Why Buying 'Market Outperform' Zalicus At A Discount Is Savvy

Here is Zalicus (ZLCS) at a discount.

Recent 12 Month Low

$0.72/share closing at $0.77/share (18 May 2012)

Breaking its previous mid-80 cent low, Zalicus has fallen, but on the heels of ZERO negative news. Zalicus has simply fallen because the market is bearish. This makes Zalicus an ideal buying opportunity if you think the market will eventually recover.

Analysts: 'Market Outperform'

At a recent investor conference hosted by JMP Securities, Dr. Charles Duncan stated that he has Zalicus as 'Market Outperform' with a price target of $5/share. Mr. Jason Napodano of Zacks also has Zalicus as 'Market Outperform' with a price target of $3/share. These two analysts have a long history covering Zalicus.

Market Cap

$0.81/share x 113M common shares = $91.530M market cap

Buy-Out Potential: Above average

End of Q1, Zalicus reported $52.5M in cash liquidity. Factor in the past history that Merck (NYSE:MRK) offered up to $450M for NMED-160 (now Z160). Pipeline valuation including Exalgo, Synavive, Prednisporin, Z160, Z944, and other intellectual property (e.g. cHTS Chalice technology) arguably out-values the company's $91.530M market cap by a minimum 2x multiple (~$180M) making Zalicus an above average buy-out target.

Exalgo Growth

Exalgo registered $1.1M in Q1 2012 royalties. This was a 33% increase Y/Y. The 32 mg version is expected in 2H 2012 as Covidien (COV) spins off new pharma unit. Watson (WPI) will enter generic space in 2013, but not have rights to the 32 mg version (the 64 mg version as well).

Novartis Extends Oncology Collaboration

Novartis (NYSE:NVS) recently extended its oncology collaboration contract for another year. This is the second of three extensions. Numerous patents are on file. One key indication appears to be for multiple myeloma. Very recent proof of Novartis activity cited here.

However, there is more exciting news. In April 2012 (unknown until revealed here), Novartis filed its fifth patent (that I've been able to find) using Zalicus' Chalice software. This patent verifies that Novartis is using cHTS Chalice for multiple myeloma combinatorial research. The latest patent is entitled "Pharmaceutical Combinations". Readers should open the patent and wild-card the words: "combination", "cancer", "synergistic" and "CombinatoRx" -- you will be pleasantly surprised to read what Novartis is up to using Zalicus cHTS Chalice technology. Also wild-card "cell", "glow", and "assay". If you read the patent carefully, you will read about the work Novartis is doing in the Zalicus laboratory. Of course the two firms are doing their best to keep this work hush-hush. But to prove to investors this is no hype on my part I include the following quote from the cited patent:

"Method for calculating the effect of the Combination : To evaluate the everolimus and Compound A combination effect in a non-bias way and to identify synergistic effect at all possible concentrations, the combination studies were conducted with a "dose matrix", where a combination is tested in all possible permutations of serially-diluted everolimus and Compound A single agent doses, in all combination assays, compounds were applied simultaneously. Single agent dose responding curves, IC50, IC90, and the Synergy are all analyzed using Chalice software (CombinatoRx, Cambridge MA). Synergy was calculated by comparing a combination's response to those of its single agents, against the drug-with- itself dose-additive reference model. Deviations from dose additivity can be assessed visually on an Isobologram or numerically with a Combination Index. Excess inhibition compare to additivity can also be plotted as a full dose-matrix chart to capture where the synergies occur. To quantify the overall strength of combination effects, a volume score Infx lnfY (/data - /HSA) is also calculated between the data and the highest-single- agent surface, normalized for single agent dilution factors fx,fY [ref]" (Ibid).

What does this mean? It means Novartis is very actively using Zalicus' cHTS Chalice technology to do oncology research, and in particular, for multiple myeloma. Personally, I think the Market and many investors remain clueless about this major initiative that per contractual agreement is worth a lot of money to Zalicus. No doubt for secrecy agreement reasons, Zalicus is not allowed to discuss this with investors, but the before-mentioned patent is undeniable proof and explains why Novartis extended its contract for another year.

Z160: Dual Phase 2A Clinical Tracks

Initial press release in early March 2012.

Second press release in early May 2012 detailing how the company is going to pursue two phase 2A clinical tracks.

In the two clinical trials, Z160 will target: (1) postherpetic neuralgia (e.g. shingles) with the potential to file 'Orphan Drug' status with the FDA, and (2) chronic lower back pain (e.g. lumbar radiculopathy and/or sciatica pain).

Major competition: Lyrica (Pregabalin), Neurotin (Gabapetin), Cymbalta (Duloxetine). In phase 1 clinical studies, N-type ion channel pain-blocker reformulated Z160 reported a six-fold bioavailability improvement over previous version NMED-160. Take note of how powerful Z160 is in blocking pain: in one study it was comparable to Morphine and Gabapetin.

CFO Renz stated the phase 2A chronic lower back pain (6 week duration) study may begin as early as August targeting ~140 patients, half-placebo, half-Z160. The second postherpetic phase 2A study (also 6 week duration with ~140 patients) will start in Q4 2012. The cost is $7M per study and Zalicus expects top-line data in 1H 2013: chronic lower back pain study, and in 2H 2013: postherpetic.

