by Michael Murphy | March 10, 2011 8:06 am
Zalicus (NASDAQ: ZLCS), my top pick for an leading biotechnology stock breakout in 2011, is proving it is indeed the best stock to buy. Zalicus reported December fourth quarter results on March 9, and biotech stock ZLCS has built on its already impressive performance so far in 2011 with even bigger profits for shareholders.
On revenues of $1.3 million, leading biotech company Zalicus lost 13 cents per share. The lone analyst publishing on the biotechnology stock expected $2.1 million and a 12 cent loss. They burned $2.1 million in cash during the quarter, and ended the period with $46.5 million in cash and equivalents.
As is usual with development-stage biotech companies, aside from cash levels and cash burn, the accounting numbers were less important than management’s program update. Zalicus has one product on the market, Exalgo for chronic pain, marketed by a subsidiary of Covidien (NYSE: COV). When Covidien reported their results, they mentioned “good sales of our new Exalgo” product. I had forecast $400,000 in Exalgo royalties to Zalicus in the December quarter, so I was pleased to learn that they hit that right on the button. With the initial distributor inventory back in balance, from here on Exalgo royalties should track prescription growth.
This year, I expect Covidien to target 12,000 high-prescribers and sell about $50 million in Exalgo, yielding around $4 million to Zalicus at my 8% royalty estimate. Sales should increase to $100 million in 2012, $200 million in 2013 and level off around $300 million in 2014. The associated royalties of at least $8 million, $16 million and $24 million will help fund research and clinical trial expenses, with no stock dilution. Zalicus says the royalty rate is “tiered,” so my 8% estimate is conservative.
There are many reasons to bank on Zalicus moving higher in the months ahead.
Zalicus was formed by the merger of Neuromed, a private company, and CombinatoRx (formerly CRXX), and has the two drug discovery platforms it inherited from the two companies. Exalgo was a Neuromed program, developed through the company’s selective ion channel modulation platform. Their next program, an advanced calcium channel blocker named Z944, is beginning the toxicology studies required before a Phase I safety trial in 2011. Z160, a novel oral calcium channel blocker, has just been selected as a clinical candidate for a Phase 1 clinical start by the end of this year. A previous formulation of Z160 was studied in clinical trials of over 200 subjects and was well tolerated.
Zalicus recently published preclinical data on a new sodium channel modulator, Z212, to control pain. It both reduces the excitability of neurons and reverses pain hypersensitivity. Z212 also could make it into a Phase I human trial this year. One or two other candidates based on the same technology could also go into Phase I late this year or early in 2012.
Zalicus has an extensive patent portfolio in ion channel blockers. The company’s business model is to get most drugs through Phase IIa dosing trials with some efficacy data, and then partner them for further development on someone else’s nickel. The pain medication market is huge, over $14 billion, and current drugs often have gastrointestinal and cardiovascular side effects, or are highly addictive.
Their other drug discovery platform, developed at CombinatoRx, is a synergistic combination high throughput screening system. They take two approved drugs, combine them, and screen for a better drug for the original indication, or an all-new indication. Because the side-effect and clinical profiles of the two approved drugs are known, they can have some confidence that the safety trials will go well, and focus on efficacy.
The lead drug candidate here is Synavive, a once-a-day pill that has completed multiple Phase II studies and is about to start a Phase IIb trial in rheumatoid arthritis in the June quarter. This Synergy trial is a 12-week, five-arm, global, double-blind, placebo-controlled study to evaluate the safety and efficacy of Synavive in approximately 250 subjects with moderate to severe rheumatoid arthritis. Subjects who complete the core Synergy study will be eligible to participate in a one-year extension study designed to investigate the long-term safety and durability of their response to Synavive.
In addition to rheumatoid arthritis, Synavive may be useful in osteoarthritis and Crohn’s disease, as it amplifies and reduces the need for steroid therapy. A key composition-of-matter patent was just allowed by the U.S. Patent and Trademark Office, and will be issued soon. This patent, along with the already-issued method-of-use patent, provides coverage of Synavive until 2028.
The company also has a discovery collaboration with Novartis using the high throughput screening platform for oncology research, which Novartis just extended to May 2012. Zalicus just began a second funded research phase of another oncology pilot program with Amgen. Sanofi-Aventis is another partner since they acquired Fovea, which licensed Prednisporin for ophthalmic applications from Zalicus and recently completed a Phase IIb study in persistent allergic conjunctivitis. We should hear about the next steps with Prednisporin soon. Zalicus gets a $3 million milestone when this goes in Phase III trials, and up to $37 million in additional future milestone payments, plus royalties.
Although ZLCS is up nicely from my original recommendation, they still have a total market capitalization of less than $190 million. Against that, they have $46.5 million in cash, no debt, a $254.6 million net operating loss carryforward, and a drug on the market that will show accelerating royalties in every quarter of 2010. Exalgo alone is worth $1.50 a share. I still think ZLCS will end 2011 between $4 and $7 a share, roughly a double or triple from current prices, and be one of the top-performing stocks of the year. This remains what some call an oxymoron: A low-risk development-stage biotech.
Michael Murphy is the editor of New World Investor. He is currently recommending Zalicus and Antares stock in his newsletter. Read more about Michael and his strategy at NewWorldInvestor.com.
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