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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011.

Or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            .

Commission File Number 000-51171

 

 

ZALICUS INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   04-3514457

(State or other jurisdiction of

Incorporation or organization)

 

(IRS Employer

Identification Number)

245 First Street

Third Floor

Cambridge, Massachusetts

  02142
(Address of Principal Executive Offices)   (Zip Code)

(617) 301-7000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     ¨    Accelerated filer       x
Non-accelerated filer     ¨    Smaller reporting company       ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares of the registrant’s Common Stock, $0.001 par value per share, outstanding as of August 3, 2011: 99,237,510 shares

 

 

 


Table of Contents

ZALICUS INC.

QUARTERLY REPORT

ON FORM 10-Q

INDEX

 

PART I FINANCIAL INFORMATION   
 

Item 1.

   Financial Statements (Unaudited)      3   
 

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      14   
 

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      20   
 

Item 4.

   Controls and Procedures      21   
PART II OTHER INFORMATION   
 

Item 1A.

   Risk Factors      22   
 

Item 4.

   Removed and Reserved      36   
 

Item 6.

   Exhibits      36   
SIGNATURES      37   

 

2


Table of Contents

PART I

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q includes statements with respect to Zalicus Inc. (“Zalicus”) and its subsidiaries (“we”, “our” or “us”), which constitute “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Words such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will be,” will continue,” “will result,” “seek,” “could,” “may,” “might,” or any variations of such words or other words with similar meanings are intended to identify such forward-looking statements. Forward-looking statements in this quarterly report on Form 10-Q include, without limitation, statements regarding our future expectations; any projections of financing needs, revenue, expenses, earnings or losses from operations, or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning product candidate research, development and commercialization plans and timelines; any statements regarding safety and efficacy of product candidates; any statements regarding our plans for the outlicensing of our clinical or pre-clinical product candidates and our seeking of collaborations; any statements regarding timing of initiating and completing clinical and pre-clinical trials and studies; any statements of expectation or belief; and any statements regarding other matters that involve known and unknown risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to differ materially from results expressed in or implied by this quarterly report on Form 10-Q.

The risks, uncertainties and assumptions referred to above include risks that are described in the Risk Factors section of our annual report on Form 10-K and in our other Securities and Exchange Commission reports. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report on Form 10-Q. We specifically disclaim any obligation to update these forward-looking statements in the future, except as required by law.

 

Item 1. Financial Statements—Unaudited

The financial information set forth below should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Quarterly Report on Form 10-Q.

 

3


Table of Contents

Zalicus Inc.

Consolidated Balance Sheets

(in thousands except per share data)

 

     June 30,
2011
    December 31,
2010
 

Assets

    

Current assets:

    

Cash and cash equivalents

    $ 2,581       $ 2,820   

Restricted cash

     650        650   

Short-term investments

     51,535        41,799   

Accounts receivable

     1,851        1,605   

Prepaid expenses and other current assets

     3,089        965   
                

Total current assets

     59,706        47,839   

Property and equipment, net

     6,032        6,898   

Intangible asset, net

     24,117        26,687   

Restricted cash and other assets

     1,258        1,245   
                

Total assets

    $ 91,113       $ 82,669   
                

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable

    $ 1,256       $ 1,840   

Accrued expenses and other current liabilities

     4,603        4,269   

Deferred revenue

     2,700        2,370   

Current portion of term loan payable

     1,871        273   

Current portion of lease incentive obligation

     284        284   
                

Total current liabilities

     10,714        9,036   

Term loan payable, net of current portion

     9,237        2,523   

Deferred revenue, net of current portion

     4,167        3,667   

Deferred rent, net of current portion

     679        743   

Lease incentive obligation, net of current portion

     1,300        1,442   

Other long-term liabilities

     2,478        2,261   

Stockholders’ equity:

    

Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding

     —          —     

Common stock, $0.001 par value; 200,000 shares authorized; 99,092 and 89,113 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively

     99        89   

Additional paid-in capital

     339,113        317,581   

Accumulated other comprehensive income (loss)

     5        (20

Accumulated deficit

     (276,679     (254,653
                

Stockholders’ equity

     62,538        62,997   
                

Total liabilities and stockholders’ equity

    $ 91,113       $ 82,669   
                

 

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Table of Contents

Zalicus Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(Unaudited)

 

     Three months ended June 30,     Six months ended June 30,  
     2011     2010     2011     2010  

Revenue:

        

Collaborations and other

    $ 1,650       $ 2,717       $ 2,742       $ 43,782   

Government contracts and grants

     198        211        377        476   
                                

Total revenue

     1,848        2,928        3,119        44,258   
                                

Operating expenses:

        

Research and development

     8,990        4,617        16,807        11,998   

General and administrative

     2,723        2,569        5,467        6,431   

Amortization of intangible

     1,285        4,685        2,570        9,369   
                                

Total operating expenses

     12,998        11,871        24,844        27,798   
                                

(Loss) income from operations

     (11,150     (8,943     (21,725     16,460   

Interest income

     31        30        67        37   

Interest expense

     (116     —          (221     —     

Loss on revaluation of contingent consideration

     —          —          —          (29,286

Other (expense) income

     (79     15        (146     (127
                                

Net loss before provision for income taxes

     (11,314     (8,898     (22,025     (12,916

Income tax benefit

     —          300        —          1,210   
                                

Net loss

    $ (11,314    $ (8,598    $ (22,025    $ (11,706
                                

Net loss per share—basic and diluted

    $ (0.11    $ (0.10    $ (0.23    $ (0.15
                                

Weighted average number of common shares used in net loss per share calculation—basic and diluted

     98,867,394        88,946,220        95,440,314        76,199,264   
                                

 

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Table of Contents

Zalicus Inc.

Condensed Consolidated Statements of Cash Flow

(in thousands)

(Unaudited)

 

     Six Months Ended June 30  
   2011     2010  

Operating activities

    

Net loss

    $ (22,025    $ (11,706

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

    

Depreciation and amortization

     3,650        10,610   

Noncash interest expense

     52        —     

Noncash rent expense

     (142     (142

Stock-based compensation expense

     1,142        2,005   

Loss on revaluation of contingent consideration

     —          29,286   

Loss on disposal of fixed assets

     99        52   

Foreign exchange loss

     50        50   

Decrease in deferred rent

     (64     (16

Changes in assets and liabilities:

    

(Increase) decrease in accounts receivable

     (246     678   

(Increase) decrease in prepaid expenses and other assets

     (2,134     4,189   

Decrease in accounts payable

     (584     (3,175

Decrease in accrued restructuring

     —          (753

Increase (decrease) in accrued expenses and other long-term liabilities

     338        (4,343

Increase in deferred revenue

     830        —     
                

Net cash (used in) provided by operating activities

     (19,034     26,735   

Investing activities

    

Purchases of property and equipment

     (154     (517

Proceeds from sale of property and equipment

     —          97   

Purchases of short-term investments

     (105,702     (261,635

Sales and maturities of short-term investments

     95,991        228,712   
                

Net cash used in investing activities

     (9,865     (33,343

Financing activities

    

Net proceeds from term loan

     8,491        —     

Proceeds from issuance of common stock, net of issuance costs

     19,190        —     

Proceeds from exercise of stock options

     975        386   

Repurchases of common stock

     —          (391
                

Net cash provided by (used in) financing activities

     28,656        (5
                

Effect of exchange rate changes on cash and cash equivalents

     4        9   
                

Net decrease in cash and cash equivalents

     (239     (6,604

Cash and cash equivalents at beginning of the period

     2,820        8,779   
                

Cash and cash equivalents at end of the period

    $ 2,581       $ 2,175   
                

Cash paid for interest

    $ 168       $ —     
                

Non-cash investing activities

    

Assets acquired under capital lease

    $ 159       $ —     
                

Non-cash financing activities

    

Fair value of warrant issued in connection with term loan

    $ 225       $ —     
                

 

6


Table of Contents

Zalicus Inc.

Notes to Condensed Consolidated Financial Statements

(all dollar amounts are in thousands, except per share amounts)

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements. Actual results could differ from those estimates. Additionally, operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2011. For further information, refer to the financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange Commission (“SEC”) on March 10, 2011.

2. Significant Accounting Policies

Revenue Recognition

Collaborations

Effective January 1, 2011, the Company adopted the new accounting standards for revenue recognition related to multiple-deliverable revenue arrangements entered into or significantly modified after the date of adoption. Under the new authoritative guidance, each deliverable within a multiple-element revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the Company’s control. The Company considers a deliverable to have standalone value if the Company sells this item separately or if the item is sold by another vendor or could be resold by the customer. Deliverables not meeting the criteria for being a separate unit of accounting are combined with a deliverable that does meet that criterion. The appropriate allocation of arrangement consideration and recognition of revenue is then determined for the combined unit of accounting. The Company determined that the adoption of this standard had no impact on revenues reported for the three and six months ending June 30, 2011. In addition, there would be no change in the Company’s accounting if the new accounting standard were applied to ongoing collaboration agreements entered into prior to January 1, 2011.

In the event the Company enters into or modifies a contract in which the deliverables are required to be separated, the Company will allocate arrangement consideration to each deliverable in an arrangement based on its relative selling price. The Company determines selling price using vendor-specific objective evidence (“VSOE”), if it exists; otherwise, the Company uses third-party evidence (“TPE”). If neither VSOE nor TPE of selling price exists for a unit of accounting, the Company uses estimated selling price (“ESP”) to allocate the arrangement consideration to the units of accounting. The Company applies appropriate revenue recognition guidance to each unit of accounting.

Effective, January 1, 2011, the Company adopted new accounting guidance which codified a method of revenue recognition that has been common practice. Under this method, contingent consideration from research and development activities that is earned upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. The Company has been accounting for milestones as codified with this new guidance. Consequently there was no effect on the Company’s consolidated financial position, results of operations or cash flows.

The Company has entered into collaborative research and development agreements with other pharmaceutical and biotechnology companies, government agencies and charitable foundations. These agreements are generally in the form of research and development and license agreements. The agreements are primarily for early-stage compounds and are generally focused on specific disease areas.

 

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Table of Contents

The agreements generally provide for nonrefundable up-front payments, milestone payments upon achieving significant milestone events and in some cases ongoing research funding. The agreements also contemplate royalty payments on sales if and when the product receives marketing approval by the United States Food and Drug Administration (“FDA”) or other regulatory agencies.

The Company’s collaboration agreements typically include one or more of the following deliverables: research and development services, screening services, licenses to the Company’s high throughput screening analysis software and licenses to specific pharmaceutical compounds. The arrangements do not contain any substantive performance conditions or refund rights. The Company evaluates its arrangements with software license components in order to determine whether the arrangement should be accounted for under revenue recognition guidance for software or if other applicable revenue guidance should be applied. Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured. License fees that do not have standalone value or amounts allocated to units of accounting that will be delivered or provided over a period of time, where the Company has a continuing obligation to perform services, are deferred and recognized over the performance period. Revenues from milestone payments that are deemed to have substantive uncertainty are to be recorded when the milestone is achieved. Contract revenues are recorded as services are performed. Royalty revenue is recognized based upon net sales of licensed products as provided by the relevant license and is recognized in the period the sales occur. The periods over which revenue is recognized are subject to estimates by management and may change over the course of a collaborative agreement.

3. Fair Value Disclosure

The Company has certain financial assets and liabilities recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements.

 

 

Level 1—Quoted market prices in active markets for identical assets or liabilities. Assets utilizing Level 1 inputs include money market funds, U.S. government securities and bank deposits;

 

 

Level 2—Inputs other than Level 1 inputs that are either directly or indirectly observable, such as quoted market prices, interest rates and yield curves. Assets utilizing Level 2 inputs include U.S. agency securities, including direct issuance bonds and corporate bonds; and

 

 

Level 3—Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use.

The following table summarizes the financial instruments measured at fair value on a recurring basis in the accompanying consolidated balance sheet as of June 30, 2011:

 

     Fair Value Measurement as of June 30, 2011         
     Level 1      Level 2      Level 3      Total  

Assets:

           

Short-term investments

    $ 16,369        $ 35,166        $ —          $ 51,535   
                                   

The Company’s Level 2 securities are valued using third-party pricing sources. These sources generally use interest rates and yield curves observable at commonly quoted intervals of similar assets as observable inputs for pricing.

4. Short-Term Investments

Short-term investments consist primarily of investments with original maturities greater than ninety days and less than one year when purchased. The Company classifies these investments as available-for-sale. Unrealized gains and losses are included in other comprehensive income (loss).

Available-for-sale securities at June 30, 2011 and December 31, 2010 consist of the following:

 

     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

June 30, 2011

          

Corporate debt securities

    $ 34,662        $ 16        $ (11    $ 34,667   

Government agency securities

     500         —           (1     499   

Treasury money market funds

     16,369         —           —          16,369   
                                  
    $ 51,531        $ 16        $ (12    $ 51,535   
                                  

December 31, 2010

          

Corporate debt securities

    $ 24,826        $ 3        $ (23    $ 24,806   

Treasury money market funds

     16,993         —           —          16,993   
                                  
    $   41,819        $ 3        $ (23    $   41,799   
                                  

 

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Table of Contents

The amortized cost and estimated fair value of investments in debt securities, which excludes money market funds, at June 30, 2011 and December 31, 2010, by contractual maturity, were as follows:

 

     June 30, 2011      December 31, 2010  
   Cost      Estimated
Fair  Value
     Cost      Estimated
Fair  Value
 

Maturing in one year or less

    $   34,662        $   34,667        $   21,898        $ 21,888   
  

 

 

    

 

 

    

 

 

    

 

 

 

Maturing in more than one year

    $ 500        $ 499        $ 2,928        $ 2,918   
  

 

 

    

 

 

    

 

 

    

 

 

 

The cost of securities sold is determined based on the specific identification method for purposes of recording realized gains and losses. Gross realized gains and losses on the sales of investments have not been material to the Company’s results of operations for all periods presented. As a matter of investment policy, the Company does not invest in auction rate securities. As of June 30, 2011, no losses, other than temporary losses, have been incurred on the Company’s investments.

5. Prepaid Expenses and Other Current Assets

 

     June 30,
2011
     December 31,
2010
 

Prepaid clinical expense

    $ 1,713        $ —     

Prepaid maintenance expense

     380         9   

Prepaid other expense

     415         398   

Other current assets

     581         558   
  

 

 

    

 

 

 
    $     3,089        $ 965   
  

 

 

    

 

 

 

6. Intangible Asset

The intangible asset relates to the commercial rights to the Exalgo contract that was acquired as part of the December 21, 2009 merger with Neuromed Pharmaceuticals Inc. and its subsidiary Neuromed Pharmaceuticals Ltd. (“Neuromed”). The intangible asset amount of $45,943 was recorded at fair value on the merger date. The intangible asset is being amortized in a manner which reflects estimates of future undiscounted cash flows expected to be generated from Exalgo over an estimated useful life of five years. The Company recognized $2,570 and $9,639 of amortization expense for the six months ended June 30, 2011 and 2010, respectively, and $1,285 and $4,685 for the three months ended June 30, 2011 and 2010, respectively. The Company continually monitors whether events or circumstances have occurred that indicate that the estimated remaining useful life of its intangible asset may warrant revision or that the carrying value of the asset may be impaired. There were no impairment indicators in the six months ended June 30, 2011.

