Covidien's Report on Exalgo Validates Zalicus' Upward Price

 |  Includes: EPRS, MDT
by: James Stocklasar Thomas Jr.

Should Zalicus (ZLCS) long-term investors be surprised?

With the recent rise of Zalicus's (ZLCS) share price, I have observed that more speculative articles are beginning to appear. I wonder why? Are some hoping to flip Zalicus for a quick profit or rake shares from emotionally driven retailers?

For example, one writer appears completely clueless about Covidien's (COV) FDA-driven REMS program for the roll-out of Exalgo, which is why Covidien was already well-prepared for the FDA's tightening opioid restrictions. As Covidien stated in response to the FDA's announcement: "Since Covidien’s Mallinckrodt business introduced a branded extended release opioid in April 2010, the Company has implemented a comprehensive REMS for it that aligns closely with today’s FDA guidance." Furthermore, Covidien's leadership is a proven fact as "last fall the Company launched the C.A.R.E.S. (Collaborating and Acting Responsibly to Ensure Safety) Alliance, a growing coalition of six patient, provider, and community organizations focused on providing resources and tools to support the responsible prescribing and safe use of prescription pain treatments" (Ibid.). Apparently that misinformed writer failed to do her homework.

The fact is, Exalgo is gaining strong market penetration, as for example, having received formulary approval by TRICARE (Department of Defense) serving the U.S. military. Go here to search "Exalgo". But herein is another example how another writer suggests that Zalicus is pumping its pipeline when any observer who has followed the company would conclude the polar opposite. Why? Because Zalicus has shown verifiable restraint regarding its entire research program restricting itself to news releases such as 8Ks & 10Ks, published scholarly articles (e.g. "A novel slow-inactivation-specific ion channel modulator attenuates neuropathic pain"), a recent key patent for Synavive, as well as normal corporate presentations at business forums such investor events.

Furthermore, it was JMP Securities who first raised Zalicus' target price to $5/share on 25 March 2011, and not Wedbush Securities Inc., which executed the recent funding of $20M by selling 8,884,800 common shares. Wedbush didn't set a $5 target until Wednesday of last week. As I have demonstrated, all of these events are documented by historic facts versus dubious short-motivated falacious speculation aimed to drive the share price down. As someone once said, "I'm nobody's fool!" In fact, in late 2009/2010, Zalicus apparently gained two cHTS research contracts (U.S. Army Medical Research Institute of Infectious Diseases and a pilot program with Amgen (NASDAQ:AMGN), but it wasn't until many months later that investors learned of either events -- Zalicus can hardly be accused of pumping; to the contrary, I would assert the opposite. Zalicus is astutely protecting its clients.

Therefore, informed fact-hungry investors like myself looked forward to Covidien's quarterly report now completed. It was an event I previously (Go here) alerted investors to look for as an indicator of Exalgo's progress in lieu of Zalicus's upcoming quarterly report to be released in early May. As it turned out, Covidien's CEO reported excellent news during the Q&A session which clarified an earlier news release that stated: "In branded pharmaceuticals, sales of our new EXALGO and PENNSAID products did not offset a significant decline for our older brands, which stemmed from competition from generics." This quote left investors wondering how Exalgo sales were going, but part of that answer is understanding how much pressure has been on Covidien's branded drugs that have gone off patent thus resulting in steep revenue losses (e.g. Afranil, Pamelor, Restoril, Tofranil). But as it turned out, the Q&A answered everyone's angst in spades, as Covidien's CEO regarding Exalgo's sales was evidently bullish per the reported Q&A dialogue (Go here for the full manuscript).

For example, at approximately 9.05am EST, investors listened to:

Joanne Wuensch - BMO Capital Markets U.S.

"And you launched several new products that were supposed to help out at the end of the year in Pharma such as EXALGO and PENNSAID. Could you give us an update on uptake of those products please?"

Richard Meelia

"Sure, this is Rich. EXALGO's right on plan, doing very well, and there's a lot of expectation that it may exceed our original forecast, so that's good. PENNSAID, there's been some competitive headwinds as well with some reimbursement issues. And so that would be slightly behind where we thought it would be. But overall there, I mean, they're very profitable. And we still feel very positively about both -- on the EXALGO is demonstrating the results, and we think PENNSAID, we understand what we need to do. So they're doing fine."

Later in the Q&A investors heard:

Michael Matson - Mizuho Securities USA Inc.

"Okay. And then in your branded drug business. I know you kind of commented on how you're doing with the new branded drugs, but at what point do you think you're going to see these new branded products start to offset the declines that you're seeing in your old products that have run off patent?"

Richard Meelia

"I would say we're starting to see it already, just not at the extent that it would totally compensate for the loss. And I believe we're talking in excess of $100 million between RESTORIL and tofranil. And so a couple years from now, I mean you'll see -- I think within 12 to 18 months, you'll see that kind of sales volume being generated by EXALGO and PENNSAID and feel pretty comfortable. Those are peak year sales of I think PENNSAID was $150 million or so, EXALGO was $200 million, in that category."

In September 2010, Jason Napodano of Zacks initiated coverage of Zalicus. He later wrote in November: "Our NPV calculations show that Exalgo alone is worth $135 million, or $1.50 per share. This is based on an estimate low double-digit royalty rate on Exalgo peaking at $250 million in 2018." Now we are learning from Covidien that Exalgo "may exceed" their original estimates. I interpret that as great news.

Day-traders will do what they do--trading in and out of Zalicus, but long-term investors apply a different strategy. The fact is Exalgo is well on target if not exceeding Covidien's original estimate. I interpret that to mean that Covidien is bullish on Exalgo (which by the way has performed much better than Pennsaid). Furthermore, Predniporin news from Sanofi-Aventis (NYSE:SNY) could come at any time as well as news of developing revenue generating collaborations, Synavive's phase 2B launch, and updates on the ion channel programs. Personally, I wouldn't want to be out of the stock when these news items come.

Therefore, I will continue to hold for $6-9/share in 2011.

Disclosure: LONG ZLCS at the time of writing.