One Biotech Stock to Avoid

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Zalicus profile

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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