7. Long-Term Debt

On June 27, 2011, the Company borrowed $8.5 million (“Term Loan B”) from Oxford Finance LLC (the “Lender”) pursuant to the terms of the loan and security agreement (the “Loan and Security Agreement”) entered into between the Company and an affiliate of the Lender on December 22, 2010.

The Company is required to pay interest on Term Loan B on a monthly basis through and including January 1, 2012. Beginning February 1, 2012 through the maturity of Term Loan B on January 1, 2015, the Company will be required to make payments of outstanding principal and interest on Term Loan B in 36 equal monthly installments. Interest is payable on Term Loan B at an annual interest rate of 10.25%.

In connection with the borrowings under Term Loan B, the Company issued to the Lender warrants to purchase 113,253 shares of the Company’s common stock (the “Warrants”). The Warrants are exercisable, in whole or in part, immediately, and have a per share exercise price of $2.25 and may be exercised on a cashless basis. The Warrants will expire on December 22, 2017. The fair value of the Warrants issued in connection with Term Loan B was $231 and was recorded as a discount to Term Loan B and is reflected in term loan payable in the balance sheet. The discount is being amortized to interest expense over the 42 month period that Term Loan B is outstanding.

 

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Future principal payments under the Loan and Security Agreement at June 30, 2011, are as follows:

 

Year ending December 31,

      

2011

    $ 364   

2012

     3,488   

2013

     3,863   

2014

     3,785   
        
    $ 11,500   
        

8. Capital Lease Obligation

On May 31, 2011 the Company entered into a capital lease for certain information technology equipment. The Company recorded $159 as equipment related to this capital lease and depreciation expense of $9 in the three and six months ended June 30, 2011. Future minimum payments are as follows:

 

2011

    $ 36   

2012

     58   

2013

     58   

2014

     30   
        

Total

     182   

Less interest

     (23
        

Capital lease obligation

    $     159   
        

9. Comprehensive Loss

Comprehensive loss is the change in equity of a company during a period from transactions and other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners. Comprehensive loss includes net loss and unrealized loss on investments for all periods presented.

The Company’s total comprehensive loss consists of the following:

 

     Three months ended June 30,     Six months ended June 30,  
     2011     2010     2011     2010  

Net loss

    $ (11,314    $ (8,598    $ (22,025    $ (11,706

Other comprehensive income:

        

Unrealized gain on investments

     11        22        25        24   
                                

Comprehensive loss

    $ (11,303    $ (8,576    $ (22,000    $ (11,682
                                

10. Net Loss Per Share

Earnings per share information is determined using the two-class method, which includes the weighted-average number of common shares outstanding during the period and other securities that participate in dividends (“participating securities”). The Company considered the contingent shares of its common stock issued to former Neuromed shareholders based on the timing of FDA approval of Exalgo in connection with the Neuromed merger (the “Escrow Shares”) “participating securities” because they included rights to participate in undistributed earnings of the Company in the form of dividends with the common stock on a one for one basis. Prior to being released from escrow, the Escrow Shares were not considered in the calculation of basic or diluted net loss per share for the six months ended June 30, 2010 since they did not include a contractual obligation to share in the losses of the Company and thus were anti-dilutive.

 

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The following potentially dilutive securities outstanding, prior to the use of the treasury stock method, have been excluded from the computation of diluted weighted-average shares outstanding as of June 30, 2011 and 2010, as they would be anti-dilutive.

 

     Six Months Ended
June 30,
 
     2011      2010  

Options outstanding

     9,079,209         7,076,296   

Unvested restricted stock or restricted stock units

     568,750         762,500   

Warrants outstanding

     239,234         96,252   

11. Stock-Based Compensation

The Company recognized, for the three and six months ended June 30, 2011 and 2010, stock-based compensation expense of approximately $623 and $429 and $1,142 and $2,005, respectively, in connection with its stock-based payment awards.

Stock Plans

A summary of the status of the Company’s stock option plans at June 30, 2011 and changes during the six months then ended is presented in the table and narrative below:

 

     Options     Weighted-
Average
Exercise Price
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic  Value
 

Outstanding at December 31, 2010

     7,110,447       $ 2.26         

Granted

     2,887,500        2.64         

Exercised

     (906,898     1.08         

Cancelled

     (11,840     4.92         
  

 

 

   

 

 

       

Outstanding at June 30, 2011

     9,079,209       $ 2.50         8.29        $ 6,396   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested or expected to vest at June 30, 2011

     7,400,793       $ 2.49         6.64        $ 6,214   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at June 30, 2011

     3,526,940       $ 3.55         6.48        $ 2,616   
  

 

 

   

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value in the table above represents the value (the difference between the Company’s closing common stock price on the last trading day of the six months ended June 30, 2011 and the exercise price of the options, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2011. As of June 30, 2011, there was $4,217 of total unrecognized stock-based compensation expense related to stock options granted under the plans. The expense is expected to be recognized over a weighted-average period of 2.7 years.

The Company uses the Black-Scholes pricing model as it is the most appropriate valuation method for its option grants. The Black-Scholes model requires inputs for risk-free interest rate, dividend yield, volatility and expected lives of the options. For options granted during the six months ended June 30, 2011, the Company used the historical volatility of its stock price. The Company does not have sufficient history to evaluate the expected term of its option grants and has evaluated the expected term of several peer companies in order to make a determination on the expected term of the option grants. The risk-free rate for periods within the expected term of the option is based on the United States Treasury yield curve in effect at the time of the grant. The Company applies a forfeiture rate to all option grants to account for options not expected to vest. The forfeiture rate is determined based upon the Company’s historical forfeitures of its option grants.

On February 8, 2011, the Company issued 1,410,000 stock options, which are included in the table above, with performance based vesting criteria. The fair value of the options granted was determined using the Black-Scholes pricing model. On April 7, 2011, the performance-based vesting criteria were modified by the Compensation Committee of the Company’s Board of Directors. The Company calculated the fair value of the stock options at the modification date using the Black-Sholes pricing model. Stock-based compensation expense for stock options with performance-based vesting criteria is only recognized when it is probable that the vesting criteria will be achieved. Accordingly, for the six months ended June 30, 2011, the Company did not recognize any stock-based compensation expense related to these stock options.

 

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During the three and six months ended June 30, 2011 and 2010, respectively, the assumptions used in the Black-Scholes pricing model for new grants were as follows.

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

Volatility factor

     101.61     107.92     102.95     108.86

Risk-free interest rate

     1.76     1.79     2.22     2.54

Dividend yield

     —          —          —          —     

Expected term (in years)

     5.58        5.77        5.58        5.77   

Restricted Stock

A summary of the status of non-vested restricted stock awards as of June 30, 2011 and changes during the six months ended June 30, 2011 is as follows:

 

     Restricted
Stock
    Weighted-
Average  Grant
Date Fair Value
 

Nonvested at December 31, 2010

     12,500       $ 4.57   

Granted

     —          —     

Vested

     (6,250    $ 4.57   

Canceled

     —          —     
                

Nonvested at June 30, 2011

     6,250       $ 4.57   
                

As of June 30, 2011, there was $16 of total unrecognized stock-based compensation expense related to non-vested restricted stock arrangements granted under the Amended and Restated 2004 Equity Incentive Plan (the “2004 Plan”). The expense is expected to be recognized over a weighted-average period of 0.6 years.

A summary of the status of non-vested restricted stock units as of June 30, 2011 and changes during the six months ended June 30, 2011 is as follows:

 

     Restricted  Stock
Units
    Weighted-
Average
Grant Date Fair
Value
     Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic  Value
 

Non-vested at December 31, 2010

     750,000       $ 0.95         

Granted

     —          —           

Vested

     (187,500     0.95         

Cancelled

     —          —           
                      

Non-Vested at June 30, 2011

     562,500       $ 0.95         2.55        $ 1,339   
                                  

As of June 30, 2011, there was $431 of total unrecognized stock-based compensation expense related to non-vested RSUs granted under the 2004 Plan. The expense is expected to be recognized over a weighted-average period of 2.6 years.

12. Income Taxes

As of June 30, 2011, the Company has recorded a liability for unrecognized tax benefits of $1,923 and interest and penalties of $450 in other long-term liabilities.

The following is a reconciliation of the Company’s gross uncertain tax positions from December 31, 2010 to June 30, 2011 (in thousands):

 

December 31, 2010

    $   1,878   

Decrease related to positions taken in prior years

     —     

Expiration of statute of limitations

     —     

Foreign exchange revaluation

     45   
        

June 30, 2011

    $ 1,923   
        

 

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13. Equity Offering

On February 9, 2011, the Company entered into an equity distribution agreement with Wedbush Securities Inc., (“Wedbush”), pursuant to which the Company could issue and sell shares of its common stock having an aggregate offering price of up to $20,000 from time to time through Wedbush acting as agent and/or principal. The Company agreed to pay Wedbush a commission, or allow a discount, of 3.0% of the gross proceeds from each sale. On March 31, 2011, the Company terminated its equity distribution agreement with Wedbush. The Company sold an aggregate of 8,884,800 shares of common stock for net proceeds of approximately $19,190.

 

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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 and immuno-inflammatory diseases. We have entered into multiple revenue-generating collaborations with large pharmaceutical companies and have a portfolio of clinical-stage product candidates targeting pain and immuno-inflammatory diseases. We also apply our selective ion-channel modulation platform and 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 our 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.

The United States commercial rights to Exalgo were acquired by Mallinckrodt, Inc., a subsidiary of Covidien, plc, or Covidien, from Neuromed Pharmaceuticals Ltd. in June 2009. 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 agreement, Covidien 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, and began to receive tiered royalties on net sales of Exalgo by Covidien following its commercial launch in April 2010. We have recognized $2.5 million in revenue related to these royalties through June 30, 2011.

Our most advanced product candidate is Synavive, a product candidate we have been developing 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 of the SYNERGY trial are expected to be available in the second half of 2012. During 2008 we studied Synavive in a multi-center Phase 2 clinical trial of 279 subjects with knee osteoarthritis, which we refer to as the COMET-1 study. The COMET-1 study was completed in September 2008, and the results of the study were disclosed in October 2008. Subjects who completed the 14-week duration of the COMET-1 study were eligible to participate in an extension study designed to investigate the long-term safety and durability of response for Synavive. The COMET-1 extension study of Synavive was completed in June 2009.

We have also been performing research and development on our proprietary ion channel modulators which have been advancing through preclinical research and development. We are currently planning to advance one or more ion channel modulators, including the product candidates Z160 and Z944, into Phase 1 clinical development by the end of 2011. We have also been using our combination high throughput screening technology platform, or cHTS, to perform our obligations with our collaboration partners.

As of June 30, 2011, we had an accumulated deficit of $276.7 million. We had net losses of $22.0 million and $11.7 million for the six months ended June 30, 2011 and 2010, 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 June 30, 2011, $0.5 million and $1.3 million of our revenues were generated in Canada and the United States, respectively. For the six months ended June 30, 2011, $0.9 million and $2.2 million of our revenues were generated in Canada and the United States, respectively. As of June 30, 2011, $0.4 million and $5.6 million of our long-lived assets were located in Canada and the United States, respectively.

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, 2010 related to business combinations, intangible assets, revenue recognition, stock-based compensation, accrued expenses and income taxes. 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 10, 2011.

 

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We updated our Critical Accounting Policies during the six months ended June 30, 2011 as follows:

Revenue Recognition

Effective January 1, 2011, we adopted the new accounting standards for revenue recognition related to multiple-deliverable revenue arrangements entered into or significantly modified after the date of adoption. Under the new authoritative guidance, each deliverable within a multiple-element revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We consider a deliverable to have standalone value if we sell this item separately or if the item is sold by another vendor or could be resold by the customer. Deliverables not meeting the criteria for being a separate unit of accounting are combined with a deliverable that does meet that criterion. The appropriate allocation of arrangement consideration and recognition of revenue is then determined for the combined unit of accounting. We determined that the adoption of this standard had no impact on revenues reported for the six months ending June 30, 2011. In addition, there would be no change in our accounting if the new accounting standard were applied to our existing collaboration agreements.

In the event we enter into or modify a contract in which the deliverables are required to be separated, we will allocate arrangement consideration to each deliverable in an arrangement based on its relative selling price. We determine selling price using vendor-specific objective evidence (“VSOE”), if it exists; otherwise, we use third-party evidence (“TPE”). If neither VSOE nor TPE of selling price exists for a unit of accounting, we use estimated selling price (“ESP”) to allocate the arrangement consideration to the units of accounting. We apply appropriate revenue recognition guidance to each unit of accounting.

Effective, January 1, 2011, we also adopted new accounting guidance which codified a method of revenue recognition that has been common practice. Under this method, contingent consideration from research and development activities that is earned upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. We have been accounting for milestones as codified with this new guidance. Consequently there was no effect on our consolidated financial position, results of operations or cash flows.

We have entered into collaborative research and development agreements with other pharmaceutical and biotechnology companies, government agencies and charitable foundations. These agreements are generally in the form of research and development and license agreements. The agreements are primarily for early-stage compounds and are generally focused on specific disease areas. The agreements provide for nonrefundable up-front payments, milestone payments upon achieving significant milestone events and in some cases ongoing research funding. The agreements also contemplate royalty payments on sales if and when the product receives marketing approval by the United States Food and Drug Administration (“FDA”) or other regulatory agencies.

Our collaboration agreements typically include one or more of the following deliverables: research and development services, screening services, licenses to our high throughput screening analysis software and licenses to specific pharmaceutical compounds. The arrangements do not contain any substantive performance conditions or refund rights. We evaluate our arrangements with software license components in order to determine whether the arrangement should be accounted for under revenue recognition guidance for software or if other applicable revenue guidance should be applied. Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured. License fees that do not have standalone value or amounts allocated to units of accounting that will be delivered or provided over a period of time, where we have a continuing obligation to perform services, are deferred and recognized over the performance period. Revenues from milestone payments that are deemed to have substantive uncertainty are to be recorded when the milestone is achieved. Contract revenues are recorded as services are performed. Royalty revenue is recognized based upon net sales of licensed products as provided by the relevant license and is recognized in the period the sales occur. The periods over which revenue is recognized are subject to estimates by management and may change over the course of a collaborative agreement. Such changes would impact the amount of revenue we recognize in each financial reporting period.

Results of Operations

Comparison of the Three Months ended June 30, 2011 and June 30, 2010

Revenue. For the three months ended June 30, 2011, we recorded $1.8 million of revenue from our research and development collaborations with Covidien, Novartis Institutes of BioMedical Research, Inc., or Novartis, and Amgen, Inc., or Amgen, Eisai Inc., or Eisai, and other pilot research parties and from grants from the United States Army Medical Research Institute for Infectious Diseases, or USAMRIID.

For the three months ended June 30, 2010, we recorded $2.9 million of revenue from our research and development collaborations with Covidien, Novartis, Amgen and Fovea Pharmaceuticals, or Fovea, and from grants from the National Institutes of Allergy and Infectious Diseases, or NIAID, and USAMRIID. The decrease in revenue in the three months ended June 30, 2011 was primarily due to a milestone payment of $0.5 million that we earned in the three months ended June 30, 2010 that did not recur in the three months ended June 30, 2011 and a $0.6 million decrease in royalties related to Exalgo revenue due to the initial launch of Exalgo in the three months ended June 30, 2010.

