Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ZLCS > SEC Filings for ZLCS > Form 10-Q on 3-May-2013All Recent SEC Filings

Show all filings for ZALICUS INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ZALICUS INC.


3-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and their notes appearing elsewhere in this quarterly report. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed below and elsewhere in this quarterly report or in our annual report on form 10-K.

Overview

We are a biopharmaceutical company that discovers and develops novel treatments for patients suffering from pain. We have a portfolio of proprietary clinical-stage product candidates targeting pain and have entered into multiple revenue-generating collaborations with large pharmaceutical companies relating to other products, product candidates and drug discovery technologies. We also apply our expertise in the discovery and development of selective ion channel modulators and our combination high throughput screening technology, or cHTS to discover new product candidates for our portfolio or for our collaborators in the areas of pain, inflammation, oncology and infectious disease.

On December 21, 2009, we completed a merger, which we refer to as the Neuromed Merger, with Neuromed Pharmaceuticals Inc., or Neuromed, pursuant to which Neuromed Pharmaceuticals Ltd. became a wholly-owned subsidiary of Zalicus. On September 8, 2010, we changed our name from CombinatoRx, Incorporated to Zalicus Inc. We also changed the name of our subsidiaries, including Neuromed Pharmaceuticals Ltd., which is now named Zalicus Pharmaceuticals Ltd., and which we refer to herein as Zalicus Canada.

Our most advanced product candidate is Z160, a novel, first in class, oral N-type calcium channel blocker we are seeking to develop for the treatment of chronic pain. We have successfully completed Phase 1 clinical trials evaluating the pharmacokinetics and safety profiles of several new formulations of Z160, and the new formulations have demonstrated substantial bioavailability improvements compared to prior formulations of Z160. Based on the data from these studies, Zalicus selected the most promising formulation for clinical use and advanced Z160 into two Phase 2a clinical trials for the treatment of neuropathic pain, including post-herpetic neuralgia, or PHN, a painful neuropathic condition resulting from an outbreak of the herpes zoster virus, otherwise known as shingles, and lumbosacral radiculopathy, or LSR, a common neuropathic back pain condition resulting from the compression or irritation of the nerves exiting the lumbar region of the spine. The Phase 2a trial in LSR began in August 2012, and the Phase 2a trial in PHN began in December 2012. We expect both of these clinical trials to continue throughout the majority of the year ending December 31, 2013.

Our next most advanced product candidate is Z944, a novel oral T-type calcium channel blocker we are seeking to develop for the treatment of pain indications. During 2012, we completed Phase 1 single ascending dose and multiple ascending dose clinical studies of Z944. We are planning to continue the clinical development of Z944 in 2013 with further studies to identify the optimal exposure of Z944 in humans and potentially in an experimental proof-of-concept study in pain.

Until September of 2012, we had also been advancing the development of Synavive, a product candidate to treat immuno-inflammatory disorders. On June 29, 2011, we initiated a Phase 2b clinical trial evaluating Synavive in patients with rheumatoid arthritis, which we refer to as the SYNERGY trial. Results from the SYNERGY trial were announced in September 2012, and while Synavive achieved a statistically significant improvement in signs and symptoms of rheumatoid arthritis, as measured by DAS28-CRP, compared to placebo, the primary end point of the trial, Synavive did not demonstrate a meaningful clinical benefit measured by DAS28-CRP, compared to 2.7 mg of prednisolone or 5 mg of prednisone, key secondary endpoints of the SYNERGY trial. Based on the data from the SYNERGY trial, we have terminated further development of Synavive.

We have also been performing discovery research and preclinical development activities on our proprietary selective ion channel modulators targeting the Nav1.7 sodium channel as well as N or T-type calcium channels. This discovery research and preclinical development is now being conducted as part of a research collaboration with Hydra Biosciences, Inc., or Hydra, a recognized leader in novel ion channel drug discovery and development.

We have also been using our cHTS platform to perform our obligations with our collaboration partners, including Novartis Institutes of Biomedical Research, Inc., or Novartis, and other pharmaceutical companies who have adopted cHTS as an important addition to their oncology discovery efforts.

