Zalicus Is Trading At Bargain Levels

Based upon my estimates, Zalicus (ZLCS) has impressive upside potential of 300% based upon two unique drug discovery platforms: Ion Channel Modulation and High Throughput Screening (cHTS) technology. ZLCS is the clear leader in ion channel research wherein ZLCS is developing oral medications that target pain signaling. If successful in trials, ZLCS's "Z" drugs would be a strong competitor in a mega-billion dollar market against lucrative opioid drugs with unpleasant side effects, including addiction.

On June 19, 2012, the company announced that it successfully completed its single ascending dose study of Z944 and that it could move into phase 2 by first quarter of 2013. As commented by Mark H.N. Corrigan, MD, President and CEO of Zalicus:

Based on their unique mechanism of action, T-type calcium channel blockers such as Z944 have the potential to provide relief of pain and other symptoms in patients suffering from acute and chronic inflammatory pain, such as post-operative pain, fibromyalgia and inflammatory bowel syndrome, which are significant disease areas in which novel agents with improved tolerability, efficacy, and long-term safety profiles are needed.

Stock followers may ask why the stock dropped over 25% in the weeks following this announcement. The answer likely lies within news released the same day as this Z944 announcement, that Zalicus Inc. entered into an equity distribution agreement with Wedbush Securities Inc. under which they may sell common stock having aggregate sales proceeds of up to $15,000,000. According to the filing:

Sales of our common stock through Wedbush, if any, will be made by means of ordinary brokers' transactions on the NASDAQ Global Market or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise agreed upon by us and Wedbush.

Such At-The-Market sales (ATM sales) are often difficult for shareholders to digest, since management is not obligated to provide status updates on the offerings - except at quarterly filings. I believe the ATM sales are already or nearly completed, as shortly thereafter we saw the highest ZLCS trading volume within the past 12 months.

Aside from the progress made on Z944, there are two drugs in pipeline that are particularly notable. First, Z160 could be a revolutionary pain medication as it would be the first of its kind to be orally administered to block calcium pain receptors without an opioidal side effect. Secondly, ZLCS's most advanced candidate, Synavive, is a treatment for immuno-inflammatory disorders, a $68 billion market, and recently completed the enrollment of patients in a phase 2b clinical trial the results of which are expected later this year.

There are several stock catalysts that may propel the stock to higher levels:

Partnership Announcement and/or Buy-Out Offer: I would not be surprised if Novartis (NYSE:NVS) or other large pharmaceuticals show increasing interest in ZLCS for Synavive alone, let alone the aforementioned "Z" drugs. ZLCS is still in partnerships with and, in some cases has, revenue generating collaborations with Amgen (NASDAQ:AMGN), NVS, Sanofi (NYSE:SNY), and Covidien (COV). Those partnerships attest to the perceived value of ZLCS, its management and technologies. In fact, Merck made a $475 million offer for a prior form of Z160 before multiple formulaic improvements were made as demonstrated in Phase 1 PK studies. Even with the dilution created by the ATM and assuming that 12 million shares are sold therein ($15,000,000 / $1.25 per share), the success of Z160 would be worth over $4 per share, well over 3 times the current value.

Zalicus Inc's Presentation at the JMP Securities Healthcare Conference on Thursday, July 12, 2012, 10:00 a.m. EST

Prednisporin: Zalicus has partnered with a division of Sanofy on this drug used to treat inflammatory ocular diseases such as allergic conjunctivitis and positive results of the phase 2b trial could propel the stock to much higher levels.

Exalgo 32 mg: Exalgo was approved as a generic in lower doses, but Covidien reserved the rights to higher doses. According to Zack's analyst, Jason Napodano, "We expect that Covidien will vigorously work to protect the exclusivity of the 32mg dose. In Fact, we believe Covidien's willingness to settle with Watson over the 8, 12 and 16mg doses stems from the fact that once the 32mg dose is approved, Covidien will focus its entire promotional efforts around this dose….our price targets remain unchanged at $3 per share." The drug is currently under FDA review and Napodano expects it to be on the market late in the third quarter of this year.

Synavive: The drug is wholly owned by the company, and as mentioned previously, the market potential is tremendous. Phase 2b study results are due late this quarter.

In addition to strong fundamentals, I believe ZLCS is well-positioned from a technical perspective. It is trading over 140% below its 52-week high and appears to have bottomed. It has pulled back over 25% just in the past 3 weeks which has prompted me to start an aggressive position in the stock. Considering the catalysts noted above, I would continue to buy the stock up into the $1.50 range. Analysts maintain a $3 to $5 target on the stock and I strongly agree with them that this stock should be trading much higher than current levels.

Disclosure: I am long ZLCS. I may buy or sell the aforementioned stocks at any time.

Disclaimer: Invest at your own risk and do your own due diligence.