 

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Research and Development. Research and development expense for the three months ended June 30, 2011 was $9.0 million compared to $4.6 million for the three months ended June 30, 2010. The $4.4 million increase was due to a $2.8 million increase in expenses related to the clinical development of Synavive and a $2.1 million increase in preclinical program expenses related to our ion channel product candidates, offset by a $0.5 million decrease in other research and development programs and related expenses. The $2.8 million increase in expense related to Synavive is due to the initiation of the Phase 2b SYNERGY trial in June of 2011. The $2.1 million increase in preclinical program expense related to our ion channel product candidates is due to our efforts to advance one or more ion channel product candidates into Phase 1 clinical trials by the end of the year. We expect research and development expense to increase for the year ended December 31, 2011 compared to 2010 due to the Phase 2b SYNERGY trial and the advancement of our ion channel product candidates.

The table below summarizes our allocation of research and development expenses to Exalgo, our clinical programs, including Synavive, our preclinical programs and our drug discovery platforms for the three months ended June 30, 2011 and 2010. 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 Exalgo and our clinical product candidate, Synavive. Preclinical program costs consist of the personnel and other expenses allocated to our internally funded preclinical programs, including our ion channel modulator product candidates Z160 and Z944. cHTS collaboration discovery costs consist of the personnel and other expenses allocated to all of our cHTS research collaborations. Ion channel discovery program costs consist of the personnel and other expenses allocated to our ion channel drug discovery programs, 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, regulatory and discovery departments, the majority of which supported the development of our clinical product candidates, including Exalgo and Synavive, as well as our preclinical product candidates, including candidates such as Z160 and Z944 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. With the initiation of the SYNERGY trial and as we initiate clinical trials for our other product candidates, we expect our research and development costs to increase as compared to 2010. 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,
(in thousands)
 
     2011      2010  

Exalgo

    $ 50        $ 148   

Synavive

     2,938         131   

Other clinical program costs

     260         356   
                 

Total clinical program costs

     3,248         635   

Preclinical program costs

     2,207         97   

cHTS collaboration discovery costs

     942         935   

Ion channel discovery program costs

     1,003         1,184   

Unallocated clinical and preclinical program costs

     265         413   

Infrastructure and support costs

     1,061         1,181   

Non-cash employee stock-based compensation expense

     264         172   
                 

Total research and development expenses

    $   8,990        $   4,617   
                 

General and Administrative. General and administrative expense for the three months ended June 30, 2011 was $2.7 million compared to $2.6 million for the three months ended June 30, 2010. We expect our general and administrative expenses for the remainder of the year ended December 31, 2011 to be consistent with such expenses during 2010.

Amortization of Intangible Asset. Amortization expense related to the Exalgo intangible asset acquired in the merger with Neuromed on December 21, 2009 was $1.3 million for the three months ended June 30, 2011 compared to $4.7 million for the three months ended June 30, 2010. The decrease 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 remaining patent life of Exalgo.

 

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Interest Income. Interest income for each of the three months ended June 30, 2011 and 2010 was less than $0.1 million.

Interest Expense. Interest expense for the three months ended June 30, 2011 was $0.1 million. This interest expense relates to the interest on the term loan with Oxford Finance Corporation, or Oxford, entered into in December 2010.

Benefit for Income Taxes. For the three months ended June 30, 2010, we recognized a tax benefit of $0.3 million. The income tax benefit was the result of an adjustment to the Neuromed tax provision for a period prior to the Neuromed merger date. As such, since the measurement period associated with the acquisition accounting for Neuromed had ended, the adjustment was recorded as an income tax benefit in the three month period ended June 30, 2010 in accordance with ASC 805 Business Combinations.

Comparison of the Six Months ended June 30, 2011 and June 30, 2010

Revenue. For the six months ended June 30, 2011, we recorded $3.1 million of revenue from our research and development collaborations with Covidien, Novartis, Amgen, Eisai and other pilot research parties and from grants from NIAID and USAMRIID.

For the six months ended June 30, 2010, we recorded $44.3 million of revenue from our research and development collaborations with Covidien, Novartis, Amgen and Fovea Pharmaceuticals, or Fovea, and from grants from NIAID and USAMRIID. We received a $40.0 million milestone payment from Covidien following the FDA approval of Exalgo on March 1, 2010.

Research and Development. Research and development expense for the six months ended June 30, 2011 was $16.8 million compared to $12.0 million for the six months ended June 30, 2010. The $4.8 million increase is due to $5.5 million increase in expenses related to Synavive and $2.7 million increase in preclinical program costs related to the development of our ion channel product candidates offset by a $1.4 million decrease in infrastructure and other support costs, a $0.8 million decrease in non-cash employee stock-based compensation expense, a $0.4 million decrease in expenses related to Exalgo and a $0.8 decrease in other research and development programs and unallocated costs. The $5.5 million increase in expense related to Synavive is due to the initiation of the Phase 2b SYNERGY trial in June of 2011. The $2.7 million increase in preclinical program expense related to our ion channel product candidates is due to our efforts to advance one or more ion channel product candidates into Phase 1 clinical trials by the end of the year. The $1.4 million decrease in infrastructure and support costs is due to one-time bonuses being paid in the six months ended June 30, 2010 related to the approval of Exalgo. The $0.8 million decrease in non-cash employee stock-based compensation is related to the vesting of certain performance-based grants that vested upon the approval of Exalgo during the six months ended June 30, 2010. The $0.4 million decrease in expenses related to Exalgo is related to the FDA approval in the six months ended June 30, 2010. We expect research and development expense to increase for the year ended December 31, 2011 compared to 2010 due to the Phase 2b SYNERGY trial and the advancement of our the ion channel product candidates.

The table below summarizes our allocation of research and development expenses to Exalgo, our clinical programs, including Synavive, our preclinical programs and our drug discovery platforms for the six months ended June 30, 2011 and 2010. 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 Exalgo and our clinical product candidate, Synavive. Preclinical program costs consist of the personnel and other expenses allocated to our internally funded preclinical programs, including our ion channel modulator product candidates Z160 and Z944. cHTS collaboration discovery costs consist of the personnel and other expenses allocated to all of our cHTS research collaborations. Ion channel discovery program costs consist of the personnel and other expenses allocated to our ion channel drug discovery programs, 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, regulatory and discovery departments, the majority of which supported the development of our clinical product candidates, including Exalgo and Synavive, as well as our preclinical product candidates, including candidates such as Z160 and Z944 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. With the initiation of the SYNERGY trial and as we initiate clinical trials for our other product candidates, we expect our research and development costs to increase as compared to 2010. 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.

 

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Table of Contents
     Six Months Ended
June  30,
(in thousands)
 
   2011      2010  

Exalgo

    $ 143        $ 494   

Synavive

     5,625         166   

Other clinical program costs

     451         746   
                 

Total clinical program costs

     6,219         1,406   

Preclinical program costs

     2,871         153   

cHTS collaboration discovery costs

     1,971         2,106   

Ion channel discovery program costs

     2,242         2,506   

Unallocated clinical and preclinical program costs

     873         1,002   

Infrastructure and support costs

     2,210         3,598   

Non-cash employee stock-based compensation expense

     421         1,227   
                 

Total research and development expenses

    $ 16,807        $  11,998   
                 

General and Administrative. General and administrative expense for the six months ended June 30, 2011 was $5.5 million compared to $6.4 million for the six months ended June 30, 2010. The $0.9 million decrease was primarily due to one-time bonuses being paid in the six months ended June 30, 2010 related to the approval of Exalgo. We expect our general and administrative expenses for the remainder of the year ended December 31, 2011 to be consistent with such expenses during 2010.

Amortization of Intangible Asset. Amortization expense related to the Exalgo intangible asset acquired in the merger with Neuromed on December 21, 2009 for the six months ended June 30, 2011 was $2.6 million compared to $9.4 million for the six months ended June 30, 2010. The decrease 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 remaining patent life of Exalgo.

Interest Income. Interest income for each of the six months ended June 30, 2011 and 2010 was less than $0.1 million.

Interest Expense. Interest expense for the six months ended June 30, 2011 was $0.2 million. This interest expense relates to the interest on the term loan with Oxford entered into in December 2010.

Loss on Revaluation of Contingent Consideration. In the six months ended June 30, 2010, we recognized a loss in the amount of $29.3 million on the revaluation of contingent consideration in connection with the Neuromed Merger. This loss represents the change in fair value of the contingent consideration at December 31, 2009 and March 1, 2010 when the contingent consideration was settled. On March 1, 2010, 37,883,123 escrow shares were released to former Neuromed stockholders as settlement of the contingent consideration. The change in value is due to the fair value of shares released from escrow being greater than our probability weighted estimate as of December 31, 2009.

Benefit for Income Taxes. For the six months ended June 30, 2010, we recognized a tax benefit of $1.2 million primarily related to the reversal of an unrecognized tax benefit for an uncertain tax position due to the expiration of the relevant statute of limitations.

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, 2011, we had cash, cash equivalents and short-term investments of approximately $56.0 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, 2011.

Based on our current operating plans and expectations regarding royalties from sales of Exalgo, we expect our resources to be sufficient to fund our planned operations into 2014. However, we may require significant additional funds earlier than we currently expect if our research and development expenses exceed our current expectations or if Exalgo royalties or our collaboration funding is less than our current expectations. We may 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. 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.

 

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Operating Activities. Our operating activities used cash of $19.0 million for the six months ended June 30, 2011 and provided cash of $26.7 million for the six months ended June 30, 2010. The decrease in the net cash provided by operating activities was primarily attributed to the $40.0 million received from Covidien related to the FDA approval of Exalgo in the quarter ended June 30, 2010 and working capital adjustments in prepaid expenses and other current assets, accounts payable and accrued expenses.

Investing Activities. Our investing activities used cash of $9.9 million and $33.3 million for the six months ended June 30, 2011 and 2010, respectively. The cash used in investing activities for the six months ended June 30, 2011 and 2010 was primarily due to net purchases of short-term investments.

Financing Activities. Our financing activities provided cash of $28.7 million for the six months ended June 30, 2011. The cash provided by financing activities for the six months ended June 30, 2011 was primarily related to the issuance of 8,884,800 shares of our common stock resulting in net proceeds of $19.2 million and borrowings under a loan and security agreement with Oxford in the amount of $8.5 million. Net cash used in financing activities was less than $0.1 million for the six months ended June 30, 2010.

Oxford Loan and Security Agreement

On December 22, 2010, we entered into a loan and security agreement with Oxford, pursuant to which Oxford agreed to lend us up to $20.0 million. Upon entering into the loan and security agreement, we borrowed $3.0 million from Oxford as Term Loan A. Under the terms of the loan and security agreement, we were permitted, in our sole discretion, to borrow from Oxford up to an additional $8.5 million, at any time on or before July 15, 2011, called Term Loan B. On June 27, 2011, we borrowed $8.5 million under Term Loan B. Under the terms of the loan and security agreement, we are permitted to borrow up to an additional $8.5 million, at any time on or before January 15, 2012, called Term Loan C, collectively with Term Loan A and Term Loan B, called the Term Loans. Our wholly owned subsidiary, Zalicus Canada, is also a party to the loan and security agreement as a co-borrower. 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.

We are required to pay interest on Term Loan A on a monthly basis through and including July 1, 2011. Beginning August 1, 2011 through the maturity of Term Loan A on July 1, 2014, we will be required to make payments of outstanding principal and interest on Term Loan A in 36 equal monthly installments. Interest is payable on Term Loan A at an annual interest rate of 10.26%. Zalicus is required to pay interest on Term Loan B on a monthly basis through and including January 1, 2012. Beginning February 1, 2012 through the maturity of Term Loan B on January 1, 2015, we will be required to make payments of outstanding principal and interest on Term Loan B in 36 equal monthly installments. The interest rate on Term Loan B is 10.25% per year.

If we enter into Term Loan C, interest on each term loan will accrue at an annual fixed rate equal to greater of (i) 10.25% or (ii) the sum of (a) the 90-day U.S. Dollar LIBOR rate prior to the funding of such term loan, plus (b) 9.96%. Payments due under Term Loan C, if borrowed, are interest only, payable monthly, in arrears, for six months following the funding of Term Loan C, and will consist of 36 payments of principal and interest which are payable monthly, in arrears. All unpaid principal and accrued and unpaid interest on Term Loan C would be due and payable 42 months after the funding of any each term loan.

Upon the last payment date of the amounts borrowed under the loan and security agreement, whether on the maturity date of one of the Term Loans, on the date of any prepayment or on the date of acceleration in the event of a default, we will be required to pay Oxford a final payment fee equal to 1.5% of any of the Term Loans borrowed. In addition, if we repay all or a portion of the Term Loans prior to maturity, we will pay Oxford a prepayment fee of four percent of the total amount prepaid if the prepayment occurs prior to the first anniversary of the funding of the relevant Term Loan, two percent of the total amount prepaid if the prepayment occurs between the first and second anniversary of the funding of the relevant Term Loan, and one percent of the total amount prepaid if the prepayment occurs on or after the second anniversary of the funding of the relevant Term Loan.

Upon the occurrence of an event of default, as defined in the loan and security agreement, including payment defaults, breaches of covenants, a material adverse change in the collateral, our business, operations or condition (financial or otherwise) and certain levies, attachments and other restraints on our business, the interest rate will be increased by five percentage points and all outstanding obligations will become immediately due and payable.

Shelf Registration Statement and Equity Offering

On April 16, 2010, we filed a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended (SEC File No. 333-166116), with the SEC covering the registration of senior debt securities, subordinated debt securities, preferred stock, common stock, warrants, units or any combination of the foregoing securities, in an aggregate amount of $50.0 million, which was declared effective by the SEC on April 29, 2010. These securities may be offered from time to time in amounts, at prices and on terms to be determined at the time of sale. We believe the shelf registration statement provides additional financing flexibility to meet potential future funding requirements and the ability to take advantage of potentially attractive capital market conditions.

 

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On February 9, 2011, we entered into an equity distribution agreement with Wedbush Securities Inc., or Wedbush, under which we could, from time to time, utilize our effective shelf registration statement to offer and sell our common stock having aggregate sales proceeds of up to $20.0 million through Wedbush, or to Wedbush, for resale. Effective March 31, 2011, we terminated our equity distribution agreement with Wedbush. Prior to terminating the agreement, we had sold an aggregate of 8,884,800 shares of Common Stock pursuant to the agreement for aggregate net proceeds of approximately $19.2 million.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at June 30, 2011 and the effects such obligations are expected to have on our liquidity and cash flows in future periods.

