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In after-hours Friday, Zalicus (ZLCS) surprised investors with a $75M S-3 registration with the SEC. Does this mean Zalicus intends to dilute its shareholders a third time in 2012? I highly doubt it and for good reason.

It could be a bullish signal because Zalicus has a number of critical catalysts (e.g. Z160 phase 2 launch, Synavive results) on the near-term horizon. It's also curious because CFO Renz recently stated that the company is well-funded (excess $50M) into 2014, so the S-3 registration appears to signal good news is forth-coming. For example, Zalicus raised $15M (completed by 28 March) in advance of Z944 multiple dose trial, and then raised another $15M (completed by 1 August) in advance of Z160's first of two phase II clinical trials. In other words, Zalicus' modus operandi seems to be to make financial moves in advance of good news. So is good news coming?

The late Friday S-3 registration has certainly not gone unnoticed. The chat boards have been buzzing all weekend. I am inclined to think it is somehow tied to Z160, Z944, and/or Synavive. However, there is one other possibility. Renz recently stated that Zalicus has seen a lot of "inbound traffic" surrounding its ion channel program (specifically Z160) suggesting the option of selling preferred shares per the S-3 filing could be a proactive move on the part of management known as a poison pill; a poison pill is a way for the company to protect itself from being taken over on the cheap. Could this be what is happening?

I am anticipating news in the week coming. Yes, there are certainly a lot of unknowns here, but I suspect management is positioning Zalicus with its future and investors in mind as I noted that Renz repeatedly stated that firm was working on behalf of its investors -- while you would expect to hear that Renz verbally emphasized and repeated that. It could also be that Zalicus is about to announce a major collaboration and that news wouldn't surprise me either.

Meanwhile, my very bullish call on Zalicus remains unchanged for a number of what I think are very good reasons. I continue to maintain that the following catalysts represented in this article, should they be successful, will propel Zalicus back above $3/share. Of course, investors should never invest more than they're willing to lose and should always seek the advice of a market professional. Synavive's phase 2 trial could fail. In fact, any drug candidate in Zalicus' pipeline could fail. Yet, to be fair, that has not happened under CEO Corrigan's watch since assuming the helm in 2010. However, I want represent to SA readers why I'm still very bullish on Zalicus. It is for five fundamental reasons.

1. Financial stability into 2014

CFO Justin Renz recently stated at the Wedbush conference that the company had over $50M in cash reserves and enough money to go into 2014. Factually, Zalicus has had very little difficulty raising capital as more than $30M has been added to the coffers in 2012. Recognizing that Zalicus trades 3,168,400 shares per day over a three month average and 500K share bids flash on Level 2, this highly under-valued firm that has just reported a 12% increase in Exalgo sales. Furthermore, a number of stock-moving catalysts (high risk of failure assume) begin this week going through Q3-Q4 2012. These are:

  • Z160's phase IIA two-prong 2H 2012 launch
  • Z944's multiple dose data
  • Prednisporin's phase III launch
  • 32 mg version of Exalgo
  • Synavive's SYNERGY trial
  • cHTS oncology research: Novartis, Amgen, others

Since I choose to invest in lower priced biotechs for highly profitable returns (high risk assumed), I personally like the progress of the company and the multiple shots on goal knowing that Zalicus is well-funded.

2. Z160 is bringing significant "in-bound traffic"

Renz also stated at the same recent conference that Z160's (formerly NMED-160) re-emergence has resulted in significant "in-bound traffic" by a number of potential suitors. Of course Pfizer's (NYSE:PFE) strategy was to simply buy-out Icagen. Meanwhile, Cubist (CBST), Novartis (NYSE:NVS), and Amgen (NASDAQ:AMGN) all remain front-runners for their inside links to Zalicus be it through the company's cHTS Chalice technology or CEO Corrigan's position on the Board of Directors at Cubist. Cubist is also in league with Hydra Biosciences that Zalicus is contracted with for sodium channel pain-blocking research.

If you don't know this then you should: Z160 in early clinical studies has already matched the efficacy of morphine. That's phenomenal news if the research bears that out. Z160 is also being described by the firm as an oral small molecule version of Prialt.

PRIALT (ziconotide intrathecal infusion) is indicated for the management of severe chronic pain in patients for whom intrathecal (NYSE:IT) therapy is warranted, and who are intolerant of or refractory to other treatment, such as systemic analgesics, adjunctive therapies, or IT morphine.

In fact, in addition to morphine and Prialt, the company has clinical evidence that Z160 significantly out-performed Gabapentin/Neurotin.

This medication is used to relieve nerve pain following shingles (a painful rash due to herpes zoster infection) in adults. This condition is called postherpetic neuralgia. Gabapentin belongs to a class of drugs known as antiseizure drugs (also called anticonvulsant or antiepileptic drugs).

The above information explains why CEO Corrigan's team has chosen to enroll Z160 into two phase II clinical trials for: (1) postherpetic neuralgia/shingles and (2) lumbosacral radiculopathy/lower back pain. Based on NMED-160's (now reformulated Z160) earlier history with Merck (NYSE:MRK), I am already anticipating that Z160 will make it into phase III clinical research and from what I'm hearing and seeing, I'm inclined to think that's the opinion of the significant "inbound traffic."

