On Friday's close, Zalicus (ZLCS) ended the day up an impressive 13.90%. But for no reason? Hardly. Another astute SA author named Ramsay Schrum notified investors that Zalicus was "Locked and Loaded..." while I in my own article alerted investors that I suspected the same. Well, happen it did on a red Market day and it's nowhere finished. I have been right about Zalicus before; I expect I will be right again because investors know the stock price potential of this very volatile stock. What Friday's closing price confirmed is that Market perception concerning Zalicus has turned positive. So the Market open on this coming Tuesday and the days that follow should be very rewarding for the savvy investor who gets in early.
Which is why this double-digit percentage reversal (13.90%) reminds you of the many revenue-generating and revenue-potential shots on goal at Zalicus. With two analysts' projections at $3 and $5, Zalicus is incredibly under-valued.
Looking at One of Many Shots on Goal
In this article, I will narrowly focus on only one shot on goal: the Zalicus-Novartis (NVS) collaboration. To accomplish this, I will explore a detailed look at the collaboration's history including a detailed analysis of the growing intellectual property often buried in patent files.
This may in part explain why the bulls are returning--once investors and institutions realize that this is only one among many Zalicus shots on goal, I maintain Friday's price rebound is just a foretaste of better days ahead. Zalicus's share price remains a bargain.
Looking Back From Last Year to Today
Last year I published an article on the Novartis-Zalicus collaboration. It received a very positive response because this collaboration could be a significant revenue enhancer for Zalicus.
Now, almost a year later, I have observed that the Novartis-Zalicus collaboration has gained significant traction. My purpose here is to explain in detail (especially for new investors) my reasons... and I offer my own speculation:
- I think Novartis may initiate a preclinical study within the next twelve months. I also think that this could be an important source of revenue to fund Zalicus's ion channel program and possibly Synavive's phase 3 clinical study. But more importantly to the languishing share price, I wager it willl bring a wave of institutional buying and new retailers to Zalicus.
Secrecy Explains the Silence!
Of course, secrecy agreements keep public information in check and all investors have heard to date is that Novartis has extended its contract with Zalicus for another year. But with a little digging, one discovers there is more to this than a little revenue generation in the Zalicus laboratory. This is a much bigger initiative than either CEO Corrigan or CFO Renz are permitted to admit to, and Novartis's patent activity actually proves it.
Patent Activity: Looking Under the Hood
Of course some think researching a company's patents is boring, speculative, and impossible to read. But really, a company's patent activity is one of the few legal means for investors to step behind the security gate that keeps you from going inside. I see it as getting an opportunity to look under the hood of a car. What is the motor powering this car? Patents expose what a company has been up to behind closed doors.
Which brings me to the issue of timing. Companies time their patent applications to gain maximum value. In the case of combinatorial medicine, the necessity of patent protection is paramount since the combination of existing drugs may already be FDA approved. Therefore, establishing a strong patent estate is essential to a drug company's success. This is actually a partial explanation as to why Zalicus's drug candidate Prednisporin, a combination of prednisolone acetate and cyclosporine A, has been moving at a snail's pace at Sanofi (SNY); Sanofi has not only been working on the formulation to move it into a phase 3 clinical study, Sanofi has also been taking the careful steps to protect the intellectual property that combines two common drugs that otherwise could be easily copied.
