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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 September 30, 2012.

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 November 6, 2012: 126,989,856 shares

 

 

 


Table of Contents

ZALICUS INC.

QUARTERLY REPORT

ON FORM 10-Q

INDEX

 

PART I FINANCIAL INFORMATION

  
  

Item 1.

  

Condensed Consolidated Financial Statements (Unaudited)

     3   
  

Item 2.

  

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

     13   
  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     19   
  

Item 4.

  

Controls and Procedures

     19   

PART II OTHER INFORMATION

  
  

Item 1A.

  

Risk Factors

     20   
  

Item 4.

  

Mine Safety Disclosures

     33   
  

Item 6.

  

Exhibits

     33   

SIGNATURES

     34   


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 pre-clinical and product candidate research, development and commercialization plans and timelines and related regulatory matters; any statements regarding safety and efficacy of products or product candidates; any statements regarding our plans for the outlicensing of our clinical or pre-clinical product candidates and our seeking of collaborations or other strategic transactions; 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 our annual report on Form 10-K in the section entitled “Risk Factors” and elsewhere and that are otherwise described from time to time 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. Condensed Consolidated 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.

Condensed Consolidated Balance Sheets

(in thousands except per share data)

(Unaudited)

 

     September 30,
2012
    December 31,
2011
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 8,971      $ 2,750   

Restricted cash

     —          50   

Short-term investments

     34,265        45,124   

Accounts receivable

     3,098        1,886   

Prepaid expenses and other current assets

     1,039        1,397   
  

 

 

   

 

 

 

Total current assets

     47,373        51,207   

Property and equipment, net

     3,869        5,258   

Intangible asset, net

     18,627        21,546   

Restricted cash and other assets

     1,816        1,872   
  

 

 

   

 

 

 

Total assets

   $ 71,685      $ 79,883   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 2,191      $ 1,743   

Accrued expenses and other current liabilities

     6,090        6,133   

Accrued restructuring

     189        —     

Deferred revenue

     4,928        3,349   

Current portion of term loan payable

     6,137        4,035   

Current portion of lease incentive obligation

     284        284   
  

 

 

   

 

 

 

Total current liabilities

     19,819        15,544   

Term loan payable, net of current portion

     10,426        15,099   

Deferred revenue, net of current portion

     1,035        3,000   

Deferred rent, net of current portion

     494        605   

Lease incentive obligation, net of current portion

     945        1,159   

Other long-term liabilities

     28        563   

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; 126,932 and 99,239 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively

     127        99   

Additional paid-in capital

     371,537        340,518   

Accumulated other comprehensive income (loss)

     10        (8

Accumulated deficit

     (332,736     (296,696
  

 

 

   

 

 

 

Stockholders’ equity

     38,938        43,913   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 71,685      $ 79,883   
  

 

 

   

 

 

 

 

4


Table of Contents

Zalicus Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands, except share and per share amounts)

(Unaudited)

 

     Three months ended September 30,     Nine months ended September 30,  
     2012     2011     2012     2011  

Revenue:

        

Collaborations and other

   $ 3,381      $ 2,300      $ 8,423      $ 5,042   

Government contracts and grants

     137        128        339        505   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     3,518        2,428        8,762        5,547   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     12,050        8,871        32,493        25,678   

General and administrative

     2,201        2,563        7,172        8,030   

Amortization of intangible

     974        1,285        2,920        3,855   

Restructuring

     (17     —          1,112        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     15,208        12,719        43,697        37,563   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (11,690     (10,291     (34,935     (32,016

Interest income

     35        33        120        100   

Interest expense

     (532     (358     (1,686     (579

Other income

     13        148        20        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before benefit for income taxes

     (12,174     (10,468     (36,481     (32,493

Income tax benefit

     —          1,217        441        1,217   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (12,174   $ (9,251   $ (36,040   $ (31,276
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share—basic and diluted

   $ (0.10   $ (0.09   $ (0.32   $ (0.32
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     124,562,900        99,214,522        114,069,137        96,712,208   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (12,171   $ (9,286   $ (36,022   $ (31,286
  

 

 

   

 

 

   

 

 

   

 

 

 

 

5


Table of Contents

Zalicus Inc.

Condensed Consolidated Statements of Cash Flow

(in thousands)

(Unaudited)

 

     Nine Months Ended September 30.  
     2012     2011  

Operating activities

    

Net loss

   $ (36,040   $ (31,276

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     4,060        5,431   

Noncash restructuring charge

     45        —     

Noncash interest expense

     207        99   

Noncash rent expense

     (214     (213

Stock-based compensation expense

     1,458        1,690   

(Gain) loss on sale of assets

     (8     74   

Foreign exchange loss (gain)

     3        (57

Decrease in deferred rent

     (111     (101

Changes in assets and liabilities:

    

Increase in accounts receivable

     (1,212     (440

Decrease (increase) in prepaid expenses and other assets

     376        (936

Increase (decrease) in accounts payable

     448        (161

Increase in accrued restructuring

     186        —     

Decrease in accrued expenses and other long-term liabilities

     (208     (358

(Decrease) increase in deferred revenue

     (386     373   
  

 

