Watching Zalicus Like A Hawk

By Jason Napodano, CFA

Zalicus (ZLCS) is starting to look very interesting at this level. Traders are no doubt waiting for the big Phase II data on potential blockbuster drug Z160 coming in the fourth quarter 2013. But now might be the time value biotech investors take a look at the stock. The currently market capitalization is only $75 million. That's less than five times our projected 2013 revenues of $16.3 million, and 33% of the market capitalization is supported by the cash balance. With Z160 a potential blockbuster and the top-line supporting the stock at today's price, Zalicus could be poised for a big second half of the year. We haven't recommended the stock yet, but we are watching the shares like a hawk.

Financial Results

On May 2, 2013, Zalicus reported financial results for the first quarter of 2013. Total revenues in the quarter were $3.7 million. Revenues consisted of $2.2 million in collaborative payments and $1.4 million in royalties on sales of Exalgo at partner Mallinckrodt. Both line items were $0.1 million shy of our modeling. We expect Exalgo sales at Mallinckrodt to slowly tick higher throughout the year (we model $7.0 million in royalties in 2013). Collaborative payments have been relatively consistent over the past three quarters, coming in at $2.1 million, $2.4 million, and $2.2 million for the third quarter of 2012, fourth quarter of 2012, and first quarter of 2013, respectively.

Net loss for the first quarter 2013 was $8.1 million, or $0.06 per share. This was essentially in line with our estimate for net loss of $0.06 per share, although we forecast slightly higher R&D expense and slightly lower amortization expense on Exalgo. Zalicus exited the quarter with $26.2 million in cash. We note the first quarter tends to be the highest quarter from a cash burn perspective. The company had a number of final payments on the Z944 Phase I studies and upfront payments on the Z160 Phase II studies. We expect operating burn over the next few quarter to average around $6-$7 million per quarter. Meaning, we see the company's cash position as sufficient to fund operations into 2014.

Z160 Update

We've written extensively on Z160 in the past, so we will not re-hash the investment thesis in this article. Investors interested in Z160 should take a look at our article from January 2013, posted following a face-to-face meeting with management (click here). We think if the two Phase IIa studies currently underway succeed, Z160 is a potential blockbuster drug. Data on both is expected in December 2013.

That being said, the most common question we receive on Z160 is: "If Z160 has such significant potential, then why did Merck walk away from developing the drug (formerly called MK6721) back in August 2007?" We think the answer is simple: Merck could not fix the formulation issues that dogged MK6721 in 2007, at least not in any timely manner that made sense for them to stick around. Merck entered the collaboration with Neuromed (acquired by Zalicus) in 2006 thinking they had a potential blockbuster in Phase II studies. Merck was not interested in going back to do preclinical formulation work.

However, that's just what Zalicus did. In fact, it spent the better half of decade on it. Now, it is back in human clinical studies. The preclinical and Phase I data Zalicus has presented on Z160 clearly demonstrates it has fixed the problem. But news in early April 2013 of a patent on Z160 went largely unnoticed by investors. Zalicus announced it has been granted a patent by the U.S. Patent and Trademark Office (USPTO) (No. 8,409,560) entitled, "Solid Dispersion Formulations and Methods of Use Thereof."

We think this is extremely important. It means Zalicus made changes to Z160 enough that the USPTO believed it worthy of a new patent on the formulation. This is not Merck's MK6721. News of a new formulation patent that does not expire until 2032 is proof of a structural change. Z160 may have always had the efficacy that Merck believed it had back when it was called MK6721, but this new patent locks up protection and opens the doors back up to potential partners post Phase IIa data later this year.

Z944 Update

We remind investors that Zalicus completed Phase I single and multiple ascending dose clinical studies with Z944 in late 2012. In February 2013, the company was granted a patent on Z944 from the USPTO (No. 8,377,968) entitled, "N-Piperidinyl Acetamide Derivatives as Calcium Channel Blockers" providing broad coverage for Z944, including compositions of matter and certain therapeutic methods of use through April 2029. Zalicus plans to continue further clinical development with Z944 during 2013. We expect the company to provide an update on these plans in the next few month.

Novartis Collaboration

In May 2009, Zalicus entered into a strategic alliance and research collaboration with Novartis for the discovery of novel anti-cancer combinations. Under the agreement, each party will contribute compounds and evaluate the anti-cancer effects by utilizing Zalicus' proprietary combination High Throughput Screening (cHTS) platform and Chalice analyzer software to screen a unique library of molecules, including Novartis compounds in multiple cell lines representing a broad spectrum of cancers. Zalicus received an upfront payment of $4 million plus $3 million per year for two years in research support funding. The company is also eligible to receive up to $58 million in clinical, regulatory and commercial milestones for each combination that is commercialized under the collaboration. In April 2012, Zalicus announced that Novartis has exercised its second option to extend its oncology discovery research collaboration with Zalicus for an additional contract year, through April 2013.

On May 2, 2013, management announced the collaboration has been extended again, this time going until October 2014. This is clearly positive news for the company, as it not only validates the platform -- Zalicus and Novartis are using the cHTS discovery technology to advance novel treatments of cancer -- but it also provides $3 million in sponsored research funding to the company over the next 18 months. For 2013, we model $9.2 million in total collaborative payments to Zalicus.

We think the potential for Zalicus to strike additional alliances and collaborations is highly discounted by investors. Here's an interesting way to view Zalicus' valuation: The current market capitalization of $75 million is less than five times our projected 2013 revenues of $16.3 million, and the company is sitting on $26.2 million in cash and investments.

Reverse Split

On April 18, 2013, Zalicus received notification from the Nasdaq Listing Qualifications Department noting that the company's application to list its common stock on the Nasdaq Capital Market has been approved. Subsequently, Zalicus made the switch from the Nasdaq Global Market to the Nasdaq Capital Market on April 23, 2013. In connection with the transfer of the listing of the company's common stock to the Nasdaq Capital Market, Zalicus expects to be granted an additional 180 days, or until Oct. 21, 2013, to regain compliance with the minimum bid price rule by maintaining a minimum closing bid price of at least $1.00 for 10 consecutive business days.

At the company's 2013 annual meeting of stockholders, planned to be held on June 6, 2013, stockholders will vote on a proposal to authorize a reverse stock split. If this proposal is approved by the company's stockholders, the board of directors could approve and implement a reverse stock split that could allow the closing bid price to be at least $1.00 per share. We suspect a 1-for-10 reverse split will take place, putting the stock at roughly $6.00 per share, sometime during the third quarter of 2013. At this "more shareholder-friendly" price, with a market capitalization of only $75 million and downside supported by the growing top line and upcoming Phase II data on Z160, Zalicus stock could be an interesting play later this year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: PropThink is a team of editors, analysts, and writers. This article was written by Jason Napodano, CFA. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. Use of PropThink’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. You should assume that as of the publication date of any report or letter, PropThink, LLC and persons or entities with whom it has relationships (collectively referred to as "PropThink") has a position in all stocks (and/or options of the stock) covered herein that is consistent with the position set forth in our research report. Following publication of any report or letter, PropThink intends to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. To the best of our knowledge and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and not from company insiders or persons who have a relationship with company insiders. Our full disclaimer is available at

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