Z944: Single Cohort Ascending Dose Phase 1 Study

News expected before Q2 2012 end per CFO Justin Renz (Source: JMP Securities conference).

Previous news: Z944 to target other medical needs as a T-type ion channel. For example, Zalicus reported that Z944 may prove to be an effective treatment for epileptic seizures:

"The paper describes the activity of Z944, a novel oral highly-selective small molecule T-type calcium channel blocker, currently in Phase 1 clinical development for the treatment of inflammatory pain. In this study, Z944 was shown to potently suppress seizures in a preclinical model by 85 to 90%. The ability of Z944 to inhibit and reduce the duration and cycle frequency of seizures suggests a unique mechanism of action distinct from current anti-epileptic drugs in clinical practice" (Ibid).

Anticipated Phase 2A launch: Q1 2013

Prednisporin

On schedule per CFO Renz citing Sanofi's (NYSE:SNY) CEO's public comments. However, the time-frame for a 2015 market launch per Sanofi's CEO is narrowing. Zalicus would receive a $3M milestone payment upon the launch of a phase 3 clinical study. News here has good potential of immediately moving the share price.

Hydra Alliance

Zalicus reports Z212 sodium channel type-candidates under preclinical evaluation. Phase 1 clinical candidate expected in early 2013. The closure of the company's Vancouver location was completed in February 2012 as the preclinical research has been contracted to Hydra BioSciences. Hydra also contracts with Cubist (CBST) where Zalicus CEO Mark H. N. Corrigan serves on their Board of Directors.

Synavive

Full enrollment. "On schedule" (Source: CFO Justin Renz, JMP Securities investor conference) for Phase 2B Q3 top-line results in September 2012. Renz commented that the company will either partner or take Synavive forward on its own.

This is perhaps one of the biggest catalysts for Zalicus in 2012. As a side-note, departing VP Christopher Gallen took stocks (versus cash) as part of his separation package; I interpret this to mean Gallen is bullish on Synavive's outcome as he was involved in the market approval of Exalgo.

Numerous Catalysts

Assuming risk of success/failure, Zalicus has a number of major catalysts in the next 1 - 12 months:

  • Prednisporin (Imminent)
  • Z944 phase 1 data (by June 2012 end)
  • Synavive (September 2012)
  • 32 mg version Exalgo (2H 2012)
  • Z160 phase 2A chronic back pain (1H 2012)

Commentary & Opinion

This is my read on Zalicus. Investors may differ and are encouraged to do their own due-diligence. In my opinion...

Synavive, Prednisporin, and Exalgo aside, Zalicus R&D is primarily focused on ion channel research for relieving pain. Internally, Synavive may be the single exception of the CEO Borisy legacy; Prednisporin belongs entirely to Sanofi. Altogether, Zalicus' stock price is well below even the most conservative pipeline valuation.

The company's ion channel IP protection extends into the late 2020's, even 2030's. Anyone who studies Zalicus knows the firm is dedicated to ion channel pain research. The closure of Vancouver was a necessary and strategic move; contracting Hydra is a low-risk high-reward formula. In 2013 Zalicus should have a sodium channel candidate entering phase 1 clinical studies. By 2013 Zalicus' ion channel program will have 2-3 drug candidates with multiple applications potentially valuing the company at much higher levels.

Investors should continue to watch the company's close research association with Novartis, including Cubist where Zalicus CEO Mark H. N. Corrigan is a board member. Cubist's partnership with Hydra may signal Cubist's undisclosed interest in the ion channel program at Zalicus. Therefore, the gross under-valuation of Zalicus makes it an easy buy-out target.

At last count, insiders may not hold enough shares to prevent a hostile takeover. I personally support a takeover and/or a controlling interest by a major firm like Cubist. For now, Zalicus owns 100% of its ion channel intellectual property, and in addition, Synavive, which may in part explain Dr. Duncan's at JMP Securities target of $5/share.

Assuming the high risk of biotech investing, a 100% plus return is within the scope of 2012 possibilities. Here's three conditional catalysts: (1) Synavive's success, (2) Z160 & Z944 advancement into phase 2A studies, and (3) 32 mg approval of Exalgo coupled with Prednisporin's launch into phase 3, then factor in the company's current stock under-valuation. Believing that Zalicus could go from $0.80/share to $1.60/share seems very possible knowing the volatility of biotech stocks.

I rate Zalicus a VERY STRONG BUY. Sooner or later, the market will turn bullish on Zalicus once fact takes over general market bearishness. Buyers who get in early will reap the benefits, but it does take nerve, foresight, and belief to buy low. I implore investors to study the company because its drug development portfolio is stacked with multiple shots on goal. There's too much value here to justify the current under-valuation. Right now, on a high volume bullish day, a savvy investor could pull in a quick 20% return should it pop over $1/share.

Disclosure: I am long ZLCS.

Additional disclosure: I recently took a position in Zalicus. I often write on stocks I own and/or plan to buy. I plan to sell Zalicus "at any time" according to my own personal goals. Investors buy and/or sell at their own risk. "Long" for me means until I sell. I do not "Short" stocks.