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ZLCS > SEC Filings for ZLCS > Form 10-Q on 5-Aug-2013All Recent SEC Filings

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Form 10-Q for ZALICUS INC.


5-Aug-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 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 2 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 2 trial in LSR began in August 2012, and the Phase 2 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 a Phase 1b experimental proof-of-concept clinical study in pain.

Until September of 2012, we had also been advancing the development of Synavive, a product candidate to treat immuno-inflammatory disorders. In June 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 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 agreement 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., then a subsidiary of Covidien plc, from Neuromed Pharmaceuticals Ltd. in June 2009 pursuant to an asset purchase agreement. On July 1, 2013, Mallinckrodt plc, or Mallinckrodt, the successor to Mallinckrodt Inc., was spun off from Covidien as an independent company. 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


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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 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 $12.5 million in revenue related to these royalties through June 30, 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. In August 2012, the FDA approved the 32 mg dosage strength of Exalgo, which was not subject to Mallinckrodt's January 2012 settlement with Actavis. In February 2013, Mallinckrodt and Actavis entered into a separate settlement agreement that would allow Actavis to introduce a generic version of the 32mg dosage strength of Exalgo starting on May 15, 2014. Under our agreement with Mallinckrodt, our royalties on net sales of the approved dosage strengths would be reduced by 50% upon the introduction of generic versions of Exalgo.

As of June 30, 2013, we had an accumulated deficit of $359.6 million. We had net losses of $18.6 million and $23.9 million for the six months ended June 30, 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 six months ended June 30, 2013 and 2012, none of our revenues were generated from customers located outside the United States. As of June 30, 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 six months ended June 30, 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 June 30, 2013 and June 30, 2012

Revenue. For the three months ended June 30, 2013, we recorded $3.9 million of revenue from Exalgo royalties and cHTS services and other collaborations. Royalty revenue from Mallinckrodt on net sales of Exalgo during the three months ended June 30, 2013 was $1.7 million. For the three months ended June 30, 2013, we recorded an aggregate of $2.2 million of revenue from cHTS services and other collaborations. Royalty revenue from Mallinckrodt on net sales of Exalgo during the three months ended June 30, 2012 was $1.3 million. Revenue from our cHTS services and other collaborations for the three months ended June 30, 2012 was $1.7 million. The increase in revenue for the three months ended June 30, 2013 was primarily due to a $0.4 million increase in Exalgo royalties and a $0.5 million increase in the recognition of cHTS revenue from new and amended services collaborations with Amgen.

Research and Development Expense. Research and development expense for the three months ended June 30, 2013 was $9.8 million compared to $9.9 million for the three months ended June 30, 2012. The $0.1 million decrease was due to a $2.8 million decrease in expenses related to Exalgo and Synavive, a $0.3 million decrease in expenses related to the clinical development of Z944, a $0.3 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 $3.3 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 $3.3 million increase in expenses related to Z160 is due to the initiation and continuation of Phase 2 clinical development. The $0.3 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, compared to the year ended December 31, 2012.

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 June 30, 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


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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
                                                                        June 30,
                                                                   2013           2012
                                                                     (in thousands)
Z160                                                            $    5,853       $ 2,511
Z944                                                                   746         1,051
Exalgo                                                                 -              25
Synavive                                                                61         2,833
Other clinical program costs                                           263           203

Total clinical program costs                                         6,923         6,623

Preclinical program costs                                              -              24
cHTS services and other collaboration discovery costs                  855         1,142
Ion channel program discovery costs                                    912           767
Unallocated clinical and preclinical program costs                     329           304
Infrastructure and support costs                                       736           898
Noncash employee and non-employee stock-based compensation
expense                                                                 90           103

Total research and development costs                            $    9,845       $ 9,861

General and Administrative. General and administrative expense for the three months ended June 30, 2013 was $2.1 million compared to $2.3 million for the three months ended June 30, 2012. The $0.2 million decrease is primarily due to lower personnel costs in the three months ended June 30, 2013. We expect our general and administrative expenses for the remainder of the year ending December 31, 2013 to be lower than such expenses were during 2012.

Amortization of Intangible Asset. For the three months ended June 30, 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 $4.4 million.

Restructuring. For the three months ended June 30, 2012, we recorded a restructuring charge of less than $0.1 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.

Interest Income. Interest income for each of the three months ended June 30, 2013 and 2012 was less than $0.1 million.

Interest Expense. Interest expense for the three months ended June 30, 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 $0.6 million.

