Expecting Further Upside Movement On Zalicus

Zalicus (ZLCS) continues to trade at bargain levels and I have added to my position since my article on July 9, 2012. Readers can refer to the article for details on why the stock has over 300% upside potential. This current article will cover some exciting topics and potential near-term catalysts.

New Drug Compound

ZLCS's new Calcium Channel blocker currently named "Compound 16" shows significant anti-hyperalgesic activity in the spinal nerve ligation model of neuropathic pain and is also efficacious in the rat formalin model of inflammatory pain.

New Z160 Phase 2 Trial

Zalicus is commencing a Phase 2, Multicenter, Randomized, Double-Blind, Placebo-Controlled, Parallel-Group Study to Evaluate The Efficacy and Safety of Z160 in Subjects With Neuropathic Pain From Lumbosacral Radiculopathy.

Strong Cash Position / No Near-term Dilution

ZLCS received approximately $15 million in cash proceeds by selling 13.09 million through an "At-the-market" (ATM) sales agreement. As of last quarter, Zalicus had $44 million in cash and a current quarterly cash burn rate of 12 million. The increased cash burn is primarily due to late stage study advancements like Synavive in Phase IIb, as well as the ion channel programs.

Better Partnership Opportunity

The market reacted negatively to ZLCS's ATM sales agreement, but I believe it is an extremely positive indication for shareholders. ZLCS's most advanced candidate, Synavive, is a treatment for immuno-inflammatory disorders, a $68 billion market, and the drug is wholly owned by the company. Phase 2b study results are due next month. The strong cash position provides better leverage in partnership negotiations as ZLCS can just "wait it out" until it gets the right deal. Depending on the results of the trial, I believe the drug could fetch ZLCS up to $500 million, which is well over four times the company's market cap. However, if results are not positive, which I do not expect, and/or ZLCS is unable to enter into a partnership agreement, the company will face some headwinds.

Nonetheless, indications seem to be that the results will be positive. Mark H.N. Corrigan, MD, President and CEO of Zalicus said:

RA is an attractive initial indication for Synavive as there is unmet need for a safer glucocorticoid; one that provides the amplified anti-inflammatory activity of a higher dose but without the associated dose-related side effects. There is already a high prevalence of glucocorticoid use in RA for chronic maintenance therapy, as well as significant demand for less expensive, easier to access options to biologic therapy,

Data from a prior Phase 2a clinical trial with Synavive demonstrated encouraging preliminary signs of activity in RA patients and we look forward to further exploring its potential in this indication and reporting top-line SYNERGY results next summer.

Analysts seem to share similar views in that, on 20 June 2012, analyst Canaccord Genuity Reiterated a 'Buy' on Zalicus with price target of $3.00 and, on 21 December 2011, analyst McNicoll Lewis & Vlak's George Zavoico initiated coverage on Zalicus with a Buy rating and a $4 price target. Most recently, Zacks' Napodano released an update on ZLCS and reiterated his $3 target.

Other Near-Term Catalysts

Other potential "news" catalysts are as follows:

  1. Timing of Sanofi's Phase III start on FOV1101

  2. Pre-clinical oncology candidates in the Novartis collaboration

  3. Covidien's progress on the 32mg dosage of Exalgo

With the current stock price around the $1.30 range, I think there is an extremely bright future for those who are long ZLCS. It is important to remember that such small cap stocks typically have greater volatility than large cap stocks. But in this case, I believe the risk is clearly worth the potential reward. From June 15 to July 13, 2012, short positions have decreased approximately 72% from 5.8 million shares to 1.6 million. This is a strong indicator that there are expectations that the stock could have a large, sudden upside move in the very near-term.

Furthermore, there is a high likelihood of partnership as ZLCS already has agreements with major companies such as Covidien (COV), Novartis (NVS), Sanofi (SNY), Hydra Biosciences and the U.S. Army Medical Research Institute for Infectious Diseases.

Disclosure: I am long ZLCS.

Disclaimer: Please do your own due diligence and/or consult with a qualified investment advisor before investing. I may buy or sell any of the stocks mentioned in this article at anytime.