Zalicus was formed by the merger of CombinatoRx (formerly CRXX) and Neuromed, a private company. Most of the current management is from Neuromed, and they have refocused the company on drugs for pain and immuno-inflammatory disease. But there were many drugs in preclinical and clinical trials at CombinatoRx before the merger, and several of them are showing more potential than Neuromed may have expected when they agreed to the merger. At the least, these drugs provide ongoing partnering opportunities, and some have world-class potential for eventual royalties.
The core development programs include Synavive, developed by CombinatoRx as CRx-102, to treat immuno-inflammatory disorders. It has completed Phase II clinical trials in subjects with knee osteoarthritis. The other core area are calcium channel blockers for chronic pain, developed by Neuromed
Partnered development programs include Prednisporin (FOV1101), which is being developed by Fovea, now owned by Sanofi-Aventis (NYSE: SNY). Prednisporin is a topical ophthalmic drug combining low doses of prednisolone acetate and cyclosporine A, an immunosuppressant. A second major partnership with Novartis (NYSE: NOV) is working on cancer drugs.
Phase 2 results are imminent from a collaboration agreement with PgxHealth, a subsidiary of Clinical Data, to develop ATL313, an adenosine A2A receptor agonist, as a combination therapy against multiple myeloma and certain other B-cell malignancies
In addition, Zalicus has four drugs developed by CombinatoRx: CRx-601, a formulation of carbidopa and levodopa for the treatment of Parkinson’s disease; CRx-401 for Type 2 diabetes; and CRx-191 and CRx-197 for psoriasis. Finally, they have research grants from the U.S. Army Medical Research Institute for Infectious Diseases for the research and discovery of potential treatments for viral hemorrhagic fevers and alpha virus infections. They also have a grant from the National Institute of Allergy and Infectious Diseases to apply the CombinatoRx drug discovery technology to identify potential anti-toxin therapeutics for anthrax exposure. It is a very full plate for a company with a total market capitalization under $150 million.
At the time of the merger, Neuromed had Exalgo, a once-a-day, extended release version of Dilaudid, in the FDA approval process for pain. They received approval on March 1, 2010, and their U. S. marketing partner Mallinkrodt, owned by Covidien (NYSE: COV), introduced the drug in April. June quarter inventory stocking resulted in $1.1 million royalties to Zalicus. Covidien expects Exalgo eventually to get $250 million to $300 million of the $6 billion long-acting opioid market.
However, as frequently happens with a new drug that is widely introduced, once the distributors have their initial stock, sales fall off for a quarter or two as the sell-through builds. That is what happened in the September quarter, when Zalicus reported only $0.15 million in Exalgo royalties, and will happen again in the December quarter, when I am expecting only $0.4 million in royalties. Investors who do not understand how stocking and distribution work gave the stock a drubbing, and gave us an amazing opportunity.
At about $1.32 per share, Zalicus has a total market capitalization of only $117.5 million. But they have $46.8 million in cash, no debt, a $242.7 million net operating loss carryforward, and a drug on the market that will show accelerating royalties in every quarter of 2011. Exalgo alone is worth $1.50 a share.
They also have numerous press releases coming as their various company and partnered clinical programs progress. Assuming someone doesn’t buy them for their cash, tax loss and pipeline (Covidien? Novartis?), I think ZLCS will end 2011 between $4 and $7 a share, and be one of the top-performing stocks of the year.
You may have to wait for the second half of the year for most of the gains, but this is what some call an oxymoron: A low-risk development-stage biotech.
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