Has Exalgo’s value been baked into Zalicus’ share price? Print E-mail
By Staff and Wire Reports   
Tuesday, 25 January 2011 09:08

best penny stock picksAt the recent San Francisco Biotech Showcase 2011, the CEO of Zalicus (Nasdaq: ZLCS ) Mark Corrigan eruditely stated regarding Exalgo’s outlook that he remains “bullish.” For those who know Mark’s style, he is a man of few words and he is hardly a Steve Job’s salesman, but he nevertheless convinces you that whatever he knows, it has cemented his belief that Exalgo will achieve Covidien’s estimate of 250-300M peak sales.

{tiny;ZLCS)To his credit, from the time of the FDA approval (March 2010) and Covidien’s launch date (May 2010), Corrigan has stubbornly told investors in Zalicus that it is going to take “a few quarters” - referring to Exalgo’s sales growth. But that said, Covidien’s 4th quarter 2010 report (i.e. a few quarters) is due to be released 1 February 2011, and it appears Corrigan’s sage insight may explain why the bearded-psychiatrist with the rifle-like tongue is “bullish.”

But why?

For one thing, the market has yet to account Exalgo’s value into Zalicus’ current share price. This is observed from a number of perspectives. First, Jason Napodano’s (Zacks Research) estimate at $3 per share, which is admirably conservative when one calculates Exalgo’s NPV at $135 Million – to date.

Furthermore, Exalgo’s initial roll-out which handsomely rewarded Zalicus with more than a million royalty dollars in Q2 2010 was primarily due to a phenomena known as ‘self-stocking’ which according to a Covidien spokeman exceeded their own estimates by 20 percent. The point however is the market was astute enough to know this—so Zalicus’ pps reflected no gain—and actually, it was in early August (the time of the Q2 report release) that the stock price began a slow decline.

Now here again, our observation is – through Q2 and as it turned out Q3 – the market did not reward Zalicus with a gain in its share price as a result of Exalgo activity – in fact, recent gains have had more to do with Zalicus being discovered and particularly the wealth of assets it has in its research vault in Cambridge and Vancouver including its ongoing and resigned collaboration with Novartis, and now recently confirmed resigning of Amgen—a coup many investors may have glossed over.

But this brings us to an important investment observation. It has been factually discovered that Exalgo has gained formulary status with multiple key players in the last nine months. In fact, TriCare, the healthcare arm of the Department of Defense, issued a published report on 6 January 2011.

Read Report Here: http://tinyurl.com/4ce7y28

That report lists Exalgo as one of its new formularies. While the data chart is somewhat hard to read (due to size, not data), it appears that somewhere in the neighborhood of 5-10,000 Exalgo tablets were dispensed by September 2010 (again the actual figure is hard to discern when reading the chart). A closer look at the chart suggests Exalgo saw a significant increase in use in September. Let’s also point out that being named to the formulary list serving the US military is a significant achievement.

Furthermore, a lengthy list of insurance companies have added Exalgo to their formulary: Optima Health, AvMed Health Plans, Blue Cross, Health Net, Oxford United Healthcare, and there are many others if you do an internet search for “Exalgo  Formulary  Insurance”. Our list here is not exhaustive, but representative. We are inclined to suggest that in the last nine months, Exalgo has gained significant formulary penetration which is critical to gaining sales traction.

But what does this information mean to the investor? The key is understanding formulary approvals foretell CEO Corrigan's stubborn bullishness and why Covidien’s CEO stated back in September 2010 that Exalgo was “on track.” But for astute investors, it’s having the foresight to recognize that since Exalgo’s value is not yet baked-into the pps, that implies that once sales traction is demonstrated (a likely possibility for 1 February 2011 Covidien’s report), then a rise in Zalicus's price per share as the market recognizes this achievement may finally start to occur.

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