Why Shares of Zalicus May Be Ready To Make A Move Print E-mail
By Michael Morhamus, Contributor   
Wednesday, 06 November 2013 06:21
icon_MarketCatalystIn case you haven't already heard, over in the biotech sector many investors are on the edge of their seats waiting for a potentially huge binary event from Zalicus, Inc. (NASDAQ:ZLCS);


a big board biopharmaceutical company that discovers and develops novel treatments for patients suffering from pain which could, according to some of the analysts who cover the stock, see share prices soaring from current levels to somewhere between $12 and $18 per share depending on pending clinical data which is set to be released within days.
Analyst Opinion on ZLCS

The company has a portfolio of proprietary clinical-stage product candidates targeting pain and has entered into multiple revenue-generating collaborations with large pharmaceutical companies relating to other products, product candidates and drug discovery technologies.

All eyes, however, are on eagerly awaited clinical human data from the potential blockbuster on Zalicus' hands-- a pain drug known as Z160. The candidate is an N-type calcium channel (Cav2.2) blocker currently wrapping up two Phase IIa studies, one for post-herpetic neuralgia(PHN) and another for lumbosacral radiculopathy (LSR). The Phase 2 trial in LSR began in August 2012, and the Phase 2 trial in PHN began in December 2012, with patient enrollment completed for both studies in September 2013. Both are looking at data from 140 patients, 6-weeks, and seeking signs of reductions in pain on a numeric rating scale, along with safety and tolerability.

Volume in the stock began to increase in August, but has really seen a sharp rise in speculator interest since early October. Data is expected to hit by mid-November according to Jason Napodano- a respected, professional sell-side equity research analyst who covers the company, has spoken to management and had confirmed Z-160's potential in several very positive articles.

Interestingly, it was the usually reserved Napodano's own tweet, that caused a brief sell-off in the stock two sessions ago. This after he warned investors to "trade wisely" after "several smart 'CNS people'" told him the drug would fail.

Message boards and twitter feeds erupted after Napodano dared to mention the opinion of these "unvetted and unidentified sources who's credentials or track records of successfully evaluating the validity of concepts or potential efficacy of compounds is unsubstantiated."

In an effort to bring balance, Napodano later tweeted and re-tweeted several questions/answers and counter arguments, including a very detailed series of tweets by one particular biotech investor which made a great run to shred many of the reported concerns raised by Napodano's unnamed experts.

48 hours later, Napodano himself authored a response note on Seeking Alpha stating that his tweet was completely misinterpreted by blind amateur investors. "(I) simply noted that some people I speak to think the drug will fail - so be careful. Be careful meaning - do not over-invest in a very risky clinical trial, and risk only what you are willing to lose because this stock could easily be below $2 on failure. Somehow that gets misconstrued as me saying 'Sell Sell Sell'."

Intriguing Bet

There are a couple of things that are particularly intriguing about this binary catalyst trading event. The first is that the U.S. Food and Drug Administration has just begun proposing new restrictions that would change regulations for some of the most commonly prescribed narcotic painkillers (particularly Hydrocodone) on the market in an effort to combat "misuse and abuse."

Not only did Z160 recently receive Orphan Drug designation from the FDA for PHN in September. If the data is good, its not difficult to imagine that the drug candidate could be granted a fast-track designation as well since the FDA has made it clear they want painkillers without all those nasty side effects.

Consider also that Zalicus chemists have been in the lab for years waiting for Z160's new lucrative shot on goal. Zalicus has spent millions during the past several years re-formulating what was formerly known as MK6721-- a drug previously tested in humans through a partnership with Merck & Co. (#MRK) and privately-held Neuromed. Their drug candidate has essentially been re-tweaked since 2010, after scientists discovered that they had an effective drug which needed an improved formulation.

In March 2006, Merck licensed the compound from Neuromed (which later merged with CombinatoRx in December 2009 to form Zalicus) for $25 million upfront and potentially as much as $450 million in milestones and royalties on sales. A year later, however, Merck returned the rights because after those phase 2 clinical studies the Big Pharma felt the compound did not demonstrate the ideal pharmaceutical characteristics necessary to advance the compound further into development.

Bullish speculators looking for clues that the upcoming data for the re-formulated Z-160 might be as stellar as promised can certainly find them all over the internet. After all, Zalicus has had a few of their own "smart CNS people" working on this project for years.

The biggest concern cited by most of those who have looked at Zalicus' proposition is the possibility of bad side effects or adverse events from potentially blockbuster compound at the appropriate doses.

Interestingly enough, Merck did note that no serious adverse events with the drug were observed in clinical trials testing the safety and effectiveness even at doses as high as 1600 mg per day.

Others say that one need not look further than last Friday's positive results of Z160's little sister compound: Zalicus' Z944 (the first T-type calcium channel modulator to demonstrate clinical translation in pain) to see that Zalicus scientists and management team know what they are doing and can deliver investors to the promised land.