 

   

 

 

 

Net cash used in operating activities

     (31,396     (25,875

Investing activities

    

Purchases of property and equipment

     (42     (221

Proceeds from sale of assets

     284        17   

Purchases of short-term investments

     (95,457     (135,462

Sales and maturities of short-term investments

     106,316        132,323   

Decrease in restricted cash

     50        —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     11,151        (3,343

Financing activities

    

Repayment of term loan

     (2,771     (143

Net proceeds from term loan

     —          8,491   

Proceeds from issuance of common stock, net of issuance costs

     29,111        19,190   

Proceeds from exercise of stock options

     125        1,122   
  

 

 

   

 

 

 

Net cash provided by financing activities

     26,465        28,660   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     1        (18
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     6,221        (576

Cash and cash equivalents at beginning of the period

     2,750        2,820   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 8,971      $ 2,244   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Cash paid for interest

   $ 1,422      $ 480   
  

 

 

   

 

 

 

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 share and 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 nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2012. 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, 2011 as filed with the Securities and Exchange Commission (“SEC”) on March 9, 2012.

2. Significant Accounting Policies

Newly Adopted Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued revised guidance on the presentation of comprehensive income and its components in the financial statements. As a result of the guidance, companies are now required to present net income and other comprehensive income either in a single continuous statement or in two separate, but consecutive statements. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The standard does not, however, change the items that must be reported in other comprehensive income or the determination of net income. The new guidance is to be applied retrospectively. The Company adopted the accounting guidance on January 1, 2012. The adoption only impacted the presentation of the Company’s financial statements.

In May 2011, the FASB issued revised guidance on fair value measurement and disclosure requirements. The amendments in this update will ensure that fair value has the same meaning in U.S. GAAP and in IFRS and that their respective fair value measurement and disclosure requirements are the same. This update is to be applied prospectively. The Company adopted the accounting guidance on January 1, 2012. The adoption did not have a material impact on the Company’s results of operations, financial position or cash flows.

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 September 30, 2012:

 

     Fair Value Measurement as of September 30, 2012     

 

 
     Level 1      Level 2      Level 3      Total  

Assets:

           

Short-term investments

   $ 8,136       $ 26,129       $ —         $ 34,265   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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. The fair value of the Company’s term loan payable is determined using current applicable rates for similar instruments as of the balance sheet date. The carrying value of the Company’s term loan payable approximates fair value because the Company’s interest rate yield is near current market rate yields. The Company’s term loan payable is a Level 3 liability within the fair value hierarchy.

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 and also investments in money market funds. 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 September 30, 2012 and December 31, 2011 consist of the following:

 

     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

September 30, 2012

          

Corporate debt securities

   $ 26,119       $ 14       $ (4   $ 26,129   

Government agency securities

     —           —           —          —     

Treasury money market funds

     8,136         —           —          8,136   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 34,255       $ 14       $ (4   $ 34,265   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011

          

Corporate debt securities

   $ 18,462       $ 7       $ (15   $ 18,454   

Government agency securities

     11,551         —           —          11,551   

Treasury money market funds

     15,119         —           —          15,119   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 45,132       $ 7       $ (15   $ 45,124   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and estimated fair value of investments in debt securities, which excludes money market funds, at September 30, 2012 and December 31, 2011, by contractual maturity, were as follows:

 

     September 30, 2012      December 31, 2011  
   Cost      Estimated
Fair Value
     Cost      Estimated
Fair Value
 

Maturing in one year or less

   $ 26,119       $ 26,129       $ 26,225       $ 26,218   
  

 

 

    

 

 

    

 

 

    

 

 

 

Maturing in more than one year

   $ —         $ —         $ 3,788       $ 3,787   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

5. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

 

     September 30,
2012
     December 31,
2011
 

Prepaid clinical expense

   $ 501       $ 982   

Prepaid maintenance expense

     146         39   

Prepaid insurance expense

     46         81   

Prepaid other expense

     147         113   

Assets held for sale

     5         —     

Other current assets

     194         182   
  

 

 

    

 

 

 
   $ 1,039       $ 1,397   
  

 

 

    

 

 

 

 

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Table of Contents

6. Research and Development Agreements

Novartis Institutes for Biomedical Research, Inc.

On May 1, 2009, the Company entered into a Research Collaboration and License Agreement (the “Collaboration Agreement”) with the Novartis Institutes for Biomedical Research, Inc. (“Novartis”) focused on the discovery of novel anti-cancer combinations using the Company’s combination high throughput screening, or cHTS, technology platform. The research program under the Collaboration Agreement had an initial two-year term that could be extended by Novartis for three additional one-year periods, and in January 2011, Novartis extended the research program for an additional year, into May 2012.