The Oncology Story Unfolds
In Zalicus's own history (CombinatoRx), they have been engaged in combinatorial oncology research from the early days of founder CEO Borisy. One drug combination, for which Zalicus holds an approved patent, CRx-026 is a combination of pentamidinen and chlorpromazin. This work dates back a decade and was eventually abandoned (I was told), but not before Novartis cited it in four of its own patents:
- 1,3-dihydro-imidazo[4,5-C]quinolin-2-ones as lipid kinase inhibitors
- 1,3-dihydro-imidazo [4,5-C] quinolin-2-ones as lipid kinase inhibitors
- Hydroxamate-based inhibitors of deacetylases B
- 3-imidazolyl-indoles for the treatment of proliferative diseases
In time Novartis signed a collaboration with Zalicus because they recognized, as many have, the value of oncological combinatorial medicine. Therefore, on 1 May 2009, the two companies began this journey together which is why the contract comes due each May. The details of this collaboration is worth a lot of potential revenue for Zalicus:
Under the terms of the collaboration agreement, CombinatoRx will receive an initial payment of $4.0 million and annual research support payments of up to $3.0 million, plus certain expenses. In addition, the collaboration agreement may provide CombinatoRx with up to $58 million for each combination product candidate advanced by Novartis upon achievement of certain clinical, regulatory and commercial milestones. The research program has an initial two-year term that may be extended by Novartis for three additional one-year periods. Novartis and CombinatoRx also entered into a Software License Agreement, where CombinatoRx has provided Novartis with a non-exclusive license to use its proprietary Chalice™ analyzer software in connection with the collaboration and other Novartis research programs for approximately five years (Ibid).
At this point Novartis-Zalicus have entered year four of the collaboration. It's been within this last year that profitable signs of the collaboration showing traction have begun to show up. And actually, it was a year ago that Dr. Short from Zalicus introduced us all to what he called "combinatorial ultra-High-Throughput Screening" (cuHTS) which is combinatorial high-throughput screening (cHTS) put into light-drive! Zalicus has been screening Novartis's entire oncology library.
Four Patents Reveal the Collaboration's Growth
Looking within the last year, four patents out of Novartis prove that the collaboration is coming to fruition:
- WIPO Patent Application WO/2011/075620
- United States Patent Application 20110245256
- WIPO Patent Application WO/2011/120911
- WIPO Patent Application WO/2011/130232
Investors should note that 3 of 4 patents represent a global footprint. Novartis is actively creating its own patent estate.
In 2012, The Collaboration Gaining Significant Traction
One of Novartis's most recent patents, entitled "Pharmaceutical Combinations" offers detailed evidence of the work they've been conducting at Zalicus (I apologize to SA readers for its technical detail but it's necessary to cite this to prove the breath of Novartis-Zalicus collaboration):
Automated imaging assay (or High-content assay) for pS6 S240/244 and p4EBP1 T37/46: 2-4 x 103 cells were seeded in clear-bottom 384-well black plates (Greiner#781091) in 30μΙ per well growth media 24 hours prior to treatment...
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].
Keys words: CombinatoRx, synergy, combination assays, Chalice (a reference to Zalicus software)
What It Means to Investors
Given that this is the beginning of year four of the collaboration, and surveying the patent activity to date, it does seem plausible that Novartis is getting close to moving a combinatorial candidate into preclinical trials (if not already).
From reading the patents, multiple myeloma seems to be a common thread and it represents a significant need. Previous Zalicus work with the Dana Farber Institute has focused on multiple myeloma and Dr. Lee's work et al. at Zalicus is well known as cited in a recent press release.
I have primarily written this article to document the collaboration story of Novartis-Zalicus from start to where it may be today. Most likely, it is even more advanced than I have represented as patent research includes significant lag time (6 - 12 months before publication).
I have also written this article to highlight to investors that here is another logical reason why the current pps is a miserable reflection of this company's true valuation.
In my last article on Zalicus, I issued a VERY STRONG BUY and nothing has changed my opinion. Biotech investing at this level represents high risk, but near-term it looks like Zalicus investors are going to receive an update on the phase 1 clinical study of Z944: I anticipate it will be good news and high volume bullishness will propel the stock upward. I continue to maintain that getting in now is savvy for those who can tolerate high-risk investing. The Zalicus bulls are back and the share price could climb very quickly.
Disclosure: I am long ZLCS. I recently took a position in Zalicus and I may actively day-trade the stock over the next 72 hours following publication and days thereafter. Investors buy and/or sell at their own risk. "Long" for me means until I sell. I do not "Short" stocks.