 

Contractual Obligations

   Total      2011      2012
through
2013
     2014
through
2015
     After
2015
 

Short and long-term debt:

              

Notes payable issued to Oxford(1)

   $ 14,042       $ 947       $ 8,939       $ 4,156       $ —     

Capital lease obligations(2)

   $ 182       $ 36       $ 117       $ 29       $ —     

Operating lease obligations:

              

Cambridge facility(3)

     6,797         557         2,449         2,459         1,332   

Vancouver facility(4)

     123         123         —           —           —     
                                            

Total contractual obligations

   $ 21,144       $ 1,663       $ 11,505       $ 6,644       $ 1,332   
                                            

 

 

(1) On December 22, 2010, we borrowed $3.0 million under Term Loan A of the loan and security agreement with Oxford. Term Loan A bears interest at 10.26%. We are required to make monthly payments on Term Loan A of interest only through July 1, 2011 and then will be required to make 36 equal monthly payments of principal and interest. On June 27, 2011, we borrowed $8.5 million under Term Loan B of the loan and security agreement with Oxford. Term Loan B bears interest at 10.25%. We are required to make monthly payments on Term Loan B of interest only through January 1, 2012 and then will be required to make 36 equal monthly payments of principal and interest.
(2) On May 31, 2011, we entered into a capital lease for certain information technology equipment. Under the terms of the lease agreement, we are obligated to make fixed monthly lease payments through May 2014.
(3) On October 18, 2005, we entered into a lease agreement for approximately 40,000 square feet of office and laboratory space in Cambridge, Massachusetts. On March 9, 2006, we entered into an amendment to the lease agreement to lease an additional approximately 23,000 square feet of laboratory space. On August 3, 2009, we entered into a second amended lease agreement to reduce our leased space to approximately 23,000 square feet of office and laboratory space. The lease term, as amended, extends through January 2017. Our rent obligations under the lease, as amended, are reflected as operating lease obligations in the table above. The amounts in the table above do not include management fees payable to our landlord for our leased space, which are meant to cover our allocable share of property taxes, utilities and other common area costs. Our payment obligations under the amended lease are supported by a standby letter of credit totaling $1.8 million.
(4) In connection with the Neuromed merger, we assumed a sublease renewal and amendment agreement between Zalicus Canada and Discovery Parks Incorporated, dated November 2, 2009, relating to our office and laboratory facility in Vancouver, British Columbia, Canada. Under the terms of this sublease we subleased approximately 24,600 square feet of office and laboratory space, which was reduced to approximately 12,000 square feet in 2010. The lease will expire on December 31, 2011. We have the option to extend the lease for an additional year. Our obligations under the lease are reflected as operating lease obligations in the table above.

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.

New Accounting Standards

Not applicable.

 

Item 3. Quantitative and Qualitative Disclosure about Market Risk

We are exposed to market risk related to changes in interest rates and changes in the exchange rate of the United States dollar to the Canadian dollar. As of June 30, 2011, we had unrestricted cash, cash equivalents and marketable securities of $54.1 million consisting of cash and highly liquid short-term investments. Our cash is deposited in and invested through highly rated financial institutions in the United States and Canada. Our marketable securities are subject to interest rate risk and will decrease in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels at June 30, 2011, we estimate that the fair value of our investments will decline by an immaterial amount, and therefore, our exposure to interest rate changes is immaterial.

 

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The amounts outstanding under Term Loan A and Term Loan B from Oxford are fixed at an annual interest rate of 10.26% and 10.25%, respectively. The loan and security agreement entered into with Oxford in December of 2010 allows for additional borrowings in the form of an additional term loan. In the event, we enter into the additional term loan, the interest rate will be the greater of (i) 10.25% or (ii) the 90-day LIBOR U.S. dollar rate prior to the funding of the term loan plus an additional 9.96%. In the event we make additional borrowings under the loan and security agreement, changes in LIBOR interest rates may increase the interest rates we would pay on such term loans and increase our cost of capital which may have a significant impact to our financial condition.

Transactions by our subsidiary, Zalicus Canada, may be denominated in Canadian dollars, however, the entity’s functional currency is the United States dollar. Exchange gains or losses resulting from the translation between the currency in which a transaction is denominated and functional currency of Zalicus Canada are included in net loss for our consolidated financial statements. Fluctuations in exchange rates, primarily between the United States dollar and the Canadian dollar, may adversely affect our results of operations, financial position and cash flows. We do not hedge this exposure.

Item 4.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a–15(b) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, the Company’s principal executive officer and principal financial officer, respectively, conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control

As required by Rule 13a-15(d) of the 1934 Act, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded no such changes during the fiscal quarter covered by this Quarterly Report on Form 10-Q materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II

 

Item 1A. Risk Factors

Risks Related to Discovery, Development and Commercialization of Drug Products

Our ability to generate ongoing revenue from Exalgo sales depends on Covidien.

We cannot assure you of the level of sales of Exalgo that Covidien will generate. Covidien has historically marketed generic drugs and Exalgo is one of the few branded drugs it markets. Covidien markets other opioids which may compete with Exalgo. We cannot control whether Covidien will devote sufficient resources to maximize sales of Exalgo and we have no control over the size of the sales force that it will assemble. Similarly, we also cannot control Covidien’s decisions regarding the commercialization of Exalgo, including the launch of Exalgo, regulatory submissions around additional dosage strengths, subsequent strategic sales initiatives, any decision to scale back its sales initiatives or withdraw Exalgo from the market for any reason, including because Covidien wants to increase sales of a competitive product at Exalgo’s expense. If sales of Exalgo by Covidien are low, the royalties we expect to receive on sales of Exalgo will be low, which, in turn, could have a material adverse effect on our business, financial position and results of operations.

Our royalty revenue from Covidien relating to the net sales of Exalgo could vary significantly in future periods and royalty revenue from Exalgo sales during quarterly periods may not be predictive of future royalty revenue to us from sales of Exalgo.

Our revenue from net sales of Exalgo by Covidien may fluctuate from period to period due to:

 

   

the rate of market acceptance of Exalgo as a new therapy by physicians and payors;

 

   

fluctuations in future sales of Exalgo due to competition from other products, including other extended-release opioids;

 

   

reimbursement and pricing for Exalgo under commercial or government plans;

 

   

permitted deductions from gross sales of Exalgo relating to estimates of sales returns, credits and allowances, normal trade and cash discounts, managed care sales rebates and other allocated costs;

 

   

the availability of additional dosage strengths of Exalgo;

 

   

inventory levels of Exalgo with wholesalers not matching actual demand for Exalgo;

 

   

the duration of market exclusivity of Exalgo;

 

   

the timing of approvals, if any, for other competitive products or the future availability of generic versions of branded long-acting opioids;

 

   

manufacturing difficulties; or

 

   

other factors that affect the sales of a pharmaceutical product.

All of these factors are outside our control, and any of these events may cause our revenues to fluctuate significantly from quarter to quarter, and in some cases may cause our operating results for a particular quarterly or annual period to vary in a material manner.

Covidien may not be able to maintain or protect the proprietary rights necessary for the long-term commercialization of Exalgo, particularly given the Watson litigation described below, which could result in reduced royalty revenue to us from sales of Exalgo by Covidien.

Covidien has obtained rights to a limited number of patents directed toward the OROS formulation of hydromorphone that is used in Exalgo. Third parties may seek to market generic versions of Exalgo by filing an ANDA with the FDA, in which they claim that patents protecting Exalgo that are held by Covidien and listed with the FDA in the Orange Book, are invalid, unenforceable and/or not infringed. This type of ANDA is referred to as a Paragraph IV filing. If an ANDA or 505(b)(2) application containing a Paragraph IV certification is submitted to the FDA and accepted as a reviewable filing by the agency, the ANDA or 505(b)(2) applicant must then, within 20 days, provide notice to the NDA holder and patent owner stating that the application has been submitted and providing the factual and legal basis for the applicant’s opinion that the patent is invalid or not infringed.

On October 29, 2010, Covidien received a Paragraph IV Certification Notice Letter from Watson Laboratories, Inc. – Florida, a subsidiary of Watson Pharmaceuticals, Inc., notifying them that it had submitted an ANDA to the FDA for approval to market a generic version of hydromorphone, the active pharmaceutical ingredient in Exalgo, prior to the expiration of United States Patent No. 5,914,131, which expires on July 7, 2014, and is listed in the Orange Book. The notice letter further stated that Watson is asserting that claims in United States Patent No. 5,914,131 are not infringed and/or are invalid. On December 10, 2010, Covidien’s Mallinckrodt Inc. subsidiary filed a patent infringement lawsuit against Watson Laboratories, Inc.—Florida, Watson Pharma, Inc. and Watson Pharmaceuticals, Inc., in response to the ANDA filing, which we refer to as the Watson litigation. The complaint, which was filed in the United States District Court for the District of New Jersey, alleges infringement of the referenced patent. Under current United States law, the filing of the lawsuit automatically prevents the FDA from approving the ANDA for 30 months from Covidien’s receipt of Watson’s Paragraph IV notification letter on October 29, 2010, or until April 29, 2013, unless the court enters judgment in favor of Watson in less than 30 months or finds that a party has failed to cooperate

 

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reasonably to expedite the lawsuit. In the Watson litigation, the court may find the patents that are the subject of the notice letter invalid, not infringed and/or unenforceable. This could lead to the approval of a generic version of Exalgo prior to the expiration of the 5,914,131 patent on July 7, 2014, which could result in reduced sales of Exalgo and a reduction in the royalties payable to us by Covidien on sales of Exalgo. The conduct of the Watson litigation and any decisions regarding litigation strategy or potential settlement are in the complete control of Covidien, and Zalicus has no rights to participate in the Watson litigation or otherwise direct its prosecution or settlement. During the period in which the Watson litigation is pending, the uncertainty of its outcome may cause our stock price to decline. In addition, an adverse result in the Watson litigation, whether appealable or not, will likely cause our stock price to decline and may have a material adverse effect on our results of operations and financial condition. Any final, unappealable, adverse result in the Watson litigation will likely have a material adverse effect on our results of operations and financial condition and cause our stock price to decline. Our ability to continue to generate significant royalty revenues from Exalgo is dependent upon Covidien’s ability to prevail in the Watson litigation or to otherwise resolve the Watson litigation on favorable terms.

Zalicus’s approach to the discovery and development of drugs is unproven and may never lead to commercially viable products.

Zalicus’s various approaches to drug discovery and development using our ion channel technology platform or our cHTS technology platform are complex and unproven. Previously unrecognized or unexpected defects in or limitations to Zalicus’s drug discovery technologies or drug development strategies may emerge, which we may also be unable to overcome or mitigate. None of the product candidates identified or developed to date, through the application of Zalicus’s business model and drug discovery technologies, has been approved by any regulatory agency for commercial sale or been commercialized.

We have committed resources to the development of our ion channel drug discovery technology, and our future success depends in part on the successful development of this technology and product candidates identified by it. The scientific evidence to support the feasibility of developing drugs that modulate ion channels is limited, and many companies with more resources than us have not been able to successfully develop drugs that modulate ion channels.

Zalicus’s current business model also involves the ability of Zalicus’s proprietary high throughput discovery technology to identify additional promising product candidates. Combination high throughput screening involves testing large numbers of compounds in cell-based assays using automated systems that measure the biological activity of the compounds and provide detailed data regarding the results. Because Zalicus’s combination high throughput discovery technology is unproven in identifying drugs that can be approved, we cannot be certain that we will be able to discover additional drug combinations that show promising effects in Zalicus’s cell-based disease models and pre-clinical studies, which we can advance into clinical trials. As a result, we may not be able to identify additional product candidates. Many other companies with substantially greater resources than ours use high throughput screening for drug discovery. These or other companies may have developed or could in the future develop combination screening technology equal or superior to Zalicus’s technology. In addition, regulatory approval for a combination drug generally requires clinical trials to compare the activity of each component drug with the combination. As a result, it may be more difficult and costly to obtain regulatory approval of a combination drug than of a new drug containing only a single active pharmaceutical ingredient. In some instances, we may choose to advance product candidates where one or more of the compounds of the combination are not approved drugs, which may lead to longer clinical development timelines for these types of product candidates. For these and other reasons, Zalicus’s approach to drug discovery and development may not be successful and Zalicus’s current business model may not generate viable products or revenue. Even if Zalicus’s approach is theoretically viable, we may not complete the significant research and development or obtain the financial resources and personnel required to further develop and apply Zalicus’s discovery technology, advance promising product candidates to and through clinical trials, and obtain required regulatory approvals.

Our results to date provide only a limited basis for predicting whether any of our product candidates will be safe or effective, or receive regulatory approval.

All of our product candidates are in an early stage of development and their risk of failure is high. The data supporting Zalicus’s drug discovery and development programs is derived from either laboratory and pre-clinical studies and limited early stage clinical trials that were not all designed to be statistically significant or proof-of-concept or Phase 2 clinical trials, some of which are exploratory in nature. We cannot predict when or if any one of Zalicus’s product candidates will prove effective or safe in humans or will receive regulatory approval. If we are unable to discover or successfully develop drugs that are effective and safe in humans, we will not have a viable business.

Exalgo is a member of a class of drugs that may cause undesirable side effects that could limit their marketability.

Opioids, including hydromorphone, the active ingredient in Exalgo, are known to have serious side effects, including dependence and addiction. These or other undesirable side effects could negatively affect sales of Exalgo. In addition, if we or others later identify additional undesirable side effects caused by Exalgo, one or more of the following could occur:

 

   

regulatory authorities may require the addition of labeling statements, such as a contraindication or a “black box” warning that the drug carries significant risks of serious or life-threatening adverse effects;

 

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regulatory authorities may withdraw their approval of Exalgo;

 

   

the FDA may require that the way Exalgo is administered be changed, that additional clinical trials be conducted or that the labeling of the product be changed; and

 

   

our reputation may suffer.

Any of these events could prevent Exalgo from achieving or maintaining market acceptance or could substantially increase the costs and expenses of commercializing Exalgo, which in turn could decrease the royalties we expect to receive from sales of Exalgo.

Exalgo could be tampered with for the purpose of drug abuse. Misuse or abuse of Exalgo may result in adverse regulatory or other actions, including withdrawals of regulatory approvals and litigation.

Misuse or abuse of drugs, including opioids such as hydromorphone, the active ingredient in Exalgo, could result in serious, even fatal, consequences. Abusers of pharmaceutical drugs may misuse or abuse Exalgo, to, among other things, accelerate the release of opioids. If effective methods to misuse or abuse Exalgo are employed, adverse action from regulatory authorities may result, including:

 

   

withdrawal of regulatory approvals;

 

   

delays or interruption in commercialization;

 

   

product recalls or seizures;

 

   

suspension of manufacturing;

 

   

withdrawals of previously approved marketing indications;

 

   

injunctions, suspensions, or revocations of marketing licenses; and

 

   

product liability or class action litigation.

If any of these events were to occur, Covidien may not be able to continue to sell Exalgo. In these circumstances, we could suffer reduced revenues. Further, in response to these circumstances, regulatory authorities may impose new regulations concerning the manufacture and sale of drugs such as Exalgo. Such regulations may include new labeling requirements, additional risk management plan requirements to further minimize the risk of abuse, restrictions on the prescription and sale of Exalgo and mandatory reformulation of products in order to make abuse more difficult. Any such new regulations may be difficult and expensive for Covidien to comply with, may adversely affect Covidien’s sales and may have a material adverse effect on our business and cash flows.

FDA approval of our drug candidates subjects Zalicus and our collaborators to ongoing FDA obligations and continued regulatory review, such as continued safety reporting requirements, and we and our collaborators may also be subject to additional FDA post-marketing obligations or new regulations, all of which may result in significant expense and limit our ability to commercialize our drug candidates or Covidien’s ability to commercialize Exalgo.

Any regulatory approvals that we receive for our drug candidates, may be subject to limitations on the indicated uses for which the drug may be marketed or contain requirements for potentially costly post-marketing follow-up studies. In addition, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping for Exalgo, or any other drug candidate the FDA may approve, is subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with a drug, including but not limited to adverse events of unanticipated severity or frequency, or the discovery that adverse events previously observed in pre-clinical research or clinical trials that were believed to be minor actually constitute much more serious problems, may result in restrictions on the marketing of the drug, and could include withdrawal of the drug from the market.