On April 24, 2012, Novartis and the Company entered into an Amendment to the Collaboration Agreement (the “Amendment”), to extend the funded research program pursuant to the Collaboration Agreement for an additional year until May 1, 2013 and to modify the basis for up to $3,000 in funded research payments under the Collaboration Agreement from the funding of the Company full-time equivalents to payments based on the Company’s combination screening deliverables. The Company recorded $1,125 and $2,875 of revenue related to the Collaboration Agreement, including the Amendment, for the three and nine months ended September 30, 2012, respectively.

7. Net Loss Per Share

Basic and diluted net loss per common share is calculated by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. The Company’s potentially dilutive shares, which include outstanding stock options, unvested restricted stock or restricted stock units, warrants and stock issuance commitments, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

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 September 30, 2012 and 2011, as they would be anti-dilutive.

 

     Nine Months Ended
September 30,
 
     2012      2011  

Options outstanding

     8,320,792         7,681,307   

Unvested restricted stock or restricted stock units

     375,000         568,750   

Warrants outstanding

     411,599         187,364   

Outstanding stock issuance commitments (See Note 8)

     145,833         —     

8. Stock-Based Compensation

The Company recognized, for the three and nine months ended September 30, 2012, stock-based compensation expense of approximately $489 and $1,458, respectively, and for the three and nine months ended September 30, 2011, stock-based compensation expense of approximately $548 and $1,690, respectively, in connection with its stock-based payment awards.

 

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Stock Plans

A summary of the status of the Company’s stock option plans at September 30, 2012 and changes during the nine months then ended is presented in the table and narrative below:

 

     Options     Weighted-
Average
Exercise Price
     Weighted-
Average
Remaining
Contractual
Term (In Years)
     Aggregate
Intrinsic Value
 

Outstanding at December 31, 2011

     7,573,388      $ 1.86         

Granted

     3,162,750        1.16         

Exercised

     (150,539     0.83         

Cancelled

     (2,264,807     2.06         
  

 

 

   

 

 

       

Outstanding at September 30, 2012

     8,320,792      $ 1.56         7.72       $ 62   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested or expected to vest at September 30, 2012

     7,778,194      $ 1.50         7.67       $ 62   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at September 30, 2012

     3,423,004      $ 1.74         6.46       $ 54   
  

 

 

   

 

 

    

 

 

    

 

 

 

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 nine months ended September 30, 2012 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 September 30, 2012. As of September 30, 2012, there was $3,573 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 2.4 years.

During the three and nine months ended September 30, 2012 and 2011, the assumptions used in the Black-Scholes pricing model for new grants were as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012     2011     2012     2011  

Volatility factor

     105.37     101.28     102.39     102.93

Risk-free interest rate

     0.83     0.96     1.30     2.21

Dividend yield

     —          —          —          —     

Expected term (in years)

     6.00        5.58        6.00        5.58   

Restricted Stock

A summary of the status of non-vested restricted stock units (RSUs) as of September 30, 2012 and changes during the nine months ended September 30, 2012 is as follows:

 

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

Nonvested at December 31, 2011

     562,500      $ 0.95         

Granted

     —          —           

Vested

     (187,500     0.95         

Cancelled

     —          —           
  

 

 

   

 

 

       

Nonvested at September 30, 2012

     375,000      $ 0.95         1.29       $ 278   
  

 

 

   

 

 

    

 

 

    

 

 

 

As of September 30, 2012, there was $228 of total unrecognized stock-based compensation expense related to non-vested RSUs granted under the Company’s Amended and Restated 2004 Incentive Plan (the “2004 Plan”). The expense is expected to be recognized over a weighted-average period of 1.29 years.

 

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On February 22, 2012, the Company granted 350,000 shares of common stock to a former executive as part of a separation agreement. The shares were granted from the 2004 Plan. The shares are being issued over the period from September 4, 2012 through February 1, 2013. The grant date fair value of the shares was $354 and was recorded as a settlement of a previously accrued liability. As of September 30, 2012, 204,167 of these shares have been issued.

9. Income Taxes

As of September 30, 2012, the Company has no liability for unrecognized tax benefits and interest and penalties. During the nine months ended September 30, 2012, the Company reversed $441 of unrecognized tax benefits and $71 of related accrued interest and penalties due to the expiration of the statute of limitations for certain tax years.

The following is a reconciliation of the Company’s gross uncertain tax positions from December 31, 2011 to September 30, 2012:

 

December 31, 2011

   $ 431   

Decrease related to positions taken in prior years

     —     

Expiration of statute of limitations

     (441

Foreign exchange revaluation

     10   
  

 

 

 

September 30, 2012

   $ —     
  

 

 

 

10. Equity Offering

In the first quarter of 2012, the Company sold an aggregate of 14,057,975 shares of common stock for net proceeds of approximately $14,484 under an equity distribution agreement with Wedbush Securities Inc. (“Wedbush”), which was entered into and terminated in the first quarter of 2012.

