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What are we to make of Exalgo, the slow-release opioid pain-reliever?

In March 2010, Zalicus's (ZLCS) Exalgo, licensed to Covidien (NYSE:COV) crossed the FDA finish line. It was a luminous month, promising an even brighter future for then, CombinatoRx, that had merged with Neuromed. But by Q2 2011, the value of Exalgo to Zalicus is yet to come to fruition, and this time, the ailing market punished the company's share price which closed on Friday: $1.52/share. Therefore, I've begun to wonder: Are Exalgo's ramp-up sales slow-release too?

After listening to CFO Justin Renz fill in for CEO Mark H. N. Corrigan at two key institution-investor conferences (Canaccord Genuity Growth Conference and Wedbush Securities 2011 Life Sciences Management Access Conference), my worries about Exalgo's value to Zalicus have increased. It appears to me that the market shares the same anxiety. Exalgo's value to Zalicus remains unproven.

At the Wedbush conference, CFO Renz reported:

"... Covidien launched the product in 2010... 275 sales reps... we received tiered royalties on the net sales of Exalgo from Covidien... and through June 30th we received two and a half million dollars. Our most recent quarter we received just over five hundred thousand dollars from Covidien..." (Note: this is a quote from the conference call so investors are advised to listen to the report [Ibid]).

To be blunt, CFO Renz's comment tweaked me. $2.5M? Sure, since Q2 2010 and the initial shelf-stocking. But why not say it? More like $900,000 through the first half of 2011. So stop the spin! Exalgo is yet to earn Zalicus even one million dollars through the first half of 2011! Going back to Q2 2010 is a subtle way of covering Exalgo's very sluggish, slow-release roll-out.

But here's the problem. Zacks' analyst Mr. Jason Napodano estimated Exalgo's net present value (NPV) at $135M with an estimate of $10.4M to Zalicus in royalties in 2011. As it has turned out, Zalicus through the first half of 2011 has barely earned $900,000 dollars which is a long shot towards $10.4M. Mr. Napodano, who I have always found to be an astute analyst communicated to me in an e-mail that he was "disappointed." Because I trust Mr. Napodano, his comment rocked my otherwise enthusiastic and optimistic outlook. Had I become blind to reality? And further complicating the issue was knowing that Zalicus's share price and Zacks' target price are directly tied to Exalgo's performance, a performance that apparently is yet to work down the original inventory from Q2 2010.

The rub is the valuation of Zalicus has been factored upon Exalgo's success and Napodano's NPV of $135M. Of course, CFO Renz repeated the earlier year mantra of Covidien, that Exalgo is worth all of $200-300M per year. The problem is, the first five quarters of data suggests the opposite, and so does Covidien's press releases that have repeatedly stated that Exalgo and Pennsaid have failed to offset other specialty pharmaceutical losses.

In my opinion, Covidien's Exalgo quarterly reports don't sound very optimistic; they come across as cryptic. Furthermore, it doesn't help when you read that Covidien has its pharmaceutical division on the sale-block. So much for Exalgo! Moreover, it is public knowledge that Watson (WPI) has already made its own move to usurp higher-priced Exalgo with a generic version given the patent expires in the not-too-distant future. The point is: Zalicus's window for earning healthy royalties is short-term unless Watson is stalled.

On top of that, at the two August 2011 conference presentations, CFO Renz, for whatever reason, completely ignored or failed to mention any update on the 32 mg dosage version of Exalgo. Why I mention this is because CEO Corrigan, earlier in Q2, mentioned that the 32 mg dosage was essential to Exalgo's sales. As one investor confided to me, it could be that Exalgo is a flop because the 8, 12, and 16 mg dosages are not strong enough to mitigate pain. I concur with his hypothesis. Yet, here we are, a month or two after CEO Corrigan's comment, and CFO Renz said nothing about the 32 mg dosage. So what gives? Is Covidien moving the 32 mg dose forward or not?

It could just be that Zalicus is going through a thorny patch. To its credit, its phase 2B Synavive clinical trial appears to be moving forward. However, the once debt-free company has been borrowing money ($3.5M [Q1], $8.5M [Q2], and may borrow an additional $8.5M before year end). Nevertheless, the wait continues for Zalicus to announce one or two ion channel candidates going into phase 1 studies hopefully by "year end".

The point is, Zalicus may have great long-term value, but Exalgo's weak performance and the mystery surrounding Prednisporin's future at Sanofi (NYSE:SNY) remains unanswered. Finally, there is still no news on the Novartis (NYSE:NVS) collaboration, and over CEO Corrigan's tenure, he is yet to deliver another revenue-generating partner similar in dollars to Novartis. All we've heard are promises, promises. For the stock price to recover its former glory, Zalicus must deliver on its promises.In the final analysis, Exalgo must deliver a very strong Q3. I for one, hope that happens because the company's valuation depends upon it. Not because I have said so, but because the analysts covering Zalicus have said so.

Source: Zalicus May Have Long-Term Value, But What's Behind Exalgo's Weakness?