One Biotech Stock to Avoid

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Company to Avoid: Zalicus (Nasdaq: ZLCS  )
Submitted By: zzlangerhans
Member Rating: 98.84
Submitted On: 7/5/2011
Stock Price At Recommendation: $2.60

Zalicus profile

CAPS Rating (out of 5) ***
Headquarters Cambridge, Massachusetts
Industry Biotechnology
Market Cap $286 million
Partners Covidien (NYSE: COV  )
Industry Peers

Incyte (Nasdaq: INCY  )

Amgen (Nasdaq: AMGN  )

Cephalon (Nasdaq: CEPH  )

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:
Today's outperform rating from Oppenheimer was a gift. I love to see a biotech stock pop after an analyst initiates coverage with a rating diametrically opposed to the stock's true prospects. My negative opinions about CombinatoRx, excuse me, Zalicus, are rooted in the five year chart. Open it up and take a look.

From 2006 to 2008 the share price degraded steadily as little came of multiple combination drugs in clinical development. The idea of combining generics into new therapeutic compounds initially seemed novel, but the market was clearly growing fatigued with lackluster results from midstage trials.

In 9/08 the share price dropped off a cliff with the failure of the company's most highly touted drug, Synavive, to achieve statistical significance in the COMET-1 trial in knee osteoarthritis. That plunge represented the last of the smart money leaving the stock, never to return.

In 2009 the company mortgaged their future by diluting massively to buy Neuromed, the private developer of an extended-release opiate called Exalgo. Since that time the share price has ballooned from 30M to 90M. Exalgo was approved by the FDA a year ago but like most other analgesics approved in recent years has failed to make any significant commercial impact.

A few months ago a cadre of like-minded pumpers began flogging Zalicus on Seeking Alpha. Working together or not, their talking points were similar. Their number one argument for Zalicus success? Synavive, of course. The compound whose failure tanked the stock in 2008. The company has just initiated a phase IIb trial in rheumatoid arthritis, and the prior failure in osteoarthritis has been blurred over to look like a success. And another thing the company and the pumpers aren't mentioning is that there was already a phase IIb trial of Synavive in rheumatoid arthritis, MARS-1, run synchronistically with COMET-1. What happened to MARS-1? The company killed the trial late in enrollment and swept it under the rug.

What do the pumpers think is the next best thing about Zalicus? Exalgo, of course. One pumper even claimed that the royalty stream from Exalgo is worth more than the current market cap of the company. But what royalty revenues have been booked from three full quarters of Exalgo sales so far? 1.1M, then 0.1M, then 0.35M. Doesn't look like this is going to be going anywhere.

In true pumper style, every drug and technology platform Zalicus has ever floated is then paraded out as the next great medical breakthrough. But in five years Zalicus has never completed development of any drug or even initiated a phase III trial.

I'm no good at calling tops. But I do call BS when I see it and this pile is getting mighty fragrant.

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The Motley Fool is investors writing for investors. Dan Dzombak did not have a position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words. Motley Fool newsletter services have recommended buying shares of Covidien. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 08, 2011, at 11:53 AM, charlie0217 wrote:

    How many times are you going to change the timestamp on this post??? You wrote this like a year ago. This is the third time I have seen you change the date and drop off the replies to make it look like a new post. The only thing different this time is you udated the Exalgo Royalties.

    You also keep changing your start price. You red thumbed it around 2. then again at 2.4 and now 2.6. Instead of changing your start price up and up and up with a red thumb, why don't you just change the thumb to a green as the stock obviously keeps going up over time.

    And besides, your analysis is so outdated, its almost laughable. Comparing Zalicus now to Zalicus 5 years ago is like comparing chicken salad to chicken sh!t.

  • Report this Comment On July 08, 2011, at 2:05 PM, kevingt wrote:

    I don't know why anyone would listen to the author of this article. This from Dan's Motley Fool profile:

    http://caps.fool.com/player/tmfdandzombak.aspx

    TMFDanDzombak

    Accuracy: 56.83%

    He's only right about half the time. I think TMF should have some sort of editorial standards for their writers which would exclude people who are only as accurate as a flip of a coin. Nobody wants to listen to someone who is only right half of the time. That's call guessing. And why doesn't he establish an underperform position in ZLCS? Afraid to put his pick on the line? His only underperform pick listed is Molycorp. Dan's not just a fool, he's a clown.

  • Report this Comment On July 08, 2011, at 2:46 PM, yukonsara wrote:

    My ZLCS stocks have gone from $1.80 to almost $3 in about four months. This guy has no idea what he's talking about.

  • Report this Comment On July 08, 2011, at 3:05 PM, Worly wrote:

    When @zzlangerhans give us a recommendation on biotech or even any healthcare stock I tend to do the opposite and seems to have work out well. To date he has got 30 out of 172 recommendation correct!

    http://caps.fool.com/player/zzlangerhans/sectors.asp

  • Report this Comment On July 09, 2011, at 9:34 AM, irishred1 wrote:

    Don't write any more articles on Zalicus- will bring all the trolls from the SA board to rain down hate on you, albeit without any solid facts as always

  • Report this Comment On July 10, 2011, at 3:15 PM, Troy2008 wrote:

    One fact is clear, zzlangerhans is a bigger tool then I originally thought. Hell, he even went short EXAS which is a huge winner. I'll buy ZLCS this week for certain.

  • Report this Comment On July 11, 2011, at 2:52 AM, TMFDanDzombak wrote:

    On zzlangerhans' record:

    If you sort by all picks and not just active picks (http://caps.fool.com/player/zzlangerhans/sectors.aspx?filter... zzlangerhans track record in the biotech sector is Accuracy: 78.82% on 728 total picks.

    Pretty remarkable.

  • Report this Comment On July 11, 2011, at 2:54 AM, TMFDanDzombak wrote:
  • Report this Comment On July 12, 2011, at 11:11 AM, brigar6 wrote:

    I'm trying a new system, other than betting on the coin toss before football games which is 50/50 give or take a 1%, I have started to go opposite whatever zz's opinion is.Better odds than the toss

    ZZ you know your getting spanked when you start throwing rebuttals such as, "is this korea, we cant give our opinions", thats like the school yard, "Oh Ya my dad is tougher than yr dad"...

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