On June 19, 2012, the Company entered into an equity distribution agreement with Wedbush, under which the Company sold an aggregate of 13,091,957 shares of common stock for net proceeds of approximately $14,625. The Company terminated the equity distribution agreement in August 2012.

11. Restructuring

On February 8, 2012, the Company committed to closing its discovery research operations in Vancouver, British Columbia, Canada. The Company closed its Vancouver discovery research operations to conserve capital while still advancing the Company’s preclinical ion channel modulator program. The closing of the Vancouver operations resulted in a workforce reduction of 16 employees. The Company completed the restructuring during the third quarter of 2012.

As a result of the closing of its Vancouver operations, the Company recorded a restructuring benefit of $17 in the three months ended September 30, 2012 and a net restructuring charge of $1,112 in the nine months ended September 30, 2012. The restructuring charges were primarily associated with cash payments for severance and other personnel-related expenses. Severance payments will continue into the first quarter of 2013. Costs associated with the restructuring are included in operating expenses in the statement of operations for the nine months ended September 30, 2012 and in current liabilities on the balance sheet at September 30, 2012.

The following table summarizes the activity of the accrued restructuring expense as of September 30, 2012 related to the closing of the Company’s Vancouver research operations:

 

     Balance at
December 31, 2011
     Charges      Payments     Other     Balance at
September  30,

2012
 

Termination benefits

   $ —         $ 1,101       $ (912   $ —        $ 189   

Facilities

     —           11           (11     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ —         $ 1,112       $ (912   $ (11   $ 189   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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12. Subsequent Events

Nasdaq Notice

On October 22, 2012, the Company received a deficiency notice from NASDAQ notifying the Company that it was not in compliance with Nasdaq’s Marketplace Rule 5450(a)(1) (the “Rule”) because the bid price for its common stock, over the last 30 consecutive business days, has closed below the minimum $1.00 per share requirement for continued listing. The notification has no immediate effect on the listing of our common stock.

In accordance with Marketplace Rule 5810(c)(3)(A), we have a period of 180 calendar days, or until April 22, 2013, to regain compliance with the Rule. If at any time before April 22, 2013, the bid price of the Company’s common stock closes at or above $1.00 per share for a minimum of 10 consecutive business days, NASDAQ will provide written notification that we have achieved compliance with the Rule. If compliance with the Rule cannot be demonstrated by April 22, 2013, the Company’s common stock will be subject to delisting from NASDAQ.

We will continue to monitor the bid price for our common stock and consider various options available to us if our common stock does not trade at a level that is likely to regain compliance.

 

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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. We have a portfolio of proprietary clinical-stage product candidates targeting pain and have entered into multiple revenue-generating collaborations with large pharmaceutical companies relating to other products, product candidates and drug discovery technologies. We also apply our expertise in the discovery and development of selective ion channel modulators and our combination high throughput screening technology, or cHTS, to discover new product candidates for our portfolio or for our collaborators in the areas of pain, inflammation, oncology and infectious disease.

On December 21, 2009, we completed a merger, which we refer to as the Neuromed Merger, with Neuromed Pharmaceuticals Inc., or Neuromed, pursuant to which Neuromed Pharmaceuticals Ltd. became a wholly-owned subsidiary of Zalicus. On September 8, 2010, we changed our name from CombinatoRx, Incorporated to Zalicus Inc. We also changed the name of our subsidiaries, including Neuromed Pharmaceuticals Ltd., which is now named Zalicus Pharmaceuticals Ltd., and which we refer to herein as Zalicus Canada.

Our most advanced product candidate is Z160, a novel, first in class, oral N-type calcium channel blocker we are seeking to develop for the treatment of chronic pain. We have successfully completed Phase 1 clinical trials evaluating the pharmacokinetics and safety profiles of several new formulations of Z160, and the new formulations have demonstrated substantial bioavailability improvements. Based on the data from these studies, Zalicus has selected the most promising formulation for clinical use and is advancing Z160 into two Phase 2a clinical trials for the treatment of neuropathic pain, including post-herpetic neuralgia, or PHN, a painful neuropathic condition resulting from an outbreak of the herpes zoster virus, otherwise known as shingles, and lumbosacral radiculopathy, or LSR, a common neuropathic back pain condition resulting from the compression or irritation of the nerves exiting the lumbar region of the spine. The Phase 2a trial in LSR began enrolling patients in September of 2012, and the Phase 2a trial in PHN is targeted to start by the end of 2012.

Our next product candidate is Z944, a novel oral T-type calcium channel blocker we are seeking to develop for the treatment of pain indications. We have successfully completed a Phase 1 single ascending dose clinical study of Z944, and Z944 has advanced into a Phase 1 multiple ascending dose study. If Z944 has an acceptable safety profile based on these Phase 1 clinical trials, we would also seek to advance Z944 into Phase 2 clinical development.

