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Zalicus announced it has initiated a phase 2b clinical trial evaluating Synavive for the treatment of rheumatoid arthritis (RA). The trial, SYNERGY (SYNavivE for Reducing signs and sYmptoms of rheumatoid arthritis trial), is a 12-week, 5-arm, double-blind, placebo-controlled study to evaluate the safety and efficacy of Synavive as a treatment for the signs and symptoms of rheumatoid arthritis in approximately 250 subjects with moderate to severe disease. The trial will be conducted in up to 60 centers throughout the U.S., Europe, and Latin America.

The primary objective of the trial is to evaluate Synavive efficacy compared to placebo. The primary endpoint will be efficacy measured by the Disease Activity Score in 28 Joints (DAS28). DAS28 is a common outcome tool used in therapeutic trials to assess disease improvement or response. Key secondary objectives include evaluating the efficacy of Synavive compared to its individual components (2.7mg of prednisolone and 360mg of dipyramidamole) as well as how Synavive performs in comparison to 5mg of prednisolone. Subjects who complete the core SYNERGY trial will be eligible to participate in a one-year extension study designed to investigate the long-term safety and durability of response for Synavive. We estimate the program will take approximately 12 months to complete, thus we are expecting top-line data in the middle of 2012.

Previous Data Supports Optimism

We are optimistic on the outcome of the trial based on results from the previous phase 2 studies with Synavive in RA. As a reminder, in November 2006, management presented positive data from a phase 2a program studying Synavive in patients with RA. The trial compared Synavive plus a disease-modifying antirheumatic drug (DMARD) to placebo plus DMARD (control) in subjects with RA over a 6-week treatment period. The primary endpoint was reduction in C-reactive protein (CRP) levels comparing drug plus DMARD to placebo plus DMARD from baseline at day 42. Secondary endpoints of the trial included ACR-20 responses and DAS-28 scores.

During the trial, Synavive was generally well-tolerated with no serious adverse events (SAE). The most common side effect was headache, with gastro-intestinal symptoms and dizziness also reported. These are all common side effects of the dipyridamole.

We note that Zalicus has also conducted a phase 2b study testing Synavive in patients with knee osteoarthritis (OA). COMET was a large-scale study in 279 patients with knee OA, with a standard flare design where subjects with active disease needed to demonstrate an increase in knee pain as determined by the WOMAC question #1 (related to pain while walking on a flat surface) upon withdrawal of their NSAID/COXIB therapy to be eligible. Subjects were dosed for a total of 14 weeks (98 days) including an initial two-week dipyridamole titration phase. The data shows a dose-related improvement in baseline change, however, the results were not significant for any cohort tested. We believe this was due to the high discontinuation rate (32%), mainly the result of adverse events and subject requests. In follow-up analysis, management identified a number of protocol violators, including use of restricted or prohibited medications during the trial. It is important to note, over half of the protocol violators were in the placebo or prednisolone alone cohort. This dramatically impacted the statistical analysis when compared to the studied doses of Synavive.

Management conducted a modified ITT analysis using the last observation carried forward for these non-compliant patients. Under the mITT analysis, the highest dose of Synavive (2.7/360mg) did demonstrate clinically meaningful benefits in WOMAC Pain, Stiffness, Physical Function, and Hand Pain VAS. The data also showed an improved dose response curve for the low and middle-dose Synavive cohorts. The high dose of Synavive (2.7/360mg) demonstrated an 18.1mm improvement over placebo and a 6.2mm improvement over prednisolone alone on the primary WOMAN Pain endpoint.

Subjects who completed the 14-week core study were eligible to participate in a 12-month, open-label extension study designed to investigate the long-term safety and durability of response for Synavive. This data was presented in October 2009 at the American College of Rheumatology 2009 annual meeting. The data demonstrated that Synavive subjects maintained efficacy levels throughout the 12 month extension trial. These findings further support the mITT data that demonstrated efficacy for the highest dose of Synavive. In addition, subjects on placebo were able to cross-over to Synavive for the 12 month extension study. These patients also experienced statistically significant improvements in all WOMAC measurement subscales upon crossing over.

Importantly, no treatment-related increase in glucocorticoid associated adverse events was observed in any Synavive treated subjects. This includes no worsening of vision, adrenal glucose, infection rate, hypotension, hyperglycemia, or osteoporosis (as measured by bone mineral density).

New Formulation Should Reduce Discontinuations

COMET failed due to the high discontinuation rate of 32%. A significant number of patients in the trial reported headaches. This is most likely the result of the dipyridamole component, which has been known to cause significant headache due to its vasodilating properties. Management has re-formulated the dipyridamole in Synavive from an immediate release to a modified release. The new formulation of Synavive provides time-release co-exposure to both prednisolone and dipyridamole. It also offers a significantly improved tolerability and side-effect profile, as demonstrated in a small (n=24) patient study in which 0% of the subjects experienced headache vs. 41% for conventional dipyridamole. The modified release formulation also allows for a once daily dosing format. We note this new formulation is what Zalicus is studying in the phase 2b SYNERGY trial discussed above.