Comparison of the Six Months ended June 30, 2013 and June 30, 2012

Revenue. For the six months ended June 30, 2013, we recorded $7.6 million of revenue from Exalgo royalties and cHTS services and other collaborations. Royalty revenue from Mallinckrodt on net sales of Exalgo during the six months ended June 30, 2013 was $3.1 million. For the six months ended June 30, 2013, we recorded an aggregate of $4.4 million of revenue from cHTS services and


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other collaborations. Royalty revenue from Mallinckrodt on net sales of Exalgo during the six months ended June 30, 2012 was $2.4 million. Revenue from our cHTS services and other collaborations for the six months ended June 30, 2012 was $2.9 million. The increase in cHTS revenue for the six months ended June 30, 2013 was primarily due to a $0.6 million and $0.8 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 six months ended June 30, 2013 was $16.9 million compared to $20.4 million for the six months ended June 30, 2012. The approximately $3.5 million decrease was due to a $6.0 million decrease in expenses related to Exalgo and Synavive, a $1.2 million decrease in expenses related to the clinical development of Z944, a $0.8 million decrease in cHTS collaboration discovery costs and preclinical programs and a $0.5 million decrease in infrastructure and support costs and non-cash stock-based compensation expense, offset by a $4.5 million increase in expenses related to the clinical development of Z160 and a $0.5 million increase in other clinical programs, ion channel discovery costs and unallocated clinical and preclinical program costs. The $4.5 million increase in expenses related to Z160 is due to the initiation and continuation of Phase 2 clinical development. The $1.2 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, compared to the year ended December 31, 2012.

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 six months ended June 30, 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.

                                                                         Six Months Ended
                                                                             June 30,
                                                                        2013          2012
                                                                          (in thousands)
Z160                                                                  $  9,110      $  4,588
Z944                                                                     1,156         2,370
Exalgo                                                                     -              51
Synavive                                                                   119         6,125
Other clinical program costs                                               504           368

Total clinical program costs                                            10,889        13,502

Preclinical program costs                                                    3            93
cHTS services and other collaboration discovery costs                    1,691         2,388
Ion channel program discovery costs                                      1,860         1,640
Unallocated clinical and preclinical program costs                         777           660
Infrastructure and support costs                                         1,527         1,948
Noncash employee and non-employee stock-based compensation expense         177           212

Total research and development costs                                  $ 16,924      $ 20,443

General and Administrative. General and administrative expense for the six months ended June 30, 2013 was $4.1 million compared to $5.0 million for the six months ended June 30, 2012. The $0.9 million decrease is primarily due to lower personnel costs in the six months ended June 30, 2013. We expect our general and administrative expenses for the remainder of the year ending December 31, 2013 to be lower than such expenses were during 2012.


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Amortization of Intangible Asset. For the six months ended June 30, 2013 and 2012, we recorded $4.4 million and $1.9 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 $4.4 million.

Restructuring. For the six months ended June 30, 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.

Interest Income. Interest income for each of the six months ended June 30, 2013 and 2012 was less than $0.1 million.

Interest Expense. Interest expense for the six months ended June 30, 2013 and 2012 was $0.8 million and $1.2 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 $0.6 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 June 30, 2013, we had cash, cash equivalents and short-term investments of approximately $20.8 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 June 30, 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 three separate term loans 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 June 30, 2013, are as follows:

                                                     (in thousands)
              The remaining six (6) months of 2013   $         3,331
              2014                                             6,707
              2015                                             2,141

              Total                                  $        12,179

On May 8, 2013, we entered into a purchase agreement with Lincoln Park Capital Fund, LLC, or LPC, pursuant to which we have the right to sell to LPC up to $25.0 million of shares of the Company's common stock, subject to certain limitations and conditions set forth in the purchase agreement, over the period from May 8, 2013 to May 1, 2015. As consideration for entering into the purchase agreement, we also issued LPC 800,000 shares of common stock, and we did not receive any cash proceeds from the issuance of these 800,000 shares. In addition to the 800,000 shares of common stock issued to LPC as consideration for entering into the purchase agreement, pursuant to the purchase agreement, on May 8, 2013, LPC purchased 3,304,147 shares of our common stock at $0.605 per share, for gross proceeds of $2.0 million. Under the purchase agreement, on any business day and as often as every other business day over the 24-month term of the purchase agreement, and up to an aggregate amount of an additional $23.0 million of shares of the Company's common stock (subject to certain limitations), we have the right, from time to time, at our sole discretion and subject to certain conditions to direct LPC to purchase up to 500,000 shares of our common stock. The purchase price of shares of common stock pursuant to the purchase agreement will be based on prevailing market prices of our common stock at the time of sales without any fixed discount, and we will control the timing and amount of any sales of common stock to LPC, but in no event will shares be sold to LPC on a day the closing price of our common stock is less than $0.40 per share, subject to adjustment. In addition, we may direct LPC to purchase additional amounts as accelerated purchases if on the date of a regular purchase the closing sale price of our common stock is not below $0.50 per share. There is no upper limit on the price per share that LPC could be obligated to pay for . . .

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