Until September of 2012, we had also been advancing the development of Synavive, a product candidate 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 from the SYNERGY trial were announced in September 2012, and while Synavive achieved a statistically significant improvement in signs and symptoms of rheumatoid arthritis, as measured by DAS28-CRP, compared to placebo, the primary end point of the trial, Synavive did not demonstrate a meaningful clinical benefit measured by DAS28-CRP, compared to 2.7 mg of prednisolone or 5 mg of prednisone, key secondary endpoints of the SYNERGY trial. Based on the data from the SYNERGY trial, we have terminated further development of Synavive.

We have also been performing discovery research and preclinical development activities on our proprietary selective ion channel modulators targeting the N or T-type calcium channel as well as select sodium channels. This preclinical research and development on our ion channel product candidates is now being conducted as part of a research collaboration with Hydra Biosciences, Inc., or Hydra, a recognized leader in novel ion channel discovery and development.

We have also been using our cHTS platform to perform our obligations with our collaboration partners, including Novartis Institutes of Biomedical Research, Inc., or Novartis, and other pharmaceutical companies who have adopted cHTS as an important addition to their oncology discovery efforts.

The United States commercial rights to Exalgo were acquired by Mallinckrodt, Inc., a subsidiary of Covidien, plc, or Covidien, from Neuromed Pharmaceuticals Ltd. in June 2009 pursuant to an asset purchase agreement. 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 asset purchase agreement,

 

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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 in March of 2010, and receive tiered royalties on net sales of Exalgo by Covidien following its commercial launch in April 2010. We have recognized $7.9 million in revenue related to these royalties through September 30, 2012. Following the settlement of the Exalgo litigation between Covidien and Watson, that became effective in January 2012, Watson can introduce a generic version of the 8, 12 and 16 mg dosage strengths of Exalgo starting on November 15, 2013. Under our agreement with Covidien, our royalties on net sales of these approved dosage strengths would be reduced by 50% upon the introduction of generic versions of Exalgo. In August 2012, the FDA approved the 32 mg dosage strength of Exalgo, which is not subject to Covidien’s settlement with Watson and on which our royalties for net sales of Exalgo at such dosage will not be reduced as a result of Covidien’s settlement with Watson.

As of September 30, 2012, we had an accumulated deficit of $332.7 million. We had net losses of $36.0 million and $31.3 million for the nine months ended September 30, 2012 and 2011, 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 nine months ended September 30, 2012 and 2011, none of our revenues were generated from customers located outside the United States. As of September 30, 2012, all of our long-lived assets were located in the United States.

Critical Accounting Policies

We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as “critical” because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used, which would have resulted in different financial results.

The critical accounting policies we identified in our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2011 related to business combinations, intangible assets, revenue recognition, stock-based compensation, accrued expenses and income taxes. There were no changes to our critical accounting policies in the nine months ended September 30, 2012. 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 9, 2012.

Results of Operations

Comparison of the Three Months ended September 30, 2012 and September 30, 2011

Revenue. For the three months ended September 30, 2012, we recorded an aggregate of $3.5 million of revenue from royalties paid by Covidien on net sales of Exalgo and from our research and development collaborations with Novartis and other companies as well as from grants from governmental agencies. Royalty revenue from Covidien on net sales of Exalgo during the three months ended September 30, 2012 was $1.4 million. For the three months ended September 30, 2011, we recorded an aggregate of $2.4 million of revenue from royalties from Covidien on net sales of Exalgo and from our research and development collaborations with Novartis and Amgen, Inc., or Amgen, and other cHTS research collaborations and from grants from governmental agencies. The increase in revenue in the three months ended September 30, 2012 was primarily due to a $0.6 million increase in Exalgo royalties from Covidien and a $0.2 million increase in the recognition of collaboration revenue from Novartis.

Research and Development Expense. Research and development expense for the three months ended September 30, 2012 was $12.1 million compared to $8.9 million for the three months ended September 30, 2011. The $3.2 million increase was primarily due to a $1.8 million increase in expenses related to the clinical development of Z160, a $1.1 million increase in expenses related to Synavive and a $0.4 million increase in expenses related to Z944. The $1.8 million increase in expenses related to Z160 is due to the continuation of the multiple Phase 1 clinical trials and the initiation of Phase 2 clinical development. The $1.1 million increase in expense related to Synavive is due to our conducting the Phase 2b Synergy trial which we completed in the third quarter of 2012. The $0.4 million increase in expenses related to Z944 is due to our conducting a Phase 1 clinical trial which commenced in December 2011. During the three months ended September 30, 2012, we terminated all development activities related to Synavive. Accordingly, we expect research and development expenses to decrease for the three months ending December 31, 2012 and for the year ending December 31, 2013.