The United States commercial rights to Exalgo were acquired by Mallinckrodt, Inc., or Mallinckrodt, a subsidiary of Covidien plc, from Neuromed Pharmaceuticals Ltd. in June 2009 pursuant to an asset purchase agreement. Exalgo is an extended release formulation of hydromorphone, an opioid analgesic that has been used in an immediate release formulation to treat pain for many years, and is intended for use in the management of moderate to severe pain in opioid tolerant patients requiring continuous, around-the-clock opioid analgesia for an extended period of time. Under the asset purchase agreement, Mallinckrodt is responsible for all commercialization activities for Exalgo in the United States, including marketing and sales, and for all post-approval regulatory


Table of Contents

activities. We received a $40.0 million milestone payment following FDA approval of Exalgo in March of 2010, and receive tiered royalties on net sales of Exalgo by Mallinckrodt following its commercial launch in April 2010. We have recognized $10.8 million in revenue related to these royalties through March 31, 2013. Following the settlement of the Exalgo litigation between Mallinckrodt and Watson Pharmaceuticals, Inc., now Actavis Inc., or Actavis, that became effective in January 2012, Actavis can introduce a generic version of the 8, 12 and 16 mg dosage strengths of Exalgo starting on November 15, 2013. Under our agreement with Mallinckrodt, our royalties on net sales of these approved dosage strengths would be reduced by 50% upon the introduction of generic versions of Exalgo. In August 2012, the FDA approved the 32 mg dosage strength of Exalgo, which is not subject to Mallinckrodt's settlement with Actavis and on which our royalties for net sales of Exalgo at such dosage will not be reduced as a result of Mallinckrodt's settlement with Actavis.

As of March 31, 2013, we had an accumulated deficit of $349.1 million. We had net losses of $8.0 million and $13.5 million for the three months ended March 31, 2013 and 2012, respectively.

Our management currently uses consolidated financial information in determining how to allocate resources and assess performance. We have determined that we conduct operations in one business segment. For the three months ended March 31, 2013 and 2012, none of our revenues were generated from customers located outside the United States. As of March 31, 2013, all of our long-lived assets were located in the United States.

Critical Accounting Policies

We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as "critical" because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates-which also would have been reasonable-could have been used, which would have resulted in different financial results.

The critical accounting policies we identified in our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2012 related to intangible assets, revenue recognition, stock-based compensation, accrued expenses and income taxes. There were no changes to our critical accounting policies in the three months ended March 31, 2013. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed in our Annual Report on Form 10-K, as filed with the SEC on March 7, 2013.

Results of Operations

Comparison of the Three Months ended March 31, 2013 and March 31, 2012

Revenue. For the three months ended March 31, 2013, we recorded $3.7 million of revenue from cHTS services and other collaborations and royalties. For the three months ended March 31, 2013, we recorded an aggregate of $2.3 million of revenue from cHTS services collaborations. Royalty revenue from Mallinckrodt on net sales of Exalgo during the three months ended March 31, 2013 was $1.4 million. Revenue from our cHTS services collaborations for the three months ended March 31, 2012 was $1.2 million. Royalty revenue from Mallinckrodt on net sales of Exalgo during the three months ended March 31, 2012 was $1.1 million. The increase in revenue for the three months ended March 31, 2013 was primarily due to a $0.3 million increase in Exalgo royalties and a $0.4 million and a $0.3 million increase in the recognition of cHTS revenue from new and amended services collaborations with Novartis and Amgen, respectively.

Research and Development Expense. Research and development expense for the three months ended March 31, 2013 was $7.1 million compared to $10.6 million for the three months ended March 31, 2012. The $3.5 million decrease was due to a $3.3 million decrease in expenses related to Exalgo and Synavive, a $0.9 million decrease in expenses related to the clinical development of Z944, a $0.5 million decrease in cHTS collaboration discovery costs and preclinical programs and a $0.2 million decrease in infrastructure and support costs and non-cash stock-based compensation expense, offset by a $1.2 million increase in expenses related to the clinical development of Z160 and a $0.2 million increase in other clinical programs, ion channel discovery costs and unallocated clinical and preclinical program costs. The $1.2 million increase in expenses related to Z160 is due to the initiation of Phase 2 clinical development. The $0.9 million decrease in expenses related to Z944 is due to the timing of conducting our Phase 1 clinical trials in 2012. During the third quarter of 2012, we terminated all development activities related to Synavive. Accordingly, we expect research and development expense to decrease for the year ending December 31, 2013.


