $1.5 billion. Under that scenario, Zalicus' stock will skyrocket on the news. Specifically, if we peg Z160 sales at $1.5 billion in 10 years (assumes 6 years to approval and then 4 years to peak sales), give the drug a 30% chance at success, apply a conservative 3.0x price-to-sales multiple to that figure, discount back to present day at 15%, and then divide that number by the current outstanding share count of 24.6 million, we get a stock price of $14. That's 250% upside upon going 2-for-2 in the above studies
If only the PHN trial hits, which may not be a big surprise to those familiar with how difficult clinical trials in LSR are, then we peg Z160 peak sales at around $500 million. The figure is so much lower than $1.5 billion (on going 2-for-2) because if we assume if Z160 works in PHN and LSR, then it probably works in diabetic neuropathy and fibromyalgia as well. If LSR fails, the company may conduct additional studies to qualify the efficacy in expanded neuropathic pain indications. Under that scenario, with similar metrics to the above methodology, we believe Zalicus' stock is worth $5. That includes nothing for Phase I candidate Z944 or the rest of the ion-channel pipeline. If only the LSR trial hits, management scratches their heads a little with respect to the mechanism for Z160, but in the end moves forward expeditiously because LSR - essentially lower back pain - is a huge market. A label for LSR alone probably gets Z160 sales to $600 million. Under that scenario, the stock is worth $6. Therefore, going 1-for-2 probably nets investors a 25% to 50% return.
If Zalicus goes 0-for-2, we think the stock drops to $2 per share. This would be based on the residual cash on the books and the potential of the acute pain drug Z944. The failure of Z160 has no bearing on the success of Z944 in our view. These are completely distinct mechanisms of action for completely different pain indications. Nevertheless, if Z160 bombs, you probably lose 50% of your money.
The preclinical animal model data for Z160 are strong and Phase I results are suggestive of improved formulation. Strong positive data could earn a 250% return. Mixed news probably still nets a decent return, or at least enough to get out break-even on the trade. Of course, if the drug fails, we suspect losses of around 50%. That's a nice ratio on good news vs. bad news, and thus might be something traders want to consider playing over the next three weeks.