In that exploratory, double-blind placebo-controlled, randomized cross-over, Phase 1b clinical study, the primary objective was to compare the analgesic/anti-hyperalgesic properties of three different single doses of Z944 in a model of inflammatory pain and in a model of chronic neuropathic pain as compared with placebo.

Highlights of the results of the Z944 Phase 1b LEP study results included:

  • Statistically significant and meaningful reductions at each of the three doses compared to placebo in models of both inflammatory and neuropathic pain.
  • Consistent trends in reduction of subjective pain scores compared to placebo using a visual analog scale in both pain models.
  • Meaningful trends in effects based on dose and concentration, providing important insights into the potential therapeutic window and effective plasma concentrations of Z944.
  • Z944 was generally well tolerated with dose dependent CNS side effects and no serious adverse events.

It has been mentioned on several occasions that the science and mechanism of action for Z160 has been validated by ziconotide, marketed by Jazz Pharmaceuticals (JAZZ) as Prialt- which has well-documented clinical efficacy, but unfortunately also comes with someloud warnings about its own dangerous side-effects.

In the U.K., there is a privately held company focused on the development of novel and high value analgesic medicines for the treatment of chronic pain known as Convergence Pharmaceuticals Limited. This summer they started a second Phase II study with a novel, small molecule perhaps more closely related to Z160. Known as CNV2197944, it is a state-dependent calcium channel blocker, designed to selectively inhibit highly active Cav2.2 channels.

Based on positive pre-clinical and clinical data already reported, it is believed that CNV2197944 could also become an effective treatment for neuropathic pain with analgesic potential for a broad range of chronic pain conditions. Extensive safety and toxicology studies to support the clinical development of CNV2197944 have also been completed, which suggest an excellent margin of safety and tolerability. CNV2197944 is the only truly selective Cav2.2 blocker in clinical development and has the potential to be a first in class treatment for chronic pain.

Clive Dix, Chief Executive Officer of Convergence Pharmaceuticals,commented: "We have begun running a second proof of concept trial with CNV2197944 in neuropathic pain and are already excited about potential results. Based on the known pre-clinical and clinical profile of CNV2197944, and the data we have seen so far, we believe it will be a safer, more effective treatment for chronic pain, with a potentially better tolerability profile and wider therapeutic index than currently available treatments."

Unlike Z160's pending data, however, results from the Convergence study are not expected until the second half of 2014.

Fitting in with a timeline that points to data for Z160 coming the week of November 18th, investors keeping an eye on neuroscience projects from Targacept Inc. (TRGT) and ACADIA Pharmaceuticals Inc. (ACAD) found that Zalicus' Z160 had been selected along with some of those firms' pipeline products as one of the "Top Projects to Watch" at the upcoming (November 19th & 20th) Therapeutic Area Partnerships Conference from Elsevier Business Intelligence.

According to the official conference website and other published reports, Z160 was hand-picked by a panel of independent experts who screen hundreds of compounds and weigh their potential as future products. Many presenting companies in previous years have gone on to establish major partnerships with Big Pharma.

All companies will present on November 19th and will be available for 1:1 partnering meetings during November 19-20. It certainly doesn't stretch the imagination of bullish speculators, who connect the dots and imagine Zalicus already waiting in the wings armed with positive data, ready to make a splash at this particular conference with this news.

For their own part, Zalicus' 10-Q, released just two sessions ago has the firm indicating that they "expect to announce top-line results from both of these clinical trials in the quarter ending December 31, 2013" but also intriguingly stating that they "expect other development activities related to Z160 to continue through the remainder of the year ending December 31, 2013."

Ready To Make A Move?

From a technical standpoint, the stock's chart is finally looking like it is ready to start moving to the upside after a few attempts at rallies that have not been able to hold on to gains-- quite possibly due to selling which has allowed the company to raise quietly and on a cumulative basis aggregate gross proceeds of $19.8 million thanks to a purchase agreement with Lincoln Park Capital Fund.

The company expects current resources to be sufficient to fund our planned obligations and operations into the third quarter of 2014.

(click to enlarge)ZLCS technical Chart

At the end of the day, as it always does in biotech, it will all come down to the data and the science.

In a couple of posted comments following his controversial tweet, Napodano-- as the analyst who has arguably followed the developments at the firm most closely says this: "I think the data is more likely to be mixed that a slam-dunk / homerun or complete bomb. I think going 1-for-2 could give the stock a little pop to the $5-6 range." He also adds: "I outlined the risk / reward, and noted the stock can go to $14 on success or $2 on failure. I've never wavered from my stance that Z160 is a potentially huge drug if it hits."

I tend to agree with a fellow Seeking Alpha writer who summed up his thoughts on the company yesterday when he wrote: "The shares have a significant upside based on sell-side estimates and an optimistic view of trials results, however the company also faces the risk of dilution. Therefore, only investors looking for a high risk and high reward play should consider Zalicus."


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