Zalicus, Inc. (Nasdaq: ZLCS, Extinct)

Stories of Companies and People Behind – ZLCS

Zalicus, Inc. (Nasdaq: ZLCS) is a small capital (around $100M) biopharmaceutical firm.

ZLCS has a library of 2000 approved drugs. The company believes that by a technology called “combination High Throughput Screening”, or cHTS, it can make new medicines that have a synergistic function.

When two or more drugs are taken together, sometimes the desired effect is enhanced, while the side effect is reduced. The result could be the opposite too. Thousands of experiments may be needed to verify a good combination. Back in 2005, when the company went public (it was called Combinatorx, Inc. at that time), there were 5 drug candidates in the phase IIa clinical trial stage based on this cHTS technology.

With the fancy term “cHTS”, this firm attracted good attention from investors in the 2000s. The stock price started high at $7-$8 per share and even rose up to $14 in early 2006.

However, looking back from the current time point, this firm shows a typical pattern of biopharma firms in the US – start out strong, but eventually fizzle out. Its price dropped to only $1 per share today (Oct26 2011).

Why can’t the exciting cHTS technology keep the stock soaring?

The answer is simple. The investors have input quite a lot of money into this firm, but in several years, there wasn’t any promising new drug in the pipeline. Bragging cHTS could not arouse investors’ interest anymore. The firm was trying to expand to another technology called “selective ion-channel modulation platform”. In Sep2008, the only hope of the company, Phase II Clinical Trial of Synavive (CRx-102) with the indication of “Knee Osteoarthritis” failed. The firm was struggling after that news was announced, and 65% of its workforce was reduced.

I tried hard to find the reason why the FDA halted the clinical trial on Synavive. To my surprise, I can’t find it in the annual reports. All the descriptions there look good, except that the discontinuation rate of the patients in the trial is as high as 32%.

Weird, I will talk about this later when this firm continues burning money on Synavivie, which they’ve been cooking for so many years (it had been emphasized as the star candidate born from the cHTS technology since the firm went public in 2005).

So, the investors were angry at the consistently bad performance. The stock price plunged. If they don’t want to liquidate the company, the best way is to find a target company with good assets and merger with it.

Neuromed, a Canada based biopharma with a potential drug candidate – Exalgo (indication on the management of pain in opioid-tolerant patients) debut.  In Dec 2009, the deal was done after a year’s negotiation. Combinatorx merged with Neuromed, and the company later changed its name to Zalicus, Inc.

Accompanying with the restructuring, the people changed. Former CEO, who was young with stellar Harvard background, left the firm.

Who is the new CEO of Zalicus?

His name is Mark Corrigan, MD, former Executive Vice President (EVP) of Research & Development at Sepracor and a member of the Combinatorx board of directors.  Christopher Gallen, MD, Ph.D., Former CEO of Neuromed, served as the EVP of Research and Development. The decision was announced by the Chairman of the board, Frank Haydu. I would assume that Mr. Haydu not only is the announcer, but also is the key decision maker.

There wasn’t any information about how Dr. Corrigan contributed to the company? Neither the merger deal nor the successful project like purchasing Exalgo was done by him.  His academic expertise is on psychiatry, not on pain or inflammation. But, Frank Haydu said, he is “ideally suited to build Combinatorx into a thriving biopharmaceutical business with a promising portfolio of pain and inflammation product candidates.” Having a great relationship, gaining trust from Chairman of board seems more important than hard skills to some extent.

In Mar 2010, the FDA approved Exalgo, which brought in $40 million mile stone fee to Zalicus right away. Covidien, a medical device company is responsible for all commercialization activities for Exalgo in the United States. Zalicus also receives tiered royalties quarterly on net sales of Exalgo by Covidien following its commercial launch in April 2010.The stock price had climbed up slowly since then.

I am wondering why Zalicus sold the marketing right of Exalgo to a medical device company, who would have to compete with strong players such as Johnson & Johnson, Hospira… there are around 80 opioid pain killer drugs already in the market now. Furthermore, Johnson & Johnson is marketing JURNISTA ™ (in several European countries), which has the exact same oral osmetic mechnism as Exalgo. Both Covidien and Zalicus did not disclose the detailed terms on tiered royalties.

Let’s take a look at how much Exalgo has earned for Zalicus since the commercial launch.

In the 3 month ended by Dec30, 2010, $1.6 million was collected, in the three month ended by Mar31, 2011, $2.0 million, in the three month ended by Jun30, 2011, $2.5 million. Covidien’s officer Richard Meelia said that Exalgo should reach peak sale at $200 million in a Q&A session with investors. I took a look at Endo’s similar product called Opana, the sales of Opana hit $300 million in 2010, tripled the record in 2007. So, it might be possible that Exalgo’s sales can reach $200 million as Covidien claimed.

Exalgo is a product purchased from Euromed, Mark Corrigan, CEO of Zalicus got to cite something else to excite the investors and show his value. What can he provide?

Surprisingly, he is still focusing on the cHTS technology, which they’ve been tried for almost a decade with barely anything out. What’s more, he didn’t churn out any new candidates but the old Synavive. Synavivie’s clinical trial on “knee Osteoarthritis” failed in 2008. Now they are busy to put it into another indication – “rheumatoid arthritis”. Here is the part I got so confused. Knee arthritis and rheumatoid arthritis are similar on the pathological mechanism, if the drug failed in the former one, what’s the rationale behind to apply it on rheumatoid arthritis? If the reason of last failure is side effect, how did Zalicus justify avoiding this side effect now?

The other big candidate is called Prednisporin (FOV1101). Zalicus collaborated with Fovea, which is now a subsidiary of Sanofi Aventis. It is undergoing through Phase 2b clinical development for allergic conjunctivitis. Zalicus has already collected $1.5 million on this candidate. $24 million is eligible to receive if some milestone is hit.  The most recent news reported all seems positive on this drug.

So, we’re expecting exciting news on the progress of these clinical trials.

But, in the last several months, the stock price of Zalicus kept going down to $1 per share.  On Jan18, 2011, only one year after his assumption on the CEO role, Mark Corrigan sold 62,160 shares himself at $2.18 per share, On Oct25, 2011 Dennis Henner sold 322,100 shares or $331,062 worth; on Oct21, 2011 Mpm Bioventures Iii-qp L.P. sold 459,817 or $473,263 worth; Over the past 12 months, a total of 4,297,352 shares, or $31,701,058 were sold by the insider, and over the same time period, no shares of Zalicus Inc. were purchased by the insiders.

These signals indicate that the company itself does not believe what is going on. Mark Corrigan put $2.5 million compensation into his own pocket last year, but how much did he contribute to the investors???

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