Price Target of $3
We are initiating coverage of Zalicus, Inc. (ZLCS) with an ‘Outperform’ rating and $3 price target. Zalicus, Inc. is a biopharmaceutical company that engages in the development of synergistic combinations of approved drugs and new chemical entities focusing on the treatment of pain and inflammation.
We believe the company is well positioned from an existing and new product development, financial and management standpoint. Zalicus has one commercialized product in Exalgo, an extended-release hydromorphone indicated for the treatment of moderate-to-severe pain in opioid tolerant patients requiring continuous (around the clock) analgesia. We believe Exalgo is poised to capture meaningful prescription and dollar share in the $6 billion long-acting opioid (LAO) market thanks to improved dosing and convenience, as well as improved safety and tolerability.
Zalicus has licensed the U.S. commercial rights to Exalgo to Covidien, plc. Covidien is responsible for all commercialization activities for Exalgo in the U.S., including marketing and sales, and for all post-approval regulatory activities Zalicus received a $40 million milestone payment following FDA approval of Exalgo in early March 2010. Covidien launched the product in late April 2010 with 250+ sales representatives and a dozen region directors. Zalicus is eligible to receive tiered royalties on net sales of Exalgo by Covidien. Royalties in the second quarter 2010 from Exalgo totaled $1.089 million.
Zalicus’ leading pipeline candidate is Synavive, a combination of the cardiovascular drug dipyridamole and an unconventionally low dose of the glucocorticoid steroid prednisolone, currently under mid-stage clinical development for the treatment of rheumatoid arthritis (RA) and osteoarthritis (OA). Previous phase II data studying Synavive in patients with moderate-to-severe arthritis demonstrated a statistically significant improvement in joint pain, stiffness, physical function and patient assessment when compared to placebo.
A larger-scale program in patients with knee osteoarthritis offered up encouraging results with the highest dose of Synavive tested, including demonstrating reductions in pain, stiffness and physical function after 14 weeks of treatment. Management is currently working on optimizing and manufacturing a new modified-release formulation of Synavive. The new formulation supports once-daily dosing with improved tolerability and therapeutic index.
We anticipate management will progress Synavive into a phase II program in rheumatoid arthritis 2011. If successfully commercialized, Synavive should be a meaningful revenue driver for Zalicus. Rheumatoid Arthritis (RA) and osteoarthritis (OA) are among the most common degenerative diseases and a frequent cause of physical disability among older adults. In the U.S. more than 100 million people suffer from RA and OA combined. A safe and effective treatment such as Synavive could present a meaningful alternative to the non-steroidal anti-inflammatory drugs (NSAIDs) or Cox-II inhibitor market, disease modifying anti-rheumatic drugs (DMARDs), or oral steroids.
Besides Synavive, Zalicus has several research and development collaborations with some of the world’s leading research organizations, including the National Institutes of Allergy and Infectious Disease (NIAID), the U.S. Army Medical Research Institute for Infectious Disease, Novartis, Amgen and Sanofi-Aventis. These collaborations helped Zalicus generate $17.3 million in revenues in 2009.
One candidate under collaborative development is Prednisporin, a topical ocular drug for the treatment of allergic conjunctivitis which Zalicus licensed to Sanofi-Aventis. Proof-of-concept data generated so far on prednisporin demonstrates efficacy on par with high-dose steroids with improved safety and tolerability.
Finally, Zalicus possesses one of the market’s leading research and discovery programs in ion channel therapeutics. Management is focusing the company’s efforts into the development of a new class of analgesics for the treatment of both acute and chronic pain using advanced understanding of medicinal chemistry and combination high throughput screening platforms. The company’s goal is to find or create new chemical entity (NCE) oral compounds with anti-inflammatory and anti-proliferative characteristics that truly advance the treatment paradigm for acute and chronic pain.
Zalicus is currently trading with a market capitalization of only $120 million. We believe this undervalues the firm by almost a factor of three. Our sum-of-parts valuation analysis yields a price target of $3 per share based on royalties from Exalgo, the potential market opportunity for Synavive and Prednisporin, early-stage development and collaborative programs, and the current solid financial position.
We recommend investors establish a position in Zalicus at this level given the potential future upside to the stock over the next several quarters. For additional information, please see our full initiation report on Zacks.com, or contact your Zacks Institutional Sales representative.
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