The table below summarizes our allocation of research and development expenses to our internal clinical programs, including Z160 and Z944 and our discontinued clinical program Synavive, our partnered product Exalgo, our preclinical programs and our drug discovery platforms for the three months ended September 30, 2012 and 2011. Our internal project

 

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costing methodology does not allocate all of the personnel and other indirect costs from all of our research and development departments to specific clinical and preclinical programs, and such unallocated costs are further summarized in the table below. Other clinical program costs consist primarily of the personnel and other expenses for our clinical operations department, the majority of which supported the development of our clinical product candidates, Z160 and Z944, and Synavive. Preclinical program costs consist of the personnel and other expenses allocated to our internally funded preclinical programs. cHTS collaboration discovery costs consist of the personnel and other expenses allocated to all of our cHTS research collaborations. Ion channel discovery costs consist of the personnel and other expenses allocated to our ion channel drug discovery programs, including expenses incurred under our collaboration agreement with Hydra, other than the preclinical development costs associated with preclinical product candidates.

Unallocated clinical and preclinical program costs consist primarily of the personnel and other expenses for our formulations, pharmacology and discovery departments, the majority of which supported the development of our clinical product candidates, including Z160 and Z944, as well as our preclinical product candidates, from our ion channel program. Infrastructure and support costs consist of facility costs, depreciation and amortization and costs for research and development support personnel such as our informatics and facilities departments. Following the termination of further development of Synavive, we incurred severance costs estimated at $0.8 million in connection with the termination of personnel in our clinical and commercial development departments.

Due to the uncertainty in drug development and the stage of development of our pre-clinical and clinical programs, we are unable to predict the nature, specific timing and estimated costs to complete the development of our product candidates or the timing of when material cash inflows may commence.

 

     Three Months Ended
September 30,
 
   2012      2011  
   (in thousands)  

Synavive

   $ 4,128       $ 3,063   

Z160

     2,831         1,020   

Z944

     1,019         589   

Exalgo

     —           50   

Other clinical program costs

     —           256   
  

 

 

    

 

 

 

Total clinical program costs

     7,978         4,978   
  

 

 

    

 

 

 

Preclinical program costs

     16         111   

cHTS collaboration discovery costs

     1,036         1,231   

Ion channel discovery costs

     835         1,013   

Unallocated clinical and preclinical program costs

     459         267   

Infrastructure and support costs

     1,608         1,105   

Noncash employee and non-employee stock-based compensation expense

     118         166   
  

 

 

    

 

 

 

Total research and development expense

   $ 12,050       $ 8,871   
  

 

 

    

 

 

 

General and Administrative. General and administrative expense for the three months ended September 30, 2012 was $2.2 million compared to $2.6 million for the three months ended September 30, 2011. The $0.4 million decrease is primarily due to legal and other costs incurred in the three months ended September 30, 2011 relating to strategic transactions that were evaluated and not executed. We expect our general and administrative expenses for the remainder of the year ending December 31, 2012 to be consistent with such expenses during the fourth quarter of 2011.

Amortization of Intangible Asset. For the three months ended September 30, 2012 and 2011, we recorded $1.0 million and $1.3 million, respectively, of amortization expense related to the Exalgo intangible asset acquired in the Neuromed Merger. 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 period during which we expect to benefit from the cash flows. We expect our amortization expense for the three months ending December 31, 2012 to be approximately $1.0 million.

 

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Table of Contents

Interest Income. Interest income for each of the three months ended September 30, 2012 and 2011 was less than $0.1 million.

Interest Expense. Interest expense for the three months ended September 30, 2012 and 2011 was $0.5 million and $0.4 million, respectively. This interest expense relates to the interest on our outstanding term loans. We expect our interest expense for the remainder of the year ending December 31, 2012 to be approximately $0.5 million.

Comparison of the Nine Months ended September 30, 2012 and September 30, 2011

Revenue. For the nine months ended September 30, 2012, we recorded an aggregate of $8.8 million of revenue from royalties paid by Covidien on net sales of Exalgo and from our research and development collaborations with Novartis, Amgen, and other companies as well as from grants from governmental agencies. Royalty revenue from Covidien on net sales of Exalgo during the nine months ended September 30, 2012 was $3.8 million. For the nine months ended September 30, 2011, we recorded an aggregate of $5.5 million of revenue from royalties from Covidien on net sales of Exalgo and from our research and development collaborations with Novartis, Amgen and other cHTS research collaborations and from grants from governmental agencies. The increase in revenue in the nine months ended September 30, 2012 was primarily due to a $2.1 million increase in Exalgo royalties from Covidien and a $1.0 million increase in the recognition of collaboration revenue from Novartis.

Research and Development Expense. Research and development expense for the nine months ended September 30, 2012 was $32.5 million compared to $25.7 million for the nine months ended September 30, 2011. The $6.8 million increase was primarily due to a $1.6 million increase in expenses related to the clinical development of Synavive, a $5.4 million increase in expenses related to the clinical development of Z160, a $1.3 million increase in expenses related to the development of Z944 and a $0.2 million increase in expenses related to cHTS collaboration discovery costs, offset by a $0.9 million decrease in expenses related to ion channel discovery costs and a $0.8 million decrease in expenses related to Exalgo, other clinical program costs, preclinical program costs and other research and development programs. The $1.6 million increase in expense related to Synavive is due to the conduct of the Phase 2b SYNERGY trial which completed in the third quarter of 2012. The $5.4 million increase in expenses related to Z160 is due to the continuation of multiple Phase 1 clinical trials and the initiation of Phase 2 clinical development. The $1.3 million increase in expenses related to Z944 is due to the initiation and conduct of the Phase 1 clinical trials which commenced in December 2011. During the nine months ended September 30, 2012, we terminated all development activities related to Synavive. Accordingly, we expect research and development expenses to decrease for the three months ending December 31, 2012 and for the year ending December 31, 2013.