Table of Contents

The table below summarizes our allocation of research and development expenses to our internal clinical programs, including Z160 and Z944 and our discontinued clinical program Synavive, our partnered product Exalgo, our preclinical programs and our drug discovery platforms for the three months ended March 31, 2013 and 2012. Our internal project costing methodology does not allocate all of the personnel and other indirect costs from all of our research and development departments to specific clinical and preclinical programs, and such unallocated costs are further summarized in the table below. Other clinical program costs consist primarily of the personnel and other expenses for our clinical operations department, the majority of which supported the development of our clinical product candidates, Z160 and Z944, and Synavive. Preclinical program costs consist of the personnel and other expenses allocated to our internally funded preclinical programs. cHTS collaboration discovery costs consist of the personnel and other expenses allocated to all of our cHTS services. Ion channel program discovery costs consist of the personnel and other expenses allocated to our ion channel drug discovery programs, including expenses incurred under our collaboration agreement with Hydra, other than the preclinical development costs associated with preclinical product candidates.

Unallocated clinical and preclinical program costs consist primarily of the personnel and other expenses for our formulations, pharmacology and discovery departments, the majority of which supported the development of our clinical product candidates, including Z160 and Z944, as well as our preclinical product candidates from our ion channel program. Infrastructure and support costs consist of facility costs, depreciation and amortization and costs for research and development support personnel such as our informatics and facilities departments.

Due to the uncertainty in drug development and the stage of development of our pre-clinical and clinical programs, we are unable to predict the nature, specific timing and estimated costs to complete the development of our product candidates or the timing of when material cash inflows may commence.

                                                                         Three Months Ended
                                                                             March 31,
                                                                        2013            2012
                                                                           (in thousands)
Z160                                                                  $   3,257       $  2,077
Z944                                                                        410          1,319
Exalgo                                                                       -              26
Synavive                                                                     59          3,292
Other clinical program costs                                                241            165

Total clinical program costs                                              3,967          6,879

Preclinical program costs                                                     3             69
cHTS services and other collaboration discovery costs                       836          1,246
Ion channel program discovery costs                                         948            873
Unallocated clinical and preclinical program costs                          448            356
Infrastructure and support costs                                            790          1,050
Noncash employee and non-employee stock-based compensation expense           87            109

Total research and development costs                                  $   7,079       $ 10,582

General and Administrative. General and administrative expense for the three months ended March 31, 2013 was $2.0 million compared to $2.7 million for the three months ended March 31, 2012. The $0.7 million decrease is primarily due to lower personnel costs in the three months ended March 31, 2013. We expect our general and administrative expenses for the remainder of the year ending December 31, 2013 to be lower than such expenses during 2012.

Amortization of Intangible Asset. For the three months ended March 31, 2013 and 2012, we recorded $2.2 million and $1.0 million, respectively, of amortization expense related to the Exalgo intangible asset acquired in the Neuromed Merger. The increase in amortization expense relates to the manner in which the Exalgo intangible asset is being amortized, which reflects our estimate of the future undiscounted cash flows we expect to receive over the period during which we expect to benefit from the cash flows. We expect amortization expense for the remainder of the year ending December 31, 2013 to be approximately $6.5 million.

Restructuring. For the three months ended March 31, 2012, we recorded a restructuring charge of $1.1 million related to the closing of our Vancouver operations in the first quarter of 2012. The charge primarily represented cash payments for severance and other personnel-related expenses.


Table of Contents

Interest Income. Interest income for each of the three months ended March 31, 2013 and 2012 was less than $0.1 million.

Interest Expense. Interest expense for the three months ended March 31, 2013 and 2012 was $0.4 million and $0.6 million, respectively. This interest expense relates to the interest on our outstanding term loans. We expect our interest expense for the remainder of the year ending December 31, 2013 to be approximately $1.0 million.

Liquidity and Capital Resources

Since our inception in March 2000, we have funded our operations principally through private and public offerings of our equity securities and, to a lesser extent, from debt financing, payments from our collaboration partners and proceeds from litigation. As of March 31, 2013, we had cash, cash equivalents and short-term investments of approximately $26.1 million, which includes $1.9 million of restricted cash. Our funds are primarily invested in short-term, government agency securities, United States Treasury money market funds and short-term corporate debt securities, and as such, we do not believe there is significant risk in our investment portfolio as of March 31, 2013.