A Big Opportunity

Rheumatoid arthritis is among the most common degenerative joint diseases and a frequent cause of physical disability among older adults. In the U.S. more than 100 million people suffer from RA and OA, combined. The disease affects the hands, lower back, neck, and weight-bearing joints such as the knees, hips, and feet. Symptoms range from stiffness and intermittent mild pain to severe joint pain and impaired biomechanical function. Over the past year, management has been conducting a series of interviews with key opinion leaders, practicing rheumatologists, primary care doctors and managed care personnel to fully explore the potential for Synavive in RA. Based on their feedback, management believes that RA is attractive on a number of fronts, including current medical practice in which there is already a high prevalence of glucocorticoid use in RA to combat inflammation and restore function, as well as the unmet need for less expensive, easier to access options to biologic therapy.

The SYNERGY trial is set up to demonstrate that Synavive superiority to placebo and the individual components, and offer non-inferiority to the higher dose of 5mg prednisolone. The ultimate goal of Synavive would be to replicate a 7.5mg dose of prednisolone, albeit without the side-effects commonly associated with high doses of corticosteroids. This would allow RA patients to take Synavive daily as a maintenance therapy to prevent flare-ups. The current treatment paradigm is for patients to manage pain by using non-steroidal anti-inflammatory drugs ((NSAIDS)) and Cox-II inhibitors, local analgesics, opioids, oral steroids, disease modifying antirheumatic drugs, intra-articular corticosteroid injection and surgery. The withdrawal of two high-profile Cox-II drugs, Merck s Vioxx and Pfizer s Bextra, has created a significant void the prescription NSAID market. These two drugs were annualizing at sales over $6 billion worldwide before they were pulled from the market for cardiovascular safety concerns. As such, the market has dramatically shifted toward over-the-counter NSAIDs such as naproxen and ibuprofen to management pain.

Rheumatologists typically start patients with RA out on steroids or DARMSs such as cyclosporine and methotrexate. Rheumatologists do not like to prescribe high doses of prednisolone as a maintenance therapy to control flare-ups due to the potential for serious side-effects such as high blood sugar, dyslipidemia, weight gain, insomnia, and weakening immune system. Failure of these pain and steroid medications leads to the use of stronger disease modifying anti-rheumatic drugs such as TNF-alpha molecules and biologics. These drugs carry potential serious metabolic, gastrointestinal, renal, and liver risks. The biologics are also injectable drugs, offering less convenience than a once-daily oral medication. Accordingly, a safer alternative such as Synavive could be a blockbuster product in the hands of a major pharmaceutical company.

The treatment paradigm for osteoarthritis plays out in a similar fashion. In the U.S. more than 100 million people suffer from RA and OA combined. We encourage investors to view our research report from November 2010 that discusses the previous phase 2 data with Synavive in the phase 2a RA program and the phase 2b COMET-1 OA program. Beyond RA and OA, we believe Synavive has potential in other steroid-responsive diseases such as polymyalgia rheumatica, lupus and ulcerative colitis (Crohn's).

IP Position Solid

In April 2011, Zalicus announced that it has been granted a composition-of-matter patent by the U.S. Patent and Trademark office covering Synavive. U.S. patent number 7,915,265 entitled "Combinations for the Treatment of Immunoinflammatory Disorders" provides broad coverage for Synavive through August 2025. This key patent, along with the existing issued method-of-use patent (US patent 7,253,155), fortifies the Synavive patent estate, which includes several patents and patent applications, granted and pending worldwide which collectively provide coverage of Synavive through 2028.

Cash Position Solid

Zalicus exited the first quarter ended March 31, 2011 with $52.8 million in cash and investments. We view this to be sufficient cash to fund operations well into 2013.

We note that on December 22, 2010, Zalicus entered into a loan and security agreement with Oxford Finance Corporation for up to $20 million. The loan included three terms: Term-A: $3.0 million upfront, Term-B: $8.5 million on or before July 15, 2011, and Term-C: $8.5 million on or before January 15, 2012. Management has taken down the initial $3.0 million upfront payment (Term-A) and the second $8.5 million tranche (Term-B) upon the initiation of the SYNERGY trial in late June 2011.

During the first quarter 2011, Zalicus raised approximately $15.1 million through an equity distribution agreement with Wedbush Securities relating to the sale of 7.14 million shares of common stock. We note that the offering was completed in April 2011 with an additional 1.75 million shares, for an additional $4.1 million in cash.

Recommendation

Our sum of parts / NPV analysis for Zalicus yields a total firm value of roughly $350 million, or $4 per share. We see Exalgo alone worth $1.50 per share. We note the current cash balance is over $0.50 per share. At the current value of only $250 million we believe the company is under-valued. We see upside beyond the $4 level based on positive news from Sanofi on prednisporin, or partnering of the early-stage ion channel program. We rate the shares 'Outperform'.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Zalicus: Undervalued, With Strong Pipeline Potential