3. Prednisporin continues to progress

Updates always help, especially in the case Prednisporin. Renz also informed investors that as of late July 2012, Sanofi (NYSE:SNY) continues to develop what is actually Zalicus' latest stage combinatorial drug candidate that upon the launch of clinical phase III will result in a $3M milestone paid to Zalicus by Sanofi.

I can confirm to SA readers that I also saw the same information months ago in a Sanofi slide presentation. According to Sanofi's CEO, the company is targeting a 2015 sales launch so news must be imminent here in 2H 2012. But in terms of risk, I have to add that I think Prednisporin is beginning to pale with the emergence of Zalicus' ion channel program. Meaning, if Sanofi halts Prednisporin's advancement, I don't think it's going to hurt Zalicus' immediate plans to advance its ion channel program as quickly as possible.

4. Z944 is "potent" according to management

Renz also informed investors that out of the recently completed single dose clinical study, researchers came away describing Z944 as "potent." A T-type ion channel blocker, Renz explained the necessity of the ongoing multiple dose study and that key leaders were being solicited for the correct path forward particularly for acute and chronic pain.

Here's a fact worth knowing: Z944 out-performed naproxen/Aleve in preclinical studies. Naproxen/Aleve is:

...one of the nonsteroidal anti-inflammatory drugs (NSAIDs) used to treat certain types of arthritis. Naproxen tablets were approved by the FDA in 1976. On January 11, 1994, the FDA approved naproxen in a nonprescription form.

By Q4 if not sooner, investors will learn the results of the multiple dose study. In my mind, should Z944 perform as well as Z160 has in its own research program, Zalicus will easily have a stable of billion dollar ponies when you match them up against drugs such as morphine, Prialt, gabapentin, and naproxen.

5. Synavive's phase IIB results are on the way in September

Rather than 'cut and paste' I prefer to direct investors to read an excellent synopsis on Synavive put out by the firm in its annual report from 2008 (See: pages 7-9). This information provides a strong historical context for the present phase IIB trial. It includes a telling history of Synavive's difficult clinical path including a re-evaluation of the COMET-1 study that initially nearly ruined the company followed by the reasoned rationale at that time to cancel the MARS-1 study for rheumatoid arthritis.

It is also a fact that Zalicus has incorporated the highs and lows of Synavive's development history to arrive at a novel once-per-day formulation that is being kept a proprietary secret from those of us who like to read patents. The grand-slam will be if Synavive, a proprietary combination of dipyridamole and prednisolone, out-performs the efficacy of a 5 mg dose of prednisone (which is converted by the liver into prednisolone).

For now, Synavive's rocky history may be why so many on the chat boards seem skittish. Renz himself stated that the company is going to be "cold-blooded" in its evaluation of Synavive's results which I think could be in their hands right now. While the clinical trial is powered to match Synavive versus placebo, there is little question that Synavive will be halted if its efficacy isn't better than: (1) placebo, (2) dipyridamole, and (3) 2.7 mg dose of prednisolone, and (4) that there is compelling evidence that its efficacy matches up against a 5 mg dose of prednisone. But Corrigan's team has also been quite savvy as a long-term Synavive study is ongoing. That study matches Synavive against 5 and 7.5 mg dosages of prednisone that could definitively prove that Synavive is not only efficacious, but its safety profile is much better than the well-known steroid side effects such as weight gain, bone density loss, and increased ocular pressure found in glaucoma.

If Synavive's phase IIB trial fails to meet both the primary and secondary endpoints, then one can assume the share price will temporarily drop. However, if Synavive's results are positive, then one can also assume that a Synavive plus Z160/Z944 pipeline equals a very dramatic share price move to the upside. I like many other long-term holders think that Z160/Z944 are an excellent hedge going into Synavive's results because their long-term value to the firm is in the billions. The point is, Synavive's outcome is not going to derail the very bullish direction of the ion channel program which is bringing significant "inbound traffic." Add to this information, the addition of the 32 mg version of Exalgo and the oncology research led by Novartis, Zalicus is much more than Synavive (though by that comment I do not intend to undermine its potential value).

It's a wrap!

It's a valid observation that CEO Corrigan came to Zalicus with extensive experience in clinical development. Coming to Zalicus from Sepracor, Dr. Corrigan has established himself as a somewhat stoic, carry a big-stick, strategic leader in contrast to the BioSante (BPAX) flamboyance of CEO Simes. In 2010, when Dr. Corrigan came to Zalicus, he shredded former CEO Borisy's combinatorial pipeline leaving only Synavive and Prednisporin that was solely owned by Sanofi. In 2012, Corrigan also shut down the company's Vancouver ion channel research center and has instead opted for contracting with Hydra Biosciences. Now as of after-hours Friday, Dr. Corrigan has issued this intriguing S-3. This could be proved to be a very interesting week-coming for Zalicus shareholders.

Disclosure: I am long ZLCS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors buy and/or sell at their own risk. I declare that I may day-trade any stock at any time mentioned in this article. For me "long" is until I sell. I do not "short" stocks. SA pays me one penny per view and beyond SA and my personal stock account, I have zero connection to Wall Street.