The FDA’s policies may change, and additional government regulations may be enacted that could prevent or delay regulatory approval of our drug candidates or may adversely impact the commercialization of Exalgo. For example, the FDA has commenced the process of developing a common “Risk Evaluation and Mitigation Strategy,” or REMS, for all opioid drugs. According to FDA’s announcement, opioid drugs affected by this announcement include both brand name and generic products that contain various drug components, including hydromorphone, the active ingredient in Exalgo. Exalgo is subject to its own unique REMS program, and may ultimately be subject to the common REMS program for approved opioid drugs. If we are not, or, in the case of Exalgo, Covidien is not, able to maintain regulatory compliance, including compliance with a required REMS program, we or Covidien may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. Any of these events could prevent us from marketing our drug candidates or prevent Covidien from marketing Exalgo and our business could suffer accordingly. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad.

 

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The approved drugs included in Zalicus’s combination product candidates, including Synavive, may have their own adverse or unacceptable side effects or may produce adverse or unacceptable side effects when delivered in combination, and we may not be able to achieve an acceptable level of side effect risks, compared to the potential therapeutic benefits, for Zalicus’s combination product candidates.

The approved drugs included in Zalicus’s combination product candidates, including Synavive, have known adverse side effects. These side effects may be acceptable when an ingredient is used in its approved dosage to achieve a therapeutic benefit for its currently approved indications, but the side effect risk compared to the therapeutic benefit may not be acceptable when used for the intended indications for the product candidate. These side effects may also make it difficult to obtain regulatory or other approval to initiate clinical trials of Zalicus’s combination product candidates. In addition, the therapeutic effect of an approved drug in its currently approved indications may be inappropriate or undesirable in the intended indication for Zalicus’s combination product candidate. Also, Zalicus’s discovery technology is not designed to and does not detect adverse side effects that may result from the combination of the two drugs. The adverse side effects of an approved drug may be enhanced when it is combined with the other approved drug in the product candidate or other drugs patients are taking, or the combined drugs in a product candidate may produce additional side effects. Adverse side effects could, in any of these situations, require pre-clinical and Phase 1 studies testing for combination side effects or prevent successful development and commercialization of some or all of Zalicus’s combination product candidates, because the risks may outweigh the therapeutic benefit of the combination.

The development of a product candidate could be adversely affected by safety or efficacy issues that subsequently arise or become the focus of increased attention or publicity regarding use of either of the approved drugs which comprise the product candidate or similar drugs. We could be forced to abandon a product candidate or an approved product due to adverse side effects from long-term or other use of one of the active pharmaceutical ingredients in the product candidate or product, even if such long-term or other use is not contemplated for such product candidate or product.

Zalicus’s combination product candidate Synavive, seeks to increase the therapeutic effect of a reduced-dose of the oral glucocorticoid prednisolone by the combination with dipyridamole that serves as an enhancer agent. The adverse side effects of prednisolone and dipyridamole are significant and generally increase as their dosage and/or duration of therapy increases. As a result, the success of Synavive depends upon the ability of an acceptable dose of dipyridamole to selectively amplify the therapeutic effect of a reduced-dose of prednisolone, without causing unacceptable expected or unexpected adverse side effects. As a result, Zalicus’s combination product candidates could have greater adverse side effects than anticipated and could fail to achieve risk-to-benefit profiles that would justify their continued development.

Significant adverse side effects of the components of Synavive include, headache, nausea, dizziness, diarrhea, muscle and bone loss, diabetes, dyslipidemia, osteoporosis, fractures, weakness, adrenal suppression, infections, abdominal distress, peptic ulceration, arrhythmias, cataracts, glaucoma and myopathy. These side effects are not the only side effects of the components of Synavive. The occurrence of these or other significant adverse side effects could make it inadvisable to continue development of Synavive or lead to difficulty in obtaining regulatory or other approval for clinical trials of Synavive, the termination of clinical trials or could result in product liability claims.

Synavive is a combination of approved drugs that are commercially available and marketed by other companies. As a result, Synavive, if approved, may be subject to substitution and competition.

The approved drugs that are combined in Synavive are commercially available at prices lower than the prices at which we would seek to market Synavive, if it is approved. Even with its new formulation, we cannot be sure that physicians will view Synavive, if approved, as sufficiently superior to a treatment regimen of the individual active pharmaceutical ingredients as to justify the significantly higher cost we expect to seek for Synavive, and they may prescribe the individual drugs already approved and marketed by other companies instead of Synavive. We have been issued patents covering the composition of matter and method of use of Synavive and are seeking patents covering its formulations. These patents may be ineffective as a practical matter to protect against physicians prescribing the individual generic drugs instead of Synavive. To the extent that the price of Synavive is significantly higher than the prices of the individual components, physicians may have a greater incentive to write prescriptions for the individual components instead of for Synavive, and this may limit how we price Synavive. Similar concerns could also limit the reimbursement amounts private health insurers or government agencies in the United States are prepared to pay for Synavive, which could also limit market and patient acceptance of Synavive, and could negatively impact our revenues and net income, if any. Physicians might also prescribe the individual components of Synavive prior to its approval, which could adversely affect our development of Synavive due to our lack of control over the administration to patients of the combination of active pharmaceutical ingredients in Synavive, the occurrence of adverse effects, and other reasons. Such pre-approval use could also adversely affect our ability to market and commercialize Synavive if it is approved.

In many jurisdictions where we plan to market Synavive, including Europe, Japan and Canada, the pricing of prescription drugs is controlled by the government or regulatory agencies. Regulatory agencies in these countries could determine that the pricing for Synavive should be based on prices for their active pharmaceutical ingredients when sold separately, rather than allowing us to market Synavive at a premium as a new drug.

 

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We may not be able to create commercially viable pharmaceutical formulations of Synavive or our ion channel product candidates.

The success of Synavive will depend on our ability to develop a formulation that is superior to a treatment regimen of prednisolone and dipyridamole taken separately. We have developed or are developing proprietary formulations of Synavive. In addition, we have developed or will need to develop proprietary formulations of ion channel product candidates, including Z160. Developing such proprietary formulations is costly and difficult, and we have limited experience in developing formulations ourselves. We are relying on and expect to rely on third-party suppliers to develop the pharmaceutical formulations, delivery methods or packaging for Zalicus’s product candidates and they may not be successful in doing so or may experience delays in doing so that could delay clinical trials, and ultimately our ability to obtain approval of Zalicus’s product candidates, including Synavive. Defects in the formulation, delivery method or packaging of any of Zalicus’s product candidates could delay our ability to conduct clinical trials or require us to repeat clinical trials using a revised formulation, delivery method or packaging. If we are unsuccessful in creating commercially viable formulations, delivery methods or packaging, we may never generate product revenue or be profitable.

We may not be able to initiate and complete clinical trials for our product candidates.

Conducting clinical studies for any of our product candidates requires finding appropriate clinical sites and clinical investigators, securing approvals for such studies from the independent review board at each such site and local regulatory authorities and enrolling sufficient numbers of patients. We may not be able to arrange for appropriate clinical trials for our product candidates, secure the necessary approvals or enroll the necessary number of participants. Zalicus initiated a Phase 2b clinical trial of Synavive in rheumatoid arthritis in June, 2011. In 2008, Zalicus terminated enrollment in a Phase 2b clinical trial of Synavive in rheumatoid arthritis due to delays in the enrollment associated with competing therapies otherwise available to the relevant patient population, enrollment criteria that required the discontinuance of glucocorticoid use by subjects and issues with third-party contract research organizations and third-party suppliers of clinical trial material. Zalicus cannot be certain that similar challenges will not arise with respect to the ongoing Phase 2b study of Synavive. In addition, we cannot guarantee that outside clinical investigators conducting clinical trials will conduct them in compliance with applicable United States or foreign regulations. Clinical sites may fail the FDA’s or other regulatory agencies’ inspections or reviews, and our trials could be halted for these or other reasons. Zalicus plans to contract with third-party clinical research organizations and other parties to conduct virtually all aspects of Zalicus’s Phase 2b and other Phase 1 clinical trials for Zalicus’s product candidates. These organizations may not adequately or completely perform their contractual obligations regarding the trials, or may not diligently or completely perform their tasks with respect to clinical trials under their supervision. As a result of these risks, our clinical trials may be extended, delayed or terminated, which could delay the receipt of clinical results for our product candidates, which could delay, impede or stop the development, regulatory approval or successful commercialization of our product candidates.

We may be unable to find safe and effective doses or dose ratios for Zalicus’s product candidates without extensive clinical trials and substantial additional costs, if at all.

We must select the doses, including the amount, frequency and duration, of each of the active pharmaceutical ingredients included in Zalicus’s product candidates, and the relative amounts, or dose ratios, of these doses, including the doses of prednisolone and dipyridamole contained in our product candidate Synavive. Our clinical trials in humans may show that the doses or dose ratios we select based on Zalicus’s in vitro screening, animal testing or early clinical trials do not achieve the desired therapeutic effect in humans, or achieve this effect only in a small part of the population. Even if the doses or dose ratios we select show efficacy in humans, the resulting doses or dose ratios of active pharmaceutical ingredients may not have acceptable safety profiles for targeted indications. Furthermore, even if we believe that pre-clinical and clinical studies adequately demonstrate that the doses or dose ratios we select for Zalicus’s product candidates are safe and effective in humans, the FDA or other regulatory agencies in foreign jurisdictions may conclude that the clinical trials do not support this conclusion. We may be required to conduct additional long-term clinical studies and provide more evidence substantiating the safety and effectiveness of the doses or selected dose ratios in a significant patient population. If we need to adjust the doses or dose ratios, we may need to conduct new clinical trials. We may also be required to make different doses or dose ratios available for different types of patients. All of this may result in significant delays and additional costs or prevent commercialization of Zalicus’s product candidates.

We may fail to select or capitalize on the most scientifically, clinically or commercially promising or profitable product candidates.

We may make incorrect determinations as to which product candidates should proceed to initial clinical trials, later stage clinical development and potential commercialization. Our decisions to allocate finite research, management and financial resources toward particular product candidates or therapeutic areas may not lead to the development of viable commercial products and may divert resources from better opportunities. Similarly, our decisions to delay or terminate drug development programs may also be incorrect and could cause us to miss valuable opportunities.

 

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A material component of our business strategy is to establish and maintain collaborative relationships to fund research and possible development and commercialization of product candidates, by us or by our collaborators. If we or any collaborator terminates or fails to perform any obligations under our collaboration agreements, the development and commercialization of product candidates under these agreements could be delayed or terminated.

A material component of our business strategy is to establish and maintain collaborative arrangements with pharmaceutical and biotechnology companies, and to seek grants from agencies of the United States government, to fund research and possible development and commercialization of drug products for the treatment of diseases. We have established collaborative royalty and milestone-based agreements with Covidien for Exalgo and with Sanofi/Fovea for Prednisporin and funded discovery research agreements with Novartis, USAMRIID and others, if any of our product candidates continue to advance through preclinical or clinical development, we intend to continue to seek collaborative relationships to obtain discovery or clinical development funding and expertise, as well as domestic or international sales, marketing and distribution capabilities.

The process of establishing collaborative relationships is difficult, time-consuming and involves significant uncertainty. Moreover, it may be difficult to maintain or perform under collaboration arrangements, as our funding resources may be limited or our collaborators may seek to renegotiate or terminate their relationships due to unsatisfactory research or clinical results, a change in business strategy, a change of control or other reasons.

See “—Our ability to generate ongoing revenue from Exalgo depends on Covidien.” If we or any collaborator fails to fulfill any responsibilities in a timely manner, or at all, our research, clinical development or commercialization efforts related to that collaboration could be delayed or terminated. Additionally it may become necessary for us to assume responsibility for activities that would otherwise have been the responsibility of our collaborator. Further, if we are unable to establish and maintain collaborative relationships on acceptable terms, we may have to delay or discontinue further development of one or more of our product candidates, undertake development and commercialization activities at our own expense or find alternative sources of funding.

Zalicus’s collaborations are generally new, and we have only a short history of working together with our collaborators and cannot predict the success of any of these collaborations. Our collaborations typically involve a complex allocation of responsibilities, costs and benefits and provide for milestone payments to us upon the achievement of specified clinical and regulatory milestones. Our collaborations also may provide us with royalty-based revenue if product candidates are successfully commercialized. Under the Covidien, Novartis, Sanofi/Fovea and other collaborations, we will rely on our collaborators to provide resources to develop new product candidates and to potentially achieve these milestones and commercialize any new products. We may not be able to achieve any of the milestones provided in the Novartis, Sanofi/Fovea or other collaboration agreements or derive any license or royalty revenue with respect to our collaborations.

If we undertake business combinations, acquisitions or similar strategic transactions, they may be difficult to integrate, disrupt our business, dilute stockholder value or divert management’s attention.

On a regular basis, we consider business combination transactions and collaborations with third parties to support our growth through acquisitions of companies, product candidates, drug products or technology. Future acquisitions may involve risks, such as:

 

   

challenges associated with integrating acquired technologies and operations of acquired companies;

 

   

exposure to unforeseen liabilities;

 

   

diversion of managerial resources from day-to-day operations;

 

   

difficulties in the assimilation of different cultures and practices, as well as in the assimilation and retention of broad and geographically dispersed personnel and operations;

 

   

misjudgment with respect to the value, return on investment or strategic fit of any acquired operations or assets;

 

   

higher than expected transaction costs; and

 

   

additional dilution to our existing stockholders if we use our common stock as consideration for such acquisitions.

As a result of these risks, we may not be able to achieve the expected benefits of any acquisition. If we are unsuccessful in completing or integrating any acquisition, we may be required to reevaluate that component of our growth strategy only after we have incurred substantial expenses and devoted significant management time and resources in seeking to complete and integrate the acquisition.

Future business combinations could involve the acquisition of significant intangible assets. We may need to record write-downs from future impairments of identified intangible assets and goodwill. These accounting charges would increase a reported loss or reduce any future reported earnings. In addition, we could use substantial portions of our available cash to pay the purchase price for acquisitions. Subject to the limitations under our existing indebtedness, it is possible that we could incur additional debt or issue additional equity securities as consideration for these acquisitions, which could cause our stockholders to suffer significant dilution.

 

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We have no sales or distribution capabilities and may not obtain the collaboration, development, commercialization, manufacturing or other third-party relationships required to develop, commercialize and manufacture some or all of our product candidates.

We have no sales or distribution capabilities and lack many of the internal resources, capabilities and experience necessary to clinically develop, formulate, manufacture, test, market and sell pharmaceuticals. As a result, to succeed in our business plan, we will be dependent on the efforts of third parties. We depend on collaborators, licensees, clinical research organizations and other third parties to formulate product candidates and to conduct clinical trials for some or all of our product candidates. We also rely on third-party manufacturers to manufacture all clinical trial supplies of our product candidates and they or we will rely on obtaining sufficient quantities of the approved drugs in Synavive from sources acceptable to the FDA and other regulators for early stage clinical trials.

