Back in early December, we issued a trade alert on Zalicus Inc. (NASDAQ:ZLCS), formerly CombinatoRx. Since that time, the stock price has risen very nicely and Zalicus shares have been seeing volume traction during their rising uptrend.
One key question surrounding the stock, however, is the accuracy of the company's valuation. How much should shares be worth? Zacks analyst Jason Napodano was the first to venture $3/share, but Jeremy Richards of Private Wealth Fund set his target at $4/share. Now Michael Murphy of New World Investor is estimating $7/share.
Our observation is that Napodano's figure appears to be the most conservative, but may also be too conservative. Kudos to him for his analysis, but his basic estimate relies on cash reserves and Exalgo royalties he estimates at 135 NPV. Richards seems to see additional value, and Murphy nearly doubles his estimate. So whose right?
Our main thesis is that multiple factors adding significant value to Zalicus are being overlooked. For example, the newly improved "cHTS" (combination high throughput screening) technology is now being advertised at a future WorldPharma 2011 conference led by Dr. Short at Zalicus as "cuHTS" -- the addition of "ultra" suggesting that Zalicus has expanded its screening method to handle far more complex drug combinations, particularly for oncology. Likewise, at their Vancouver location, where Dr. Snutch and his team are getting ready to file an IND for one or two ion channel pain-killing drugs, research into their publications reveals that they have a proprietary method of electrophysiological screening that is arguably one of the best in the world.
The point is this: What value would a large pharma firm place on having these two proprietary technologies? Something like this could be hard to value, but when 30 plus indications have already come out of cHTS, now cuHTS, one estimate may suggest that 500M for either or both technologies is not illogical. Does this make Zalicus an excellent buy-out target?
Recently, Zalicus published two technical papers (See: PubMed) that all validate the money-drug-generation potential of cuHTS. One article, "Optiimization of a Yellow Fluorescent Protein-Based Iodide Influx High-Throughput Screening Assay for Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) Modulators" represented the power of cuHTS to generate a thorough and promising lead for cystic fibrosis sponsored by the Cystic Fibrosis Foundation. Zalicus also completed work on anthrax for the National Institute of Allergy and Infectious Diseases and National Institutes of Health published as "Auranofin protects against anthrax lethal toxin-induced Nlrp1b-inflammasome activation." Therefore, it is reasonable to conclude that Zalicus' cuHTS technology has a wide range of uses such as its oncology collaboration with Novartis.
Furthermore, while moving from preclinical to phase 1, the ion channels program garnished ~500M from Merck (NMED 160) in its first go-round that made it into phase 2 studies before being canceled. These second generation ion channels that Zalicus is about to file (if not already) an IND could easily snatch up the same or higher offer given the improved electrophysiological process that went into their development. Here again, how much could Zalicus be worth to a pharma giant that wants to jump start new pain-killing drug indications? One curious factor has been frequently hinted to by Zalicus--that the upcoming IND is actually the front-runner to other ion channel drug indication coming behind it. How so? It is discovered that along with N-Type pain blockers, there are published articles and patents pointing to T-Type pain blockers, or a combination thereof. It was also discovered that Snutch's team may be employing combinations of its work with, yes, cuHTS which could open up a very wide range of possibilities. What this means is Snutch's team has virtual stream of ion channel drugs for entry into the pipeline.
The point is, in valuating Zalicus, one needs to consider the multiple combinations (pun intended) Zalicus represents. Exalgo royalties, cash-on-hand, two powerful drug producing technologies, the ion channel program, too numerous drug candidates not even appearing on their pipeline (e.g. Parkinson's, Type 2 Diabetes, Virals, etc.), plus oncology drug ATL313 licensed from Clinical Data Inc. and to this you are still to add Prednisporin's fate with Sanofi-Aventis and the newly improved version of Synavive which is arguably a platform drug for low-dose steroids without the side effects. With contracts with Covidien, Novartis, Sanofi-Aventis, US government, and recently Amgen, there is a strong case for setting Zalicus' not-too-distant target in a double-digit range.
Double-digits? Yes, if you calculate the value of Zalicus' two technologies, the advertised pipeline, the non-advertised indications available for license or internal development if bought out by a big pharma with deep research pockets.
As to the buy-out thesis, it has been very curious to investors that Zalicus' management style has almost purposely allowed the company to fly under the radar, but more likely because CEO Corrigan's team has been very carefully laying the foundation of this emerging biotech.
For example, Zalicus' published calendar on its website shows no activities planned for 2011, yet a basic search of the company reveals that Zalicus has lined up numerous events such as:
The New Paradigms Biotech Conference with VP or R&D Christopher Gallen (http://newparadigmstglpackage.eventbrite.com/)
The 13th Annual Bio CEO & Investor Conference (http://www.earthtimes.org/articles/press/ceo--investor-conference,1582203.html)
The 9th Annual BioPartnering North America Conference in Vancouver (http://www.techvision.com/bpn/program/index.php?showall=1)
The Bio-Europe Spring Conference in Milan Italy (http://www.ebdgroup.com/bes/participants/index.php)
The major WorldPharma Congress featuring Drs.Snutch and Short (http://www.worldpharmacongress.com/cba/).
It is becoming quite evident is Zalicus is somewhat quietly and carefully executing on a business plan to move onto the center stage.
It is submitted that given its depth of partnerships, technologies, and pipeline, this company may very well reach for double-digit figures far sooner than later, especially with big pharmas like Sanofi-Aventis, Novartis, Amgen, or Covidien, so close by.
Disclosure: No Positions
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