On December 22, 2010, we entered into a loan and security agreement with Oxford Finance LLC, or Oxford, pursuant to which we have borrowed an aggregate of $20.0 million under Term Loan A, Term Loan B and Term Loan C from Oxford. Our obligations under the loan and security agreement are secured by a first priority security interest in substantially all of our assets, including those of Zalicus Canada, other than intellectual property. Future principal payments under the loan and security agreement at March 31, 2013, are as follows:

               The remaining nine (9) months of 2013   $      4,934
               2014                                           6,707
               2015                                           2,141

               Total                                   $     13,782

We expect our resources to be sufficient to fund our planned obligations and operations into the first half of 2014. However, we may require significant additional funds earlier than we currently expect if our research and development expenses exceed our current expectations or Exalgo royalties or our collaboration funding is less than our current expectations. We expect to seek additional funding through collaboration agreements and public or private financings of debt or equity capital. However, funding may not be available to us on acceptable terms or at all. In addition, the terms of any financings may be dilutive to, or otherwise adversely affect, holders of shares of our common stock.

If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our research or development programs or our operations. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies or product candidates which we would otherwise pursue on our own.

Operating Activities. Our operating activities used cash of $8.7 million and $11.1 million for the three months ended March 31, 2013 and 2012, respectively. The decrease in the net cash used in operating activities is attributable to a $3.5 million decrease in research and development expense, including a $3.2 million decrease from terminating all development activities related to Synavive.

Investing Activities. Our investing activities provided cash of $9.0 million and $4.2 million for the three months ended March 31, 2013 and 2012, respectively. The cash provided by investing activities for both the three months ended March 31, 2013 and 2012 was primarily due to the timing of purchases and maturities of our short-term investments.

Financing Activities. Our financing activities used cash of $1.6 million and provided cash of $13.9 million for the three months ended March 31, 2013 and 2012, respectively. The cash used in financing activities for the three months ended March 31, 2013 was related to repayment of our term loans. The cash provided by financing activities for the three months ended March 31, 2012 was primarily related to the issuance of 14,057,975 shares of our common stock resulting in net proceeds of $14.5 million offset by repayment of our term loans.

Nasdaq Listing Matters

On October 22, 2012, we received a deficiency notice from NASDAQ notifying us that we were not in compliance with NASDAQ's Marketplace Rule 5450(a)(1) (the "Rule") because the bid price for our common stock, over the last 30 consecutive business days, had closed below the minimum $1.00 per share requirement for continued listing on the NASDAQ Global Market. The notification had no immediate effect on the listing of our common stock.


Table of Contents

In accordance with Marketplace Rule 5810(c)(3)(A), we had a period of 180 calendar days, or until April 22, 2013, to regain compliance with the Rule. If at any time before April 22, 2013, the bid price of our common stock had closed at or above $1.00 per share for a minimum of 10 consecutive business days, NASDAQ would have provided written notification that we had achieved compliance with the Rule. We were not able to maintain the minimum closing bid price by April 22, 2013, and as a result, we voluntarily applied to transfer the listing of our common stock from the NASDAQ Global Market to the NASDAQ Capital Market. In connection with the transfer to the NASDAQ Capital Market, which occurred on April 23, 2013, we were granted an additional 180 days, or until October 21, 2013, to regain compliance by maintaining a minimum closing bid price of at least $1.00 for ten consecutive business days.

We will continue to monitor the bid price for our common stock and will consider various options available to us if our common stock does not trade at a level that is likely to regain compliance with the Rule. At our 2013 annual meeting of stockholders to be held on June 6, 2013, our shareholders will vote on a proposal to authorize an amendment to our sixth amended and restated certificate of incorporation to effect a reverse stock split of our issued and outstanding shares of common stock that may be implemented by our Board of Directors at our discretion at any time prior to the 2014 annual meeting of stockholders, pursuant to which any whole number of outstanding shares between and including 5 and 10 would be combined and reclassified into one share of our common stock. If this proposal is approved by our shareholders, the Board of Directors could approve and implement a reverse stock split that could allow the closing bid price of our common stock on NASDAQ to be at least $1.00 per share for at least ten consecutive business days prior to October 21, 2013, which would allow us to maintain the listing of our common stock on the NASDAQ Capital Market.

There can be no assurance, however, that the reverse stock split proposal will be approved, or that we will be able to regain compliance with the Rule prior to October 21, 2013, if at all, or that we will otherwise continue to satisfy other NASDAQ listing criteria. The delisting of our common stock would significantly affect the ability of investors to trade our common stock and negatively impact the liquidity and price of our common stock. In addition, the delisting of our common stock could materially adversely impact our ability to raise capital on acceptable terms or at all.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or any relationships with unconsolidated entities of financial partnerships, such as entities often referred to as structured finance or special purpose entities.

  Add ZLCS to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ZLCS - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.