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Sum Of Parts Show Zalicus (ZLCS) Is Under-Valued

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Wrtitten by Jason Napodano, CFA

Zalicus is in an enviable position within the biotechnology industry. The company has an approved product on the market in Exalgo, and is collecting royalties from a strong partner in Covidien. The company’s pipeline contains Synavive, a mid-stage candidate with proof-of-concept data in a significant market opportunity with rheumatoid arthritis (RA) and osteoarthritis (OA). Zalicus also possess one of the market’s leading research and discovery programs in calcium channel programs. Management is focusing the company’s early-stage discovery efforts into the development of a new class of analgesics for the treatment of both acute and chronic pain. Finally, the cash position is strong, with nearly $50 million on hand at the end of September 2010, with the potential to raise additional funds in 2011 through the sale or out-license of non-core candidates for psoriasis (CRx-191) and diabetes (CRx-401). Accordingly, we believe the best valuation methodology for Zalicus is a sum-of-parts analysis that takes into account the strong cash flows from Exalgo and the upside in future development from Synavive, the ion channel programs, and potential out-licensing opportunities.

Based on our forecast for Exalgo sales, guided broadly by Covidien’s estimation that Exalgo is a $250 to $300 million product, we have conducted a net present value (NPV) analysis on the cash flow royalties. Our analysis shows that the royalties from Exalgo alone are worth more than the entire market value of Zalicus  at $105 million. Our NPV calculations show that Exalgo alone is worth $135 million, or $1.50 per share. This is based on an estimate low double-digit royalty rate on Exalgo sales peaking at $250 million in 2018.

Over the past several months, management at Zalicus has been working on optimizing and manufacturing the new modified release formulation of Synavive. The new formulation allows for once-daily dosing with improved tolerability and therapeutic index. The company plans to progress Synavive into a phase IIb clinical development program for the treatment of rheumatoid arthritis (RA) in early 2011. Based on previous proof-of-concept data with the old formulation of Synavive in osteoarthritis (OA), we believe this asset is worth $35 million in value. Once additional proof-of-concept and safety has been established with the planned new phase IIb program, we believe that management can work to secure a development and commercialization alliance with a larger pharmaceutical company with an NPV far above this level.

Zalicus is in a unique position with respect to discovery and collaborations. The company is one of the few small biotech companies in the world with a dual platform to fuel its product pipeline expansion and potential revenue generating alliances.  Zalicus, created between the merger of CombinatoRx and Neuromed, is a market leader in both selective ion channel modulation discovery and high throughput screening. The selective ion channel modulation platform from Neuromed allows management to identify product candidates that harness the potential of the electrophysiology of calcium channel blockers for acute and chronic pain.  CombinatoRx’ proprietary cell-based combination High Throughput Screening (cHTS) technology evaluates the therapeutic potential of various drug combinations while elucidating new mechanisms to treat diseases. Together these two platforms should allow management at Zalicus to discover and monetize candidates at a significantly improved rate when compared to traditional industry standards. Zalicus currently has existing collaborations with the National Institutes of Allergy and Infectious Disease (NIAID), the U.S. Army Medical Research Institute for Infectious Disease, Novartis, Amgen, and Sanofi-Aventis. Our sum-of-parts analysis includes $40 million for the company’s dual discovery platform and existing collaborations.

Sum of Parts Analysis NPV
Royalties from Exalgo $135 million
Synavive Development Plan $35 million
Dual Discovery Platform + Collaborations $40 million
Total Firm Value $210 million

Adding in the existing cash on hand totaling $48.6 million as of September 30, 2010, and our sum of parts / NPV analysis for Zalicus yields a total firm value of roughly $260 million, or $3 per share. At the current value of only $105 million we believe the company is far under-valued.

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