The table below summarizes our allocation of research and development expenses to our internal clinical programs, including Z160 and Z944 and our discontinued clinical program Synavive, our partnered product Exalgo, our preclinical programs and our drug discovery platforms for the nine months ended September 30, 2012 and 2011. Our internal project costing methodology does not allocate all of the personnel and other indirect costs from all of our research and development departments to specific clinical and preclinical programs, and such unallocated costs are further summarized in the table below. Other clinical program costs consist primarily of the personnel and other expenses for our clinical operations department, the majority of which supported the development of our clinical product candidates, Z160 and Z944, and Synavive. Preclinical program costs consist of the personnel and other expenses allocated to our internally funded preclinical programs. cHTS collaboration discovery costs consist of the personnel and other expenses allocated to all of our cHTS research collaborations. Ion channel discovery costs consist of the personnel and other expenses allocated to our ion channel drug discovery programs, including expenses incurred under our collaboration agreement with Hydra, other than the preclinical development costs associated with preclinical product candidates.

Unallocated clinical and preclinical program costs consist primarily of the personnel and other expenses for our formulations, pharmacology and discovery departments, the majority of which supported the development of our clinical product candidates, including Z160 and Z944, as well as our preclinical product candidates, from our ion channel program. Infrastructure and support costs consist of facility costs, depreciation and amortization and costs for research and development support personnel such as our informatics and facilities departments. Following the termination of further development of Synavive, we incurred severance costs estimated at $0.8 million in connection with the termination of personnel in our clinical and commercial development departments.

 

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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.

 

     Nine Months Ended
September 30,
 
   2012      2011  
   (in thousands)  

Synavive

   $ 10,273       $ 8,693   

Z160

     7,419         1,979   

Z944

     3,389         2,115   

Exalgo

     51         193   

Other clinical program costs

     348         656   
  

 

 

    

 

 

 

Total clinical program costs

     21,480         13,636   
  

 

 

    

 

 

 

Preclinical program costs

     109         390   

cHTS collaboration discovery costs

     3,424         3,201   

Ion channel discovery costs

     2,475         3,414   

Unallocated clinical and preclinical program costs

     1,119         1,134   

Infrastructure and support costs

     3,556         3,315   

Noncash employee and non-employee stock-based compensation expense

     330         588   
  

 

 

    

 

 

 

Total research and development expense

   $ 32,493       $ 25,678   
  

 

 

    

 

 

 

General and Administrative. General and administrative expense for the nine months ended September 30, 2012 was $7.2 million compared to $8.0 million for the nine months ended September 30, 2011. The $0.8 million decrease is primarily due to legal and other costs incurred in the nine months ended September 30, 2011 relating to strategic transactions that were evaluated and not executed. We expect our general and administrative expenses for the remainder of the year ending December 31, 2012 to be consistent with such expenses in the fourth quarter of 2011.

Amortization of Intangible Asset. For the nine months ended September 30, 2012 and 2011, we recorded $2.9 million and $3.9 million, respectively, of amortization expense related to the Exalgo intangible asset acquired in the Neuromed Merger. 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 period during which we expect to benefit from the cash flows. We expect our amortization expense for the year ending December 31, 2012 to be approximately $3.9 million.

Restructuring. For the nine months ended September 30, 2012, we recorded a restructuring charge of $1.1 million related to the closing of our Vancouver operations in the first quarter of 2012. The charge primarily represents cash payments for severance and other personnel related expenses.

Interest Income. Interest income for each of the nine months ended September 30, 2012 and 2011 was $0.1 million.

Interest Expense. Interest expense for the nine months ended September 30, 2012 and 2011 was $1.7 million and $0.6 million, respectively. This interest expense relates to the interest on our outstanding term loans. We expect our interest expense for the year ending December 31, 2012 to be approximately $2.2 million.

Benefit for Income Taxes. For the nine months ended September 30, 2012 and 2011, we recognized tax benefits of $0.4 million and $1.2 million, respectively, related to the reversal of unrecognized tax benefits for uncertain tax positions 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

 

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litigation. As of September 30, 2012, we had cash, cash equivalents and short-term investments of approximately $45.0 million, which includes $1.8 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 September 30, 2012.

We expect our resources to be sufficient to fund our planned operations into the first half of 2014. However, we may require significant additional funds earlier than we currently expect if our research and development expenses exceed our current expectations or 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.

