Tuesday, November 12, 2013

The Meltdown of Small Cap Pain Stock Zalicus Inc (ZLCS): Now What? IBB & XBI

Yesterday, shares of small cap pain stock Zalicus Inc (NASDAQ: ZLCS) caused recent investors some extreme plain when shares plunged 72.28% (but are still up 100% since the start of the year) after drug candidate Z160 failed two mid-stage clinical trials – meaning its probably time to take an objective look at what to do with this stock (as it intends to focus on its pain treatment Z944) plus take a look at the performance of biotech industry benchmarks like the iShares NASDAQ Biotechnology Index ETF (NASDAQ: IBB) and SPDR S&P Biotech ETF (NYSEARCA: XBI).

What is Zalicus Inc?

Small cap Zalicus Zalicus Inc discovers and develops treatments for pain. Its internal pipeline includes or had included Z160, an N-type calcium channel blocker for chronic neuropathic pain and Z944, a T-type calcium channel blocker for acute and inflammatory pain. Zalicus Inc also has a pre-clinical Ion channel program, which is advancing lead candidates for potential clinical development in pain; along with partnered programs in other therapeutic areas as it receives royalty and milestone revenue from both Covidien/Mallinckrodt Inc. for Exalgo (hydromorphone HCl) extended-release tablets for the management of moderate to severe pain in opioid tolerant patients, and from Sanofi/Fovea Pharmaceuticals for candidate Prednisporin™/FOV1101, a topical ocular drug candidate to treat inflammatory ocular diseases such as persistent allergic conjunctivitis.

For reference or benchmarking purposes, the iShares NASDAQ Biotechnology Index ETF tracks the Nasdaq Biotechnology Index through 119 holdings while the SPDR S&P Biotech ETF tracks the S&P Biotechnology Select Industry Index through 58 holdings.

What You Need to Know or be Warned About With Zalicus Inc

On Monday, Zalicus Inc announced that while Z160 was shown to be generally safe and well-tolerated with no drug-related serious adverse events, it failed to meet the primary endpoint in either of the Phase 2 clinical studies in patients with lumbosacral radiculopathy (LSR), a condition that causes pain in the lower back, and post-herpetic neuralgia (PHN) or nerve pain that follows shingles. Based on those results (actually, there was no real detailed explanation as to why what looked like a promising drug had failed), Zalicus Inc will be discontinuing the Z160 program to focus efforts on Z944 as it reported positive results for a Phase 1b clinical study at the beginning of the month.

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It should be mentioned that Z944 is an oral non-opioid painkiller and that Research into non-opioid medicines has become more important as they offer an alternative to potentially-addictive drugs such as morphine and oxycodone. However, Z944 won't be into the Phase II stage until next year.

A look at Zalicus Inc's financials reveals revenues of $3.40M (quarter ending Sept 30, 2013), $3.89M, $3.67M, $3.79M and $3.52M for the past five quarters plus net losses of $10.53M (quarter ending Sept 30, 2013), $10.56M, $8.05M, $8.29M and $12.17M. At the end of the last quarter, Zalicus Inc had $18.12 million in cash and short term investments to cover $16.25 million in current liabilities and $20.96 million in total liabilities. To make matters worst, what revenues Zalicus Inc does have coming in could be impacted because third party manufacturers will have the right to sell generic version Exalgo at the end of this week.

So while Zalicus Inc will have lower expenses with the discontinuation of Z160, the company might be needing to raise some cash as early as early next year, but it does have a financing agreement already in place with Lincoln Park Capital where management has the right to sell up to $25 million worth of common stock at prevailing market prices.

Share Performance: Zalicus Inc vs. IBB & XBI

On Monday, small cap Zalicus Inc sank 72.28% to $1.30 (ZLCS has a 52 week trading range of $1.15 to $8.28 a share) for a market cap of $29.22 million plus the stock is still up 100% over the past year, up 170.8% over the past year and up 128.1% over the past five years. Here is a look at the performance of Zalicus Inc verses that of biotech benchmarks the iShares NASDAQ Biotechnology Index ETF and the SPDR S&P Biotech ETF:

As you can see from the above chart, Zalicus Inc was handily beating benchmarks the iShares NASDAQ Biotechnology Index ETF and the SPDR S&P Biotech ETF up until 2012.

Finally, here is a look at the technical charts for all three: 

The Bottom Line. If small cap pain stock Zalicus Inc was a risky speculative bet with two drugs in trials, its an even riskier and more speculative bet with just one drug to fall back on. In other words, recent investors might want to take the tax deduction for any painful losses while longer term investors should kick themselves for not getting out earlier this fall. 

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