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Shares of Zalicus Inc. (NASDAQ: ZLCS) are struggling to gain any serious traction in the wake of the very weak phase IIb trial results for the drug Synavive reported by the company in September, 2012. 

Unfortunately, if you check the price action on ZLCS, you can see that many people attempting to play the long side of ZLCS prior to the Synavive phase II data got burned in the crash that sent the stock about 43% lower on Septeamber 10th. 

Synavive was being developed as a treatment for rheumatoid arthritis (RA), and actually demonstrated significantly significant results in the aforementioned phase II trial at week twelve versus placebo as measured by the Disease Activity Score. The only problem with the drug that it was unable to outperform a standard treatment used for patients with rheumatoid arthritis – 2.7mg doses of prednisolone. Basically, while Synavive worked (as demonstrated by the phase II trial meeting its primary endpoint), it wasn’t able to prove superiority in any way. Since the FDA would probably reject the drug, Zalicus made the wise decision to abandon the program.

Although things may not look so great, investors should at least realize that the company’s new flagship product Z160. This is a calcium channel blocker that has proven effective in the treatment of neuropathic and inflammatory pain, which introduces the potential for the drug to be used in a variety of indications (and perhaps for off-label use as well.) 
Z160 has two programs that are in phase II development – one for lumbosacral radiculopathy (LSR) and post-herpetic neuralgia (PHN). These trials were initiated recently, although they are relatively short in length and should provide investors with results before the end of this year. According to estimates, we are looking at LSR data around August of this year, and PHN data most likely at the very end of the year.

This news should help the stock recovery given that the data actually turns out to be good, since Zalicus has yet to form a partnership with this particular compound. It’s also targets a big enough market to potentially turn the company’s downward trend around, although there are some other things that investors should be cautious about regarding Zalicus.
One very big worry in the minds of many ZLCS investors is the situation regarding Z944, the company’s calcium channel blocker that is being developed as an inflammatory/pain medication. The company suggested that this drug was supposed to enter phase II trials in the first quarter of 2013 after a multi-dose trial that would conclude its phase I development, although it seems that the company does not want to report the results. This recent article from Seeking Alpha summarizes this particular controversy quite well.

It’s also worth noting that ZLCS has become a penny stock (having moved below $1/share). This could be fixed with a reverse stock split in the near future, which investors may want to avoid due to the market’s disdain of reverse splits. The problem is that these events mask a given company’s capacity to dilute shareholder value through equity financing.
Despite all the problems and controversies that Zalicus has, one good thing is that it’s market capitalization is quite cheap given the situation and the company’s pipeline. At ~85 million, investors can expect substantial upside in the stock if the company reports strong phase II data for Z160 later this year. While it can be hard for a drug to single-handedly turn a company around this early in development, I think that Zalicus has been beaten down enough to at least introduce this possibility. 
The catch is that Zalicus could become a nightmare if Z160 fails in the development process as well. Without any solid candidates in reserve, it seems that Z160 is the last thing standing in the way between Zalicus and another major leg down in ZLCS.