Exalgo Royalties Monetized
On February 3, 2014, Zalicus Inc. (ZLCS) filed a Form 8K announcing the sale of all rights to future royalties on sales of Exalgo at Mallinckrodt Inc. in return for $7.2 million in cash. Zalicus originally entered into a licensing agreement with Mallinckrodt for Exalgo, an extended release formulation of hydromorphone hydrochloride, in June 2009. Exalgo was approved for sale in the U.S. in March 2010 and launched by Mallinckrodt in April 2010. To date, Zalicus has received $16.0 million in royalties relating to sales of Exalgo at Mallinckrodt. In the fourth quarter 2013, royalties on Exalgo totaled $2.0 million to Zalicus.
We believe the transaction was a wise one for Zalicus because Exalgo's days of exclusivity are nearing an end. Pending final U.S. approval for the generic formulation, generic manufacturer, Actavis, Inc. has already reached an agreement with Mallinckrodt allowing Actavis to launch a generic formulation of Exlago for the 8, 12, and 16 mg dosage strengths back in November 2013. The agreement allows for Actavis to launch a generic 32 mg dosage strength on May 15, 2014. Under terms of the previous agreement with Mallinckrodt, Zalicus royalties on net sales of the approved dosage strengths are reduced by 50% upon the introduction of generic versions of the drug.
...Uses Cash to Strengthen Balance Sheet...
Our financial model assumed only limited royalties on sales of Exalgo to Zalicus in 2014, so the $7.2 million in cash received by Zalicus on January 31, 2014 was a nice positive surprise. Zalicus immediately used the $7.2 million cash payment from Mallinckrodt to pay off an $8.65 million outstanding term loan with Oxford Finance LLC. The original $20 million loan was entered into back in December 2010 with Oxford. Zalicus paid both principal and interest payments on the loan in 2013, with another $6.7 million due in 2014 and $2.1 million scheduled for 2015 assuming full interest payments were made. Paying down the loan in its entirety not only improves the company's working-capital position, but also reduces future cash burn associated with the principal and interest payments.
As a result of paying back the loan, Oxford has released all security interests in Zalicus' tangible and intangible property. This should allow the company to enter into future equity or debt financings unencumbered by the terms of the Oxford transaction.
Zalicus reported cash and equivalents at December 31, 2013 of $19.8 million. We note net cash burn in the fourth quarter 2013 was only $0.2 million, as the company raised $7.7 million in cash through sales of securities to Lincoln Park Capital in October 2013. As of October 24, 2013, Zalicus has sold $19.8 million of the $25.0 million allowed through the securities purchase agreement with Lincoln Park. We believe the company's goal is to keep cash and cash equivalents of - at least - six months of operating burn. For the first half of 2014, we model cash usage from operations of roughly $10 million, meaning Zalicus should tap the remaining $5.2 million from Lincoln Park here in the first or second quarter 2014 (assuming they haven't already done so). We model cash at March 31, 2014, the end of the first quarter, to still be above $17.5 million.
Z944 Is the Primary Driver In 2014
Given the failure of Z160 in November 2013, all eyes are now squarely focused on Z944 as the primary valuation driver in 2014 and beyond. Z944 is the company's novel, oral T-type calcium channel (Cav 3.1, Cav 3.2, and Cav 3.3) modulator for chronic, acute, or visceral pain. The profile of the drug candidate clearly has enormous potential for Zalicus, but it is early stage, having only just recently completed a Phase 1b study in November 2013.
The preclinical data generated to date with Z944 is very encouraging. In February 2012, the company published a paper in Science Translational Medicine identifying Z944 as a potential therapy for seizure and generalized epilepsy. In May 2013, the company presented Poster #383 at the American Pain Society highlighting the mechanism of action for Z944 and its potential utility in various nonclinical models of acute and inflammatory pain. Below we highlight some of this data showing how Z944 compared well to naproxen in rat complete Freund's adjuvant (CFA) model, mouse formalin model, and in a model of rat visceral pain.
(click to enlarge)
The Phase 1b data has some good nuggets of information. Firstly, Zalicus saw dose proportional pharmacokinetics with similar exposure to preclinical doses where efficacy was achieved. The data show rapid absorption and a pk profile that supports twice daily dosing. The drug was also well tolerated, but the company did identify a maximum tolerated dose. In fact, when doses got too high there were limiting CNS side effects. This is in contrast to Z160 where Zalicus saw very limited side effects and incredible tolerability. It's important to note companies want to see dose-limiting CNS side effects. That confirms the drug is hitting the target organ. With Z160, no dose-limiting side effects should have been a clue that the efficacy wasn't there.
The Phase 1b study utilized a state-of-the-art experimental clinical model measuring Laser-Evoked Potentials (LEP) following administration of capsaicin or exposure to UV light. The trial was designed to efficiently provide objective and subjective data on a drug's ability and modulate neuropathic pain signaling. This provided management with a better sense of the efficacy signal than with Z160. Data shows that Z944 reduced peak-to-peak amplitudes in both neuropathic (capsaicin) and inflammatory (UV) pain models (see graphs below taken from the company's investor presentation). The drug also reduced subjective VAS pain scores for both models, with the highest dose of 80mg comparing well to preclinical data on Pfizer's (PFE) Lyrica (pregabalin).