Our third-party manufacturers may encounter difficulties performing their obligations in a timely manner and in accordance with applicable governmental regulations, including problems involving: inconsistent production yields; poor quality control and assurance or inadequate process controls; and lack of compliance with regulations set forth by the FDA or other foreign regulatory agencies. We typically engage only a single contract manufacturer to make any product candidate which can exacerbate the impact of any such difficulties. Under our agreements with Covidien, we have no responsibility for manufacturing Exalgo. However, any manufacturing difficulties or related regulatory issues could impact Covidien’s sales of Exalgo, if any, which would reduce the significant revenue we expect to receive from royalties on net sales of Exalgo.

We expect to be able to develop and commercialize many of our product candidates only with the participation of pharmaceutical or biotechnology company collaborators or by out-licensing rights to the product candidates. Pharmaceutical and biotechnology companies and others may be reluctant to collaborate with Zalicus or to license rights to Zalicus’s product candidates due to the unproven nature of Zalicus’s drug discovery and development approach, the fact that the active pharmaceutical ingredients in Synavive are approved generic drugs, the risk that healthcare providers may substitute the component active pharmaceutical ingredients for Synavive, concerns regarding the pricing of and reimbursement for Zalicus’s product candidates if they are successfully developed, or other factors.

We cannot guarantee that we will be able to successfully negotiate agreements for relationships with collaborators, partners, licensees, clinical investigators, manufacturers and other third parties on favorable terms, if at all. If we are unable to obtain these agreements, we may not be able to clinically develop, formulate, manufacture, test, obtain regulatory approvals for or commercialize our product candidates. We expect to expend substantial funds and management time and effort to enter into relationships with these third parties and, if we enter successfully into such relationships, to manage these relationships. However, we cannot control the amount or timing of resources our contract partners will devote to our research and development programs, product candidates or potential product candidates, and we cannot guarantee that these parties will succeed in a timely fashion, if at all. Due to the recent volatility in the financial markets and tightening of the credit markets, there may be a disruption or delay in the performance or satisfaction of commitments to us by third party providers which could have a material adverse effect on our business.

We may not be able to gain market acceptance of our product candidates, which would prevent us from becoming profitable.

We cannot be certain that any of our product candidates, if approved, will gain market acceptance among physicians, patients, healthcare payors, pharmaceutical companies or others. Demonstrating the safety and efficacy of our product candidates and obtaining regulatory approvals will not guarantee future revenue. Sales of medical products largely depend on the reimbursement of patients’ medical expenses by government healthcare programs and private health insurers. Governments and private insurers closely examine medical products to determine whether they should be covered by reimbursement and if so, the level of reimbursement that will apply. We cannot be certain that third-party payors will sufficiently reimburse sales of our products, or enable us to sell our products, if approved, at profitable prices. Sales of medical products also depend on physicians’ willingness to prescribe the treatment, which is likely to be based on a determination by these physicians that the products are safe, therapeutically effective and cost-effective. We cannot predict whether physicians, other healthcare providers, government agencies or private insurers will determine our products are safe, therapeutically effective and cost effective relative to competing treatments, including a treatment regimen of the individual approved drugs included in Zalicus’s combination products.

Disputes under key agreements could delay or prevent development or commercialization of our product candidates.

Any agreements we have or may enter into with third parties, such as collaboration, license, formulation supplier, manufacturing, testing, clinical research organization or clinical trial agreements, may give rise to disputes regarding the rights and obligations of the parties to such agreements. Disagreements could develop over rights to ownership or use of intellectual property, the scope and direction of research and development, the approach for regulatory approvals or commercialization strategy. We intend to conduct research programs in a range of therapeutic areas, but our pursuit of these opportunities could result in conflicts with the other parties to these agreements who may be developing or selling pharmaceuticals or conducting other activities in these same therapeutic areas. Any disputes or commercial conflicts could lead to the termination of these agreements, delay progress of our product development programs, compromise our ability to renew agreements or obtain future agreements, lead to the loss of intellectual property rights or result in costly litigation.

 

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Risks Related to Financial Results, Need for Additional Financing and Debt Arrangements

We may be unable to raise the substantial additional capital that we will need to sustain our operations.

We will need substantial additional funds to support our planned operations. Based on current operating plans, we expect our resources to be sufficient to fund our operations into 2014. We may, however, need to raise additional funds before that time if our research and development expenses exceed current expectations or our collaboration funding and Exalgo royalties are less than current assumptions or expectations. This could occur for many reasons, including:

 

   

we determine to acquire or license rights to additional product candidates or new technologies;

 

   

some or all of our product candidates fail in clinical or pre-clinical studies or prove to be less commercially promising than we expect or we are forced to seek additional product candidates;

 

   

our product candidates require more extensive clinical or pre-clinical testing or clinical trials take longer to complete than we currently expect;

 

   

we advance more of our product candidates than expected into costly later stage clinical trials;

 

   

we advance more of our pre-clinical product candidates than expected into early stage clinical trials;

 

   

our revenue generating collaboration agreements are terminated;

 

   

we determine or are required to conduct more discovery research than expected to develop additional product candidates;

 

   

we are required, or consider it advisable, to acquire or license rights from one or more third parties.

While we expect to seek additional funding through public or private financings, we may not be able to obtain financing on acceptable terms, or at all. In addition, the terms of any financings may be dilutive to, or otherwise adversely affect, holders of Zalicus common stock. We may also seek additional funds through arrangements with collaborators or others. These arrangements would generally require us to relinquish rights to some of our technologies, product candidates or products, and we may not be able to enter into such agreements on acceptable terms, if at all. The arrangements also may include issuances of equity, which may also be dilutive to, or otherwise adversely affect, holders of Zalicus common stock. Many people believe that participants in financial markets in the United States are increasingly less willing to fund drug discovery companies like Zalicus. There can be no assurance that we will be able to access equity or credit markets in order to finance our operations or expand development programs for any of our product candidates, or that there will not be a further deterioration in financial markets and confidence in economies. We may also have to scale back or further restructure our operations. If we are unable to obtain additional funding on a timely basis, we may be required to curtail or terminate some or all of our research or development programs.

The terms of our debt facility place restrictions on our operating and financial flexibility, and if we were to default on our obligations under our debt facility, our stockholders would be adversely effected.

We have borrowed an aggregate of $11.5 million pursuant to the terms of a loan and security agreement with Oxford. In addition, at any time before January 15, 2012, we may, at our sole option, borrow from Oxford an additional $8.5 million, subject to our satisfaction of specified conditions precedent described in the loan agreement. As collateral for these loans, we pledged substantially all of our assets, other than intellectual property. Our agreement with Oxford restricts our ability to incur additional indebtedness, dispose of certain of our assets, pay dividends and engage in significant business transactions such as certain acquisitions or a change of control of Zalicus, so long as we owe any amounts to Oxford under the agreement. Any of these restrictions could significantly limit our operating and financial flexibility and ability to respond to changes in our business or competitive activities. In addition, if we default under our agreement, Oxford may have the right to accelerate all of our repayment obligations under the agreement and to take control of our pledged assets, which include our cash, cash equivalents and short-term investments, potentially requiring us to renegotiate our agreement on terms less favorable to us. Further, if we are liquidated, Oxford’s right to repayment would be senior to the rights of the holders of our common stock to receive any proceeds from the liquidation. An event of default under the loan and security agreement includes the occurrence of any material adverse change regarding our business, operations or condition (financial or otherwise). If Oxford declares a default upon the occurrence of any event that it interprets as resulting in a material adverse change as defined under our agreement, we will be required to repay the loan immediately or to attempt to reverse Oxford’s declaration through negotiation or litigation. Any declaration by Oxford of an event of default could significantly harm our business and prospects and could cause our stock price to decline.

Zalicus has a history of operating losses. We expect to incur significant operating losses and may never be profitable. Zalicus common stock is a highly speculative investment.

Zalicus commenced operations in March 2000 and has no approved products of its own and has generated no direct product revenue. Zalicus has incurred operating losses since Zalicus’s inception in 2000. As of June 30, 2011, Zalicus had an accumulated deficit of $276.7 million. We have spent, and expect to continue to spend, significant resources to fund research and development of our product candidates and to enhance our drug discovery technologies. We expect to incur substantial operating losses over the next several years due to our ongoing research, development, pre-clinical testing, and potential clinical trial activities. As a result, our accumulated deficit will continue to increase.

 

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Our product candidates are in the early stages of development and may never result in any revenue. We will not be able to generate product revenue unless and until one of our product candidates successfully completes clinical trials and receives regulatory approval. We may seek to obtain revenue from collaboration or licensing agreements with third parties. Other than our agreement with Covidien, our current collaboration and license agreements may not provide us with material, sustainable ongoing future revenue, and we may not be able to enter into additional collaboration agreements. Even if we eventually generate product revenues, we may never be profitable, and if we ever achieve profitability, we may not be able to sustain it.

Risks Related to Regulatory Approvals

The regulatory approval process is costly and lengthy and we may not be able to successfully obtain all required regulatory approvals.

The pre-clinical development, clinical trials, manufacturing, marketing, testing and labeling of pharmaceuticals and medical devices are all subject to extensive regulation by numerous governmental authorities and agencies in the United States and other countries. We or our collaborators must obtain regulatory approval for product candidates before marketing or selling any of them. The approval process is typically lengthy and expensive, and approval is never certain. It is not possible to predict how long the approval processes of the FDA or any other applicable federal or foreign regulatory authority or agency for any of our products will take or whether any such approvals ultimately will be granted. The FDA and foreign regulatory agencies have substantial discretion in the drug and medical device approval process, and positive results in pre-clinical testing or early phases of clinical studies offer no assurance of success in later phases of the approval process. Generally, pre-clinical and clinical testing of products and medical devices can take many years and require the expenditure of substantial resources, and the data obtained from these tests and trials can be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Any delay in obtaining, or failure to obtain, approvals could prevent or adversely affect the marketing of our products or our collaborator’s products and our ability to generate product revenue. The risks associated with the approval process include delays or rejections in the regulatory approval process based on the failure of clinical or other data to meet expectations, or the failure of the product or medical device to meet a regulatory agency’s requirements for safety, efficacy and quality. In addition, regulatory approval, if obtained, may significantly limit the indicated uses for which a product may be marketed.

We or our collaborators may delay, suspend or terminate clinical trials to obtain marketing authorization of any of our product candidates or their associated medical devices or products at any time for reasons including:

 

   

ongoing discussions with the FDA or comparable foreign authorities regarding the scope or design of clinical trials;

 

   

delays or the inability to obtain required approvals from institutional review boards or other governing entities at clinical sites selected for participation in our clinical trials;

 

   

delays in enrolling patients and volunteers into clinical trials;

 

   

lower than anticipated retention rates of patients and volunteers in clinical trials;

 

   

the need to repeat clinical trials as a result of inconclusive or negative results or poorly executed testing;

 

   

lack of effectiveness of a product candidate in other clinical trials;

 

   

lack of sufficient funds for further clinical development;

 

   

insufficient supply or deficient quality of product candidate materials or other materials necessary to conduct clinical trials;

 

   

unfavorable regulatory inspection of a manufacturing, testing, labeling or packaging facility for drug substance or drug product;

 

   

unfavorable regulatory inspection and review of a clinical or pre-clinical trial site or records of any clinical or pre-clinical investigation;

 

   

serious and unexpected drug-related side effects or serious adverse safety events experienced by participants in clinical trials or by patients following commercialization; or

 

   

the placement of a clinical hold on a product candidate in an ongoing clinical trial.

Positive or timely results from pre-clinical studies and early clinical trials do not ensure positive or timely results in late stage clinical trials or product approval by the FDA or any other regulatory authority. Product candidates that show positive pre-clinical or early clinical results often fail in later stage clinical trials. Data obtained from pre-clinical and clinical activities is susceptible to varying interpretations, which could delay, limit, or prevent regulatory approvals.

We may not be able to conduct clinical trials at preferred sites, enlist clinical investigators, enroll sufficient numbers of patients, or begin or successfully complete clinical trials in a timely fashion, if at all. Any failure to perform may delay or terminate the trials. Our current clinical trials may be insufficient to demonstrate that our potential products are active, safe, or effective and as a result we may

 

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decide to abandon further development of such product candidates. Additional clinical trials may be required if clinical trial results are negative or inconclusive, which will require us to incur additional costs and significant delays. If we do not receive the necessary regulatory approvals, we will not be able to generate product revenues and will not become profitable. We may encounter significant delays in the regulatory process that could result in excessive costs that may prevent us from continuing to develop our product candidates. In addition, the failure to comply with applicable regulatory requirements may result in criminal prosecution, civil penalties, product recalls, withdrawal of product approval, mandatory restrictions or other actions that could impair our ability to conduct our business.

The FDA and other regulatory agencies may require more extensive or expensive trials for Synavive than may be required for single agent pharmaceuticals.

To obtain regulatory approval for Synavive, we expect to be required to show that each active pharmaceutical ingredient in Synavive makes a contribution to the combined product candidate’s claimed effects and that the dosage of each component, including amount, frequency and duration, is such that the combination is safe and effective for a significant patient population requiring such concurrent therapy. As a result, we are typically required to conduct clinical trials comparing each component drug with the combination. This could require us to conduct more extensive and more expensive clinical trials with Synavive than would be the case for many single agent pharmaceuticals. The need to conduct such trials could make it more difficult and costly to obtain regulatory approval of Synavive compared to a new drug containing only a single active pharmaceutical ingredient.

Even if we receive regulatory approvals for marketing Zalicus’s product candidates, if we fail to comply with continuing regulatory requirements, we could lose regulatory approvals, and our business would be adversely affected.

The FDA and other regulatory authorities continue to review therapeutic products and medical devices even after they receive initial approval. If we receive approval to commercialize any product candidates, the manufacturing, testing, marketing, sale and distribution of these drugs and medical devices will be subject to continuing regulation, including compliance with quality systems regulations, good manufacturing practices, adverse event reporting requirements and prohibitions on promoting a product for unapproved uses. Furthermore, heightened Congressional scrutiny on the adequacy of the FDA’s drug approval process and the agency’s efforts to assure the safety of marketed drugs has resulted in the enactment of legislation, the FDA Amendments Act of 2007, addressing, among other things, drug safety issues. This law provides the FDA with expanded authority over drug products after approval, including the authority to require post-approval studies and clinical trials, labeling changes based on new safety information, and compliance with REMS approved by the FDA. The FDA’s exercise of this authority could result in delays or increased costs during the period of product candidate development, clinical trials and regulatory review and approval, increased costs to assure compliance with new post-approval regulatory requirements, and potential restrictions on the sale of approved products, which could lead to lower product revenues to us or our collaborators. Enforcement actions resulting from failure to comply with government requirements could result in fines, suspension of approvals, withdrawal of approvals, recalls of products, product seizures, operating restrictions, and civil or criminal penalties. These enforcement actions could affect the manufacturing, testing, marketing, sale and distribution of our products.

Legislative or regulatory reform of the health care system in the United States and foreign jurisdictions may affect our ability to profitably sell our products, if approved.

Our and our collaborators’ ability to commercialize our future products successfully will depend in part on the extent to which reimbursement for the products will be available from government and health administration authorities, private health insurers and other third-party payors. The continuing efforts of the U.S. and foreign governments, insurance companies, managed care organizations and other payors of health care services to contain or reduce health care costs may adversely affect our ability to set prices for our products which we believe are fair, and our ability to generate revenues and achieve and maintain profitability.

