Zalicus Says Workforce Reduction Is A Strategic Decision

Very, very sadly for the 16 pink-slipped employees and families, Zalicus (ZLCS) is shutting down its Vancouver, British Columbia, research center. Late Thursday, Zalicus, the Cambridge, MA, firm, issued a press release stating its intention to close its Vancouver, British Columbia, operation in a new collaborative effort with Hydra BioSciences. The final paragraph of the press release warrants careful reflection:

In connection with the collaboration agreement, Zalicus also announced it will discontinue its Vancouver, British Columbia-based ion channel discovery research operations, resulting in a workforce reduction of 16 employees, or approximately 28% of the Company's workforce.

I begin here because 16 dedicated employees lost their jobs. In an 8-K filing, their top-line executive VP Christopher Gallen, who is recognized for his role in bringing Exalgo to market, including the merger between Neuromed and CombinatoRx (now Zalicus) announced his own resignation:

On February 7, 2012, Dr. Christopher Gallen resigned as Executive Vice President, Research and Development of the Company, effective March 1, 2012. Dr. Gallen is resigning to pursue other interests.

Dr. Gallen will be missed and his talents will leave a gaping hole. For those who remember Neuromed, he was a very capable leader.

Of course, the reason for terminating 16 employees was to conserve cash in this new arrangement with Hydra BioSciences. Interestingly, Hydra also has a partnership with Cubist Pharmaceuticals (CBST). Zalicus's CEO Mark Corrigan sits on the Cubist Board of Directors (since 2008.) Could it be that CEO Corrigan has a longer-term relationship in mind with Cubist Pharmaceuticals? Could a future merger be in the works here?

The press release stated the new partnership would focus on products in pre-clinical development and not include already enrolled Z160 and Z944 that are in phase 1 clinical trials:

"'Coming so quickly after our January announcement of Hydra's and Cubist Pharmaceuticals' progression in the clinic with our novel TRPA1 modulator for acute pain, the collaboration with Zalicus solidifies our strong position in this area and provides non-dilutive capital to help fund internal activities," said Russell Herndon, Chief Executive Officer of Hydra Biosciences. "The Hydra team looks forward to collaborating with Zalicus to advance their sodium and calcium channel candidates toward clinical development in the next two years.'"

This new partnership is bitter-sweet. Hard for the unemployed families, good for the company's balance sheet. But why should we be surprised with Bill Hunter of bankrupted Angiotech Pharmaceuticals that got delisted to the pink sheets and Frank Haydu of 14 cent/share IParty sitting on the Zalicus company's board?

Still the Vancouver operation was eating up precious dollars. Zalicus Inc. took on nearly $15-20M in new debt in 2011, has diluted company shareholders, and shareholders got it handed to them right after Exalgo got approved in 2010 by the FDA while the company executives padded their pockets for a drug that has under-performed.

Finally, brace yourselves for the Q4 2011 financial results to be published in the coming weeks. I suspect investors are going hear a huge sucking sound as Exalgo's royalty figures continue to under-perform and the cash-burn sets the company up for a 2012 stock dilution. Okay, on the one hand, some will say it was time to shut down the Vancouver operation, but read carefully:

"Under the terms of the agreement, Zalicus will pay Hydra an upfront payment and fund research and development activities at Hydra for a two-year period."

More expense. But maybe the hope of discovering a new sodium channel pain blocker? Time will tell. I sure hope Novartis (NYSE:NVS) comes through this year with news for Zalicus shareholders; there is no mention yet of the annual contract being renewed.

Caveat: Monday Morning's Biotechnology Industry Presentation

CFO Justin Renz informed investors to expect Synavive phase 2B results in Q3, also referencing Q4 2012. Looks like Prednisporin at Sanofi (NYSE:SNY) may not get to phase 3 until 2013. The company hopes for good phase 1 results to move its ion channel candidates Z160 and Z944 into phase 2 studies later this year. Unfortunately it doesn't look like investors have much to look forward to in the first half of 2012. Exalgo earned $4.1M in 2011-- the company remains optimistic.

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