Zalicus in Novartis's Sweet Spot Signals More Upside

I venture there is good news on the Zalicus (ZLCS) horizon. Here's why:

A report this morning confirms that Zalicus is among those companies like Incyte (NASDAQ:INCY) that is collaborating into Novartis' (NYSE:NVS) sweet spot, i.e. oncology. But what makes this even more interesting is how Novartis is planning to emphasize its oncology activity here in June.

In lieu of the upcoming American Society of Clinical Oncology (ASCO), a report came out early Wednesday morning (click here) stating: "Novartis also said the data would highlight its drive for targeted therapies, set to be in focus at this year's ASCO, and that it would continue to build up its diagnostics capabilities both internally and through partnerships."

As it turns out, Zalicus is among those companies that has a well-defined contractual relationship with Novartis. In fact, any indication brought forward as a result of that collaboration could be worth up to $58M for the cHTS Cambridge, MA biotech firm. Furthermore, it is well-known that Novartis has been screening its entire oncology library employing Zalicus' cHTS-Chalice technology platform. With Novartis' current drive to be an oncology leader, Zalicus looks to benefit from this unique partnership.

The same article emphasized that: "Novartis is one of the few companies with a deep and broad pipeline that will allow us to combine our product and to identify the groups of patients where these drugs work the best," Hoppenot said. (Ibid) That language is exactly where Zalicus' cHTS is such a key asset.

In my own evaluation of recent Novartis patent activity, one could expect to see signs of the Zalicus-Novartis collaboration in the near future. Similarly, Zalicus is engaged in a pilot program with Amgen (NASDAQ:AMGN) that company sources imply is still ongoing, and optimistically may grow into a much larger collaboration. Given that Zalicus' drug candidate Synavive for rheumatoid arthritis is set to begin phase 2B clinical studies here in June and Zalicus expects Covidien (COV) to file with the FDA the approval of a 32mg version of Exalgo, there is justifiable rationale to conclude that Zalicus is collaborating in more than one sweet spot. Likewise, Zalicus appears to be moving at a quick pace to move Z160 "into man" phase 1 clinical studies in the not-too-distant future.

Therefore, I am encouraging Zalicus investors to pay close attention to Novartis at ASCO. Timing-wise, it is quite possible there could be very favorable news for Zalicus shareholders. Given that the stock recently retraced from a high of $3.21/share on 28 April 2011 to a low of $2.18/share on 23 May 2011. This stock has also put in a triple bottom: $2.15 (12 April 2011), $2.23 (9 May 2011), $2.18 (23 May 2011) and has been churning in the $2.60s range in recent days. With or without news, Zalicus looks to be moving up, but the Novartis news may be one more reason why it will reach $6-9/share in 2011.

Disclosure: I am long ZLCS.