Specifically, in both the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system in ways that could affect our ability to sell our products profitably. Congress has passed America’s Affordable Health Choices Act of 2009 and is considering a number of proposals that are intended to reduce or limit the growth of health care costs and which could significantly transform the market for pharmaceuticals products. We expect further federal and state proposals and health care reforms to continue to be proposed by legislators, which could limit the prices that can be charged for the products we develop and may limit our commercial opportunity. In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, also called the Medicare Modernization Act, or MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for drugs. In addition, this legislation provided authority for limiting the number of drugs that will be covered in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.

 

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The continuing efforts of government and other third-party payors to contain or reduce the costs of health care through various means may limit our commercial opportunity. It will be time consuming and expensive for us or our partners to go through the process of seeking reimbursement from Medicare and private payors. Our products, including Exalgo, may not be considered cost effective, and government and third-party private health insurance coverage and reimbursement may not be available to patients for any of our future products or sufficient to allow us or our collaborators, including Covidien, to sell our products on a competitive and profitable basis. Our results of operations could be adversely affected by the MMA and additional prescription drug coverage legislation, by the possible effect of this legislation on amounts that private insurers will pay and by other health care reforms that may be enacted or adopted in the future. In addition, increasing emphasis on managed care in the United States will continue to put pressure on the pricing of pharmaceutical products. Cost control initiatives could decrease the price that we or any potential collaborators could receive for any of our future products and could adversely affect our profitability.

In some foreign countries, including major markets in the European Union and Japan, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take 6 to 12 months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we or our collaborators may be required to conduct a clinical study that compares the cost-effectiveness of our product candidates to other available therapies. Such pharmacoeconomic studies can be costly and the results uncertain. Our business could be harmed if reimbursement of our or our collaborators’ products are unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels.

Federal laws or regulations on drug importation could make lower cost versions of our future products available, which could adversely affect our revenues, if any.

The prices of some drugs are lower in other countries than in the United States because of government regulation and market conditions. Under current law, importation of drugs into the United States is generally not permitted unless the drugs are approved in the United States and the entity that holds that approval consents to the importation. Various proposals have been advanced to permit the importation of drugs from other countries to provide lower cost alternatives to the products available in the United States. In addition, the MMA requires the Secretary of Health and Human Services to promulgate regulations for drug reimportation from Canada into the United States under some circumstances, including when the drugs are sold at a lower price in Canada than in the United States.

If the laws or regulations are changed to permit the importation of drugs into the United States in circumstances not now permitted, such a change could have an adverse effect on our business by making available lower priced alternatives to our future products. Failure to obtain regulatory and pricing approvals in foreign jurisdictions could delay or prevent commercialization of our products abroad.

If we succeed in developing any products (other than Exalgo), we intend to market them in the European Union and other foreign jurisdictions. In order to do so, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval abroad may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval and additional risks particularly because there may be additional variations between how our combination products, including Synavive, and single agent drugs are treated in foreign jurisdictions. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. We and our collaborators may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market outside the United States. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations. Even if we are successful at obtaining these approvals, regulatory agencies in foreign countries where the pricing of prescription drugs or medical devices is controlled by the government, could determine that pricing for Zalicus’s combination products should be based on prices for the existing drugs that comprise the active pharmaceutical ingredients in Zalicus’s combination products instead of allowing us to price Zalicus’s combination products at a premium as novel medicines.

Risks Related to Intellectual Property

Our success depends upon our ability to obtain and maintain intellectual property protection for our products and technologies.

Our success will depend on our ability to obtain and maintain adequate protection of our intellectual property, including our proprietary drug discovery technologies and any products or product candidates we plan to develop. We intend to apply for patents with claims covering our technologies, processes, products and product candidates when and where we deem it appropriate to do so and plan to take other steps to protect our intellectual property. We have applied for patent protection covering our clinical and pre-clinical product candidates in the United States, and some, but not all, foreign countries. In countries where we have not and do not seek patent protection, third parties may be able to manufacture and sell our products without our permission, and we may be unable to stop them from doing so. The patents covering Exalgo expire in July 2014, or they may be successfully challenged prior to expiration, after which Covidien may face generic competition for the specific formulation of Exalgo. One patent covering Exalgo is the subject of ongoing patent litigation with Watson Pharmaceuticals.

 

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Similar to other biotechnology companies, our patent position is generally uncertain and involves complex legal and factual questions. In addition, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States, and other biotechnology companies have encountered significant problems in protecting and defending their proprietary rights in non-US jurisdictions. Whether filed in the United States or abroad, our patent applications may be challenged or may fail to result in issued patents. In addition, our existing patents and any future patents may not be sufficiently broad to prevent others from practicing our technologies or from developing or commercializing competing products. Furthermore, others may independently develop or commercialize similar or alternative technologies or drugs, or design around our patents. Our patents may be challenged, invalidated or fail to provide any competitive advantages.

The United States Patent and Trademark Office and similar agencies in foreign jurisdictions may not agree with our view that our combination product candidates are patentable or novel and non-obvious, and on this basis may deny patent protection. Even if we receive patent protection, others, including those who own patent or trade secret rights associated with the approved drugs that are active pharmaceutical ingredients of these product candidates, may attempt to invalidate our patent or trade secret rights. Even if our patent or trade secret rights are not directly challenged, disputes among third parties could lead to the weakening or invalidation of intellectual property rights.

If we do not obtain or are unable to maintain adequate patent or trade secret protection for products in the United States, competitors could duplicate them without repeating the extensive testing that we will be required to undertake to obtain approval of the products by the FDA and other regulatory authorities. Regardless of any patent protection, under the current statutory framework the FDA is prohibited by law from approving any generic version of any of Zalicus’s combination products for three years after it has approved Zalicus’s combination product and for five years in the case of other product candidates. Upon the expiration of that period, or if that time period is altered, the FDA could approve a generic version of Zalicus’s product unless we have patent protection sufficient to enforce our rights. Without sufficient patent protection, the applicant for a generic version of Zalicus’s product would be required only to conduct a relatively inexpensive study to show that its product is bioequivalent to Zalicus’s product and would not have to repeat the studies that we conducted to demonstrate that the product is safe and effective. In the absence of adequate patent protection in other countries, competitors may similarly be able to obtain regulatory approval of products that duplicate Zalicus’s products.

We may not be able to develop or commercialize our product candidates due to intellectual property rights held by third parties.

If a third party holds a patent to a composition or method of use of an approved drug that is a component of one or more of Zalicus’s combination product candidates or a formulation technology related to Zalicus’s planned formulation of a combination product candidate, we may not be able to develop or commercialize such product candidates without first obtaining a license to such patent, or waiting for the patent to expire. Our business will be harmed if we are unable to use the optimal formulation or methods of use of the component drugs that comprise our product candidates. This may occur because the formulations or methods of use are covered by one or more third-party patents, and a license to such patents is unavailable or is available on terms that are unacceptable.

We may be unable to in-license intellectual property rights or technology necessary to develop and commercialize Zalicus’s products.

Depending on its ultimate formulation and method of use, before we can develop, make, use, or sell a particular product candidate, we may need to obtain a license from one or more third parties who have patent or other intellectual property rights covering components of Zalicus’s product candidate or its method of use. There can be no assurance that such licenses will be available on commercially reasonable terms, or at all. Because Zalicus’s combination product candidates are based on combinations of existing drugs, there may be a significant number of patents covering both the active pharmaceutical ingredients in Zalicus’s combination product candidates and their method of use. If a third party does not offer us a necessary license or offers a license only on terms that are unattractive or unacceptable, we might be unable to develop and commercialize one or more of Zalicus’s combination product candidates.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

In our activities, we rely substantially upon proprietary materials, information, trade secrets and know-how to conduct our research and development activities, and to attract and retain collaborators, licensees and customers. We take steps to protect our proprietary rights and information, including the use of confidentiality and other agreements with our employees and consultants and in our academic and commercial relationships.

However, these steps may be inadequate, agreements may be violated, or there may be no adequate remedy available for a violation of an agreement. Our proprietary information may be inadvertently disclosed or we may lose the protection of our trade secrets. Our competitors may independently develop substantially equivalent proprietary information or may otherwise gain access to our trade secrets, which could adversely affect our ability to compete in the market.

 

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Litigation or third-party claims of intellectual property infringement could require substantial time and money to resolve. Unfavorable outcomes in these proceedings could limit our intellectual property rights and our activities.

We may need to resort to litigation to enforce or defend our intellectual property rights, including any patents issued to us. If a competitor or collaborator files a patent application claiming technology also invented by us, in order to protect our rights, we may have to participate in an expensive and time consuming interference proceeding before the United States Patent and Trademark Office. We cannot guarantee that our product candidates will be free of claims by third parties alleging that we have infringed their intellectual property rights. Third parties may assert that we are employing their proprietary technologies without authorization and they may resort to litigation to attempt to enforce their rights. Third parties may have or obtain patents in the future and claim that the use of our technology or any of our product candidates infringes their patents. We may not be able to develop or commercialize product candidates because of patent protection others have. Our business will be harmed if we cannot obtain a necessary or desirable license, can obtain such a license only on terms we consider to be unattractive or unacceptable, or if we are unable to redesign our product candidates or processes to avoid actual or potential patent or other intellectual property infringement.

Our efforts to obtain, protect and defend our patent and other intellectual property rights, whether we are successful or not, may require us to incur substantial costs, including the diversion of management and technical personnel. An unfavorable ruling in patent or intellectual property litigation could subject us to significant liabilities to third parties, require us to cease developing, manufacturing or selling the affected products or using the affected processes, require us to license the disputed rights from third parties, or result in awards of substantial damages against us. In addition, defending patent or other intellectual property litigation, whether we are successful or not, can be very expensive and may require us to incur substantial costs, including the diversion of management and technical personnel. During the course of any patent litigation, there may be public announcements of the results of hearings, motions, and other interim proceedings or developments in the litigation. If securities analysts or investors regard these announcements as negative, the market price of Zalicus common stock may decline. General proclamations or statements by key public figures may also have a negative impact on the perceived value of our intellectual property.

There can be no assurance that we would prevail in any intellectual property infringement action, will be able to obtain a license to any third-party intellectual property on commercially reasonable terms, successfully develop non-infringing alternatives on a timely basis, or license non-infringing alternatives, if any exist, on commercially reasonable terms. Any significant intellectual property impediment to our ability to develop and commercialize our products could seriously harm our business and prospects.

Risks Related to the Biotechnology and Pharmaceutical Industry

Our industry is highly competitive and our competitors and potential competitors may develop products and technologies that make ours less attractive or obsolete.

The development and commercialization of pharmaceutical products is highly competitive. Many companies, universities, and research organizations developing competing product candidates have greater resources and significantly greater experience in research and development, manufacturing, marketing, sales, distribution, financial and technical regulatory matters than we have. In addition, many competitors have greater name recognition and more extensive collaborative relationships. Our competitors could commence and complete clinical testing of their product candidates, obtain regulatory approvals, and begin commercial-scale manufacturing of their products faster than we are able to for our products. They could develop drug discovery technology or products that would render Zalicus’s drug discovery technologies and our product candidates, and those of our collaborators, obsolete and noncompetitive.

Our competitors already have high throughput screening technologies and if they employ these technologies to discover combination drugs, they may render Zalicus’s technologies or Zalicus’s approach to combination drug discovery and development obsolete or noncompetitive. Even when we successfully identify a new combination product candidate, our ability to commercialize any combination product candidate may be limited to the extent that we are unable to obtain patent protection for such a product candidate or patent or trade secret protection for its newly identified formulation. Our competitors may also be able to use similar component drugs or different combinations of component drugs to develop combination products that are not covered by our patents. Our competitors’ ability to market competitive drugs would adversely impact our ability to generate revenues. In addition, the approved drugs that are combined to produce our combination product candidates are likely to be commercially available at lower prices, so physicians may be able to prescribe the individual drugs already approved and marketed by other companies instead of prescribing our combination products. This practice could adversely impact our ability to generate revenues and would be difficult or impossible for us to prevent by enforcing our combination patents, if obtained.

Zalicus’s drug discovery technologies compete against well-established techniques to discover new drugs. If we are unable to compete effectively against these existing techniques and the companies that support them, then we may not be able to commercialize our product candidates or achieve a competitive position in the market. In addition, any product candidates that we do discover will face competition from existing pharmaceuticals. Our competitors’ success is discovering new drugs and marketing existing drugs which compete with our product candidates would adversely affect our ability to generate revenues.

 

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We may have significant product liability exposure which may harm our business and our reputation.

We face exposure to product liability and other claims if our product candidates, products or processes are alleged to have caused harm. These risks are inherent in the testing, manufacturing, and marketing of human therapeutic products and medical devices. We maintain product liability insurance covering our clinical trials of our product candidates. We may not have sufficient insurance coverage, and we may not be able to obtain sufficient coverage at a reasonable cost, if at all. Our inability to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of any products or product candidates that we develop. If we are sued for any injury caused by our products, product candidates or processes, our liability could exceed our product liability insurance coverage and our total assets. Claims against us, regardless of their merit or potential outcome, may also divert significant management time and resources, generate negative publicity or hurt our ability to obtain physician endorsement of our products or expand our business.

We use and generate materials that may expose us to expensive and time-consuming legal claims.

Our development programs involve the use of hazardous materials, chemicals, and biological materials. We are subject to foreign, federal, state and local laws and regulations governing the use, manufacture, storage, and disposal of materials and waste products. We believe that our safety procedures for handling these materials comply with the standards prescribed by laws and regulations. However, we may incur significant costs to comply with current or future environmental laws and regulations. In addition, we cannot completely eliminate the risk of contamination or injury from hazardous materials. In the event of an accident, an injured party may seek to hold us liable for any damages that result. Any liability could exceed the limits or fall outside the coverage of our insurance, and we may not be able to maintain insurance on acceptable terms, if at all.

Risks Related to an Investment in Our Common Stock

Future sales of common stock by former Neuromed stockholders may cause the price of Zalicus common stock to fall.

After the FDA approved Exalgo, shares issued in connection with the Neuromed Merger were released from an escrow arrangement such that pre-merger Zalicus stockholders only owned approximately 40% of the then outstanding shares of Zalicus common stock. Before this merger, the former Neuromed stockholders held shares of a private company that were difficult to sell. If the former Neuromed stockholders seek to sell substantial amounts of our common stock in the public market to monetize their merger proceeds, particularly if these sales are in a rapid or disorderly manner, or investors perceive that these sales could occur, the market price of our common stock could decrease significantly. These sales might also make it more difficult for us to sell equity securities at an appropriate time and price.

Our common stock has a volatile public trading price.

The market price for our common stock has been volatile, and market prices for securities of companies comparable to us have been highly volatile. In addition, the stock market as a whole and biotechnology and other life science stocks in particular have experienced significant recent price declines and volatility. Like our common stock, these stocks have experienced significant price and volume fluctuations for reasons unrelated to the operating performance of the individual companies. Factors giving rise to this volatility may include:

 

   

disclosure of the sales performance of Exalgo by Covidien, or matters related to the Watson litigation;

 

   

disclosure by our collaboration partners, including Sanofi/Fovea and Novartis regarding our collaborations and the related product candidates, including Prednisporin;

 

   

disclosure of actual or potential preclinical or clinical results with respect to product candidates we are developing;

 

   

regulatory developments in both the United States and abroad;

 

   

developments concerning proprietary rights, including patents and litigation matters;

 

   

disclosure of new collaborations or other strategic transactions;

 

   

public concern about the safety or efficacy of our product candidates or technology, their components, or related technology or new technologies generally;

 

   

public announcements by our competitors or others regarding new products or new product candidates; and

 

   

general market conditions and comments by securities analysts and investors.

Fluctuations in our operating losses could adversely affect the price of our common stock.

Our operating losses may fluctuate significantly on a quarterly basis. Some of the factors that may cause our operating losses to fluctuate on a period-to-period basis include royalties from sales of Exalgo, the status of our clinical and pre-clinical development programs, level of expenses incurred in connection with our clinical and pre-clinical development programs, restructuring costs, implementation or termination of collaboration, licensing, manufacturing or other material agreements with third parties, non-recurring revenue or expenses under any such agreement, and compliance with regulatory requirements. Period-to-period comparisons of our historical and future financial results may not be meaningful, and investors should not rely on them as an indication of future performance. Our fluctuating losses may fail to meet the expectations of securities analysts or investors. Our failure to meet these expectations may cause the price of our common stock to decline.

 

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Anti-takeover provisions in our charter documents and provisions of Delaware law may make an acquisition more difficult and could result in the entrenchment of management.

We are incorporated in Delaware. Anti-takeover provisions of Delaware law and our charter documents may make a change in control or efforts to remove management more difficult. Also, under Delaware law, our board of directors may adopt additional anti-takeover measures. The existence of the following provisions of Delaware law and our sixth amended and restated charter, as amended, or our amended and restated bylaws could limit the price that investors might be willing to pay in the future for shares of our common stock.

Our charter authorizes our board of directors to issue up to 5,000,000 shares of preferred stock and to determine the terms of those shares of stock without any further action by our stockholders. If the board of directors exercises this power to issue preferred stock, it could be more difficult for a third party to acquire a majority of our outstanding voting stock and vote the stock they acquire to remove management or directors.

Our charter also provides staggered terms for the members of our board of directors. Under Section 141 of the Delaware General Corporation Law and our charter, our directors may be removed by stockholders only for cause and only by vote of the holders of 75% of voting shares then outstanding. These provisions may prevent stockholders from replacing the entire board in a single proxy contest, making it more difficult for a third party to acquire control without the consent of our board of directors. These provisions could also delay the removal of management by the board of directors with or without cause. In addition our amended and restated bylaws limit the ability our stockholders to call special meetings of stockholders.

Our equity incentive plans generally permit our board of directors to provide for acceleration of vesting of options granted under these plans in the event of certain transactions that result in a change of control. If our board of directors uses its authority to accelerate vesting of options, this action could make an acquisition more costly, and it could prevent an acquisition from going forward.

Under Section 203 of the Delaware General Corporation Law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction in advance.

 

Item 4. Removed and Reserved

 

Item 6. Exhibits

The Exhibits listed in the Exhibit Index immediately preceding the Exhibits are filed as a part of this Quarterly Report on Form 10-Q.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ZALICUS INC.
By:  

/S/    JUSTIN A. RENZ

 

Justin A. Renz

Senior Vice President and Chief Financial Officer

(Authorized Officer and Principal Financial Officer)

Date: August 4, 2011

 

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EXHIBIT INDEX

 

           Incorporated by Reference to:  

Exhibit

No.

   

Description

  

Form or

  Schedule  

    

Exhibit

No.

    

Filing

    Date with    

SEC

    

  SEC File  

Number

 
  2.1      Agreement and Plan of Merger, dated as of June 30, 2009, by and among the Registrant, PawSox, Inc., Neuromed Pharmaceuticals Inc., Neuromed Pharmaceuticals Ltd. and the Stockholder Representative named therein.      8-K         2.1         07/01/2009         000-51171   
  2.2      Escrow Agreement, dated as of June 30, 2009, by and among the Registrant, Computershare Trust Company, N.A. and the Stockholder Representative.      8-K         2.2         07/01/2009         000-51171   
  3.1      Sixth Amended and Restated Certificate of Incorporation of the Registrant.      S-1/A         3.2         11/04/2005         333-121173   
  3.2      Certificate of Amendment to the Registrant’s Sixth Amended and Restated Certificate of Incorporation.      8-K         3.1         12/21/2009         000-51171   
  3.3      Certificate of Amendment to the Registrant’s Sixth Amended and Restated Certificate of Incorporation.      8-K         3.1         09/09/2010         000-51171   
  3.4      Amended and Restated By-Laws of the Registrant.      8-K         3.2         09/09/2010         000-51171   
  4.1      Specimen Common Stock Certificate of the Registrant.      10-Q         4.1         11/10/2010         000-51171   
  4.2      Warrant issued to General Electric Capital Corporation on September 15, 2004, to purchase up to 8,892 shares of the Registrant’s Common Stock.      S-1         10.7         12/10/2004         333-121173   
  4.3     

Warrant issued to General Electric Capital Corporation on

June 28, 2005, to purchase 471 shares of the Registrant’s Common Stock.

     10-K         4.5         03/20/2006         000-51171   
  4.4      Warrant issued to Silicon Valley Bank on April 25, 2001, to purchase up to 10,019 shares of the Registrant’s Common Stock.      S-1         10.9         12/10/2004         333-121173   
  4.5      Registration Rights Agreement dated as of April 25, 2001, by and between Silicon Valley Bank and the Registrant.      S-1         10.10         12/10/2004         333-121173   
  4.6      Form of Warrant to purchase shares of the Registrant’s Stock, together with a schedule of warrant holders.      S-1         10.11         12/10/2004         333-121173   
  4.7      Registration Rights Agreement, dated as of June 30, 2009, among the Registrant and the investors set forth therein.      8-K         10.4         07/01/2009         000-51171   
  4.8      Form of Warrant issued to Oxford Finance Corporation on December 22, 2010.      8-K         4.1         12/22/2010         000-51171   
  #10.1      2000 Stock Option Plan, as amended.      S-1         10.1         12/10/2004         333-121173   
  #10.2      Amended and Restated 2004 Incentive Plan.      S-8         4.1         04/16/2010         333-166118   
  #10.3      Form Incentive Stock Option Agreement under the 2004 Incentive Plan.      10-K         10.3         03/20/2006         000-51171   
  #10.4      Form Non-Qualified Option Agreement under the 2004 Incentive Plan.      10-K         10.4         03/20/2006         000-51171   
  #10.5     

Nonqualified Deferred Compensation Plan, effective

December 1, 2007.

     S-8         4.1         11/30/2007         333-147745   
  #10.6      Employment Letter Agreement with Jason F. Cole, dated as of January 23, 2006.      10-K         10.15         03/20/2006         000-51171   

 

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           Incorporated by Reference to:  

Exhibit

No.

   

Description

  

Form or

  Schedule  

    

Exhibit

No.

    

Filing

    Date with    

SEC

    

  SEC File  

Number

 
  #10.7      Amendment to Employment Agreement with Jason Cole, dated December 15, 2008.      10-K         10.13         03/16/2009         000-51171   
  #10.8      Letter Agreement Re: Retention Bonus with Jason Cole, dated December 16, 2008.      10-K         10.13         03/16/2009         000-51171   
  #10.9      Amended and Restated Restricted Stock Award Agreement, dated September 5, 2008, by and between Jason Cole and the Registrant.      10-Q         10.25         11/10/2008         000-51171   
  #10.10     

Employment Letter Agreement with Justin Renz, dated as of

August 31, 2006.

     S-4         10.14         08/07/2009         333-161146   
  #10.11      Letter Agreement Re: Retention Bonus with Justin Renz, dated December 12, 2008.      S-4         10.15         08/07/2009         333-161146   
  #10.12      Letter Agreement Re: Severance Arrangements with Justin Renz, dated December 12, 2008.      S-4         10.16         08/07/2009         333-161146   
  #10.13      Separation Agreement, dated as of January 14, 2010 between the Registrant and Robert Forrester.      10-Q         10.13         05/12/2010         000-51171   
  #10.14      Employment Agreement with Mark H. N. Corrigan, dated as of March 8, 2010.      8-K         10.1         03/08/2010         000-51171   
  #10.15      Form Incentive Stock Option Agreement with Mark H. N. Corrigan, dated as of January 15, 2010.      8-K         10.1         01/20/2010         000-51171   
  #10.16      Form Nonstatutory Stock Option Agreement with Mark H. N. Corrigan, dated as of January 15, 2010.      8-K         10.2         01/20/2010         000-51171   
  #10.17      Form Restricted Stock Unit Agreement between the Registrant and Mark Corrigan, dated as of January 15, 2010.      8-K         10.3         01/20/2010         000-51171   
  #10.18      Award Letter from Neuromed Pharmaceuticals to Christopher C. Gallen, accepted and agreed to as of June 19, 2009.      S-4         10.43         08/07/2009         333-161146   
  #10.19      Revised Offer Letter from Neuromed Pharmaceuticals accepted by Christopher C. Gallen, dated May 27, 2004.      S-4         10.45         08/07/2009         333-161146   
  #10.20      Confidentiality and Assignment of Proprietary Developments Agreement between Neuromed Technologies Inc. and Christopher C. Gallen, dated April 2005.      S-4         10.46         08/07/2009         333-161146   
  #10.21      Neuromed Pharmaceuticals Inc. Special Equity Incentive Plan.      S-4/A         10.51         09/16/2009         333-161146   
  #10.22      The Registrant’s Form of Restricted Stock Unit Agreement for awards granted under the Neuromed Pharmaceuticals Inc. Special Equity Incentive Plan (Directors).      S-4/A         10.52         09/16/2009         333-161146   
  #10.23      The Registrant’s Form of Restricted Stock Unit Agreement for awards granted under the Neuromed Pharmaceuticals Inc. Special Equity Incentive Plan (Executives).      S-4/A         10.53         09/16/2009         333-161146   
  #10.24      The Registrant’s Form Stock Option Agreement for performance-based stock options, dated as of February 8, 2011.      10-Q         10.24         05/05/2011         000-51171   
  #10.25      The Registrant’s Form Stock Option Agreement for performance-based stock options, dated as of February 8, 2011.      10-Q         10.25         05/05/2011         000-51171   

 

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           Incorporated by Reference to:  

Exhibit

No.

   

Description

  

Form or

  Schedule  

    

Exhibit

No.

    

Filing

    Date with    

SEC

    

  SEC File  

Number

 
  10.26      Form of Indemnification Agreement for Directors.      8-K         10.1         12/21/2009         000-51171   
  10.27     

Research Project Cooperative Agreement, dated

April 10, 2005, between the National Institutes of Health and the Registrant.

     S-1/A         10.37         08/19/2005         333-121173   
  10.28      Second Amended and Restated Research and License Agreement, dated July 22, 2009, between Fovea Pharmaceuticals SA and the Registrant.      8-K         10.1         07/23/2009         000-51171   
  10.29      Office and Laboratory Lease Agreement, dated as of October 18, 2005, by and between MA-Riverview, 245 First Street, L.L.C. and the Registrant.      S-1/A         10.48         10/24/2005         333-121173   
  10.30      First Amendment to Office and Laboratory Lease Agreement, dated as of March 9, 2006, by and between MA-Riverview, 245 First Street, L.L.C. and the Registrant.      10-K         10.44         03/20/2006         000-51171   
  10.31      Second Amendment to Office and Laboratory Lease Agreement, dated as of August 3, 2009, by and between MA-Riverview, 245 First Street, L.L.C. and the Registrant.      8-K         10.1         08/04/2009         000-51171   
  †10.32      Research Collaboration and License Agreement, dated as of May 1, 2009, by and between the Registrant and Novartis Institutes for BioMedical Research, Inc.      10-Q         10.43         05/11/2009         000-51171   
  10.33      Software License Agreement, dated as of May 1, 2009, by and between the Registrant and Novartis Institutes for BioMedical Research, Inc.      10-Q         10.44         05/11/2009         000-51171   
  10.34      Collaboration Agreement, dated August 11, 2009, by and between PGxHealth, LLC and the Registrant.      8-K         10.1         08/13/2009         000-51171   
  †10.35      Asset Purchase Agreement, dated as of June 11, 2009, between Neuromed Development Inc. and Mallinckrodt Inc. and amendments thereto.      S-4/A         10.35         10/13/2009         333-161146   
  †10.36      Development and Transition Services Agreement, dated as of June 11, 2009, by and among Neuromed Development Inc., Neuromed Pharmaceuticals Ltd. and Mallinckrodt Inc.      S-4/A         10.40         10/13/2009         333-161146   
  10.37      Agreement by and among Mallinckrodt Inc., a Covidien company, ALZA Corporation and Neuromed Pharmaceuticals Ltd. dated February 11, 2010.      10-Q         10.42         05/12/2010         000-51171   
  10.38      Sub-Lease Agreement between Neuromed Pharmaceuticals Inc. and Discovery Parks, Inc.      S-4/A         10.56         10/09/2009         333-161146   
  10.39      Sub-Lease Renewal and Amendment Agreement between Neuromed Pharmaceuticals Ltd. and Discovery Parks, Inc., dated as of November 2, 2009.      10-K         10.54         03/26/2010         000-51171   
  10.40      Sub-Lease Renewal Agreement between Zalicus Pharmaceuticals Ltd. and Discovery Parks, Inc., dated as of September 16, 2010.      10-Q         10.45         11/10/2010         000-51171   
  10.41      Lease Agreement between Neuromed Pharmaceuticals Inc. and Six Tower Bridge Associates.      S-4/A         10.57         10/09/2009         333-161146   

 

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Table of Contents
           Incorporated by Reference to:  

Exhibit

No.

   

Description

  

Form or

  Schedule  

    

Exhibit

No.

    

Filing

    Date with    

SEC

    

  SEC File  

Number

 
  10.42      Second Amendment to Lease Agreement between Neuromed Pharmaceuticals Inc. and Six Tower Bridge Associates, dated as of November 17, 2009.      10-K         10.56         03/26/2010         000-51171   
  10.43      Loan and Security Agreement dated as of December 22, 2010, by and among the Registrant and Oxford Finance Corporation.      8-K         10.1         12/22/2010         000-51171   
  10.44     

Equity Distribution Agreement dated as of

February 9, 2011 between Zalicus Inc. and Wedbush Securities Inc.

     8-K         10.1         02/09/2011         000-51171   
  21.1        List of subsidiaries.      10-K         21.1         03/10/2011         000-51171   
  *31.1        Certification of Chief Executive Officer pursuant to Exchange Act rules 13a-14 or 15d-14.            
  *31.2        Certification of Chief Financial Officer pursuant to Exchange Act rules 13a-14 or 15d-14.            
  *32.1        Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Exchange Act rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350.            
  **101.INS      XBRL Instance Document            
  **101.SCH      XBRL Taxonomy Extension Schema Document            
  **101.CAL      XBRL Taxonomy Extension Calculation Document            
  **101.LAB      XBRL Taxonomy Extension Labels Linkbase Document            
  **101.PRE      XBRL Taxonomy Extension Presentation Link Document            

 

* Filed herewith.
Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Securities and Exchange Commission.
# Management contract or compensatory plan or arrangement.
** Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Pursuant to Rule 406T of Regulation S-T, the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is otherwise not subject to liability under these sections.

 

41