On October 22, 2012, we received a deficiency notice from NASDAQ advising us that the closing bid price of our stock had been less than $1.00 per share for more than 30 consecutive business days. Under the NASDAQ rules, we have 180 days, or until April 22, 2013, to regain compliance by maintaining a minimum closing bid price of at least $1.00 for at least ten consecutive business days in order to remain listed on The NASDAQ Global Market. There can be no assurance, however, that that we will be able to regain compliance with the NASDAQ minimum bid price requirement prior to April 22, 2013, if at all, and the delisting of our common stock could materially adversely impact our ability to raise capital 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.

Operating Activities. Our operating activities used cash of $31.4 million and $25.9 million for the nine months ended September 30, 2012 and 2011, respectively. The increase in the net cash used in operating activities was primarily attributed to a $6.8 million increase in research and development expense related to the advancement of Synavive, Z160 and Z944 into and through clinical trials in the second half of the year ended December 31, 2011 and throughout the year ended December 31, 2012.

Investing Activities. Our investing activities provided cash of $11.2 million and used cash of $3.3 million for the nine months ended September 30, 2012 and 2011, respectively. The cash used in and provided by investing activities for both the nine months ended September 30, 2012 and 2011 was primarily due to the timing of purchases and maturities of our short-term investments, respectively.

Financing Activities. Our financing activities provided cash of $26.5 million and $28.7 million for the nine months ended September 30, 2012 and 2011, respectively. The cash provided by financing activities for the nine months ended September 30, 2012 was primarily related to the issuance of 27,149,932 shares of our common stock resulting in net proceeds of $29.1 million, offset by $2.8 million in repayments of our outstanding term loan. The cash provided by financing activities for the nine months ended September 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 Finance in the amount of $8.5 million.

Equity Offerings

On January 10, 2012, we entered into an equity distribution agreement with Wedbush Securities Inc., or Wedbush, under which we could, from time to time, offer and sell our common stock having aggregate sales proceeds of up to $15.0 million through Wedbush, or to Wedbush, for resale. We agreed to pay Wedbush a commission, or allow a discount, as the case may be, equal to 2.5% of the gross offering proceeds from each sale. Effective March 28, 2012, we terminated this equity distribution agreement with Wedbush. Prior to terminating the agreement, we had sold an aggregate of 14,057,975 shares of common stock pursuant to the agreement for aggregate net proceeds of approximately $14.5 million.

On June 19, 2012, we entered into a new equity distribution agreement with Wedbush under which we could, from time to time, offer and sell our common stock having aggregate sales proceeds of up to $15.0 million through Wedbush, or to Wedbush, for resale. We agreed to pay Wedbush a commission, or allow a discount, as the case may be, in each case equal to 2.0% of the gross offering proceeds from each sale. Effective August 1, 2012, we terminated this equity distribution agreement with Wedbush. Prior to terminating the agreement, we had sold an aggregate of 13,091,957 shares of common stock pursuant to the agreement for aggregate net proceeds of approximately $14.6 million.

 

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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

In June 2011, the Financial Accounting Standards Board (“FASB”) issued revised guidance on the presentation of comprehensive income and its components in the financial statements. As a result of the guidance, companies are now required to present net income and other comprehensive income either in a single continuous statement or in two separate, but consecutive statements. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The standard does not, however, change the items that must be reported in other comprehensive income or the determination of net income. The new guidance is to be applied retrospectively. We adopted the accounting guidance on January 1, 2012. The adoption only impacted the presentation of our financial statements.

In May 2011, the FASB issued revised guidance on fair value measurement and disclosure requirements. The amendments in this update will ensure that fair value has the same meaning in U.S. GAAP and in IFRS and that their respective fair value measurement and disclosure requirements are the same. This update is to be applied prospectively. We adopted the accounting guidance on January 1, 2012. The adoption did not have a material impact on our results of operations, financial position or cash flows.

 

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 September 30, 2012, we had unrestricted cash, cash equivalents and marketable securities of $43.2 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 September 30, 2012, 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.

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

We have marked with an asterisk (*) those risks described below that reflect substantive changes from, or additions to, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2011.

Risks Related to Discovery, Development and Commercialization of Drug Products

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 expertise 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.

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. 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.

Our future success depends in part on the successful development of product candidates, such as Z160 and Z944, identified by our ion channel drug discovery technology. 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 business also involves advancing product candidates, such as Prednisporin, that was discovered using Zalicus’s proprietary high throughput screening technology. 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.

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.

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 on a timely basis. 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 on a timely basis. We cannot guarantee that outside clinical investigators conducting clinical trials will conduct them in compliance with applicable United States or foreign regulations or the relevant clinical trial protocol. 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 2 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 not be able to create commercially viable pharmaceutical formulations of our product candidates.*

We have developed or are developing proprietary formulations of our product candidate 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 and test the pharmaceutical formulations of Zalicus’s product

 

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candidates as well as manufacture materials for clinical trials of our product candidates. These third parties may not be successful in developing or manufacturing these novel formulations of our product candidates 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 our product candidate Z160. 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 be unable to find safe and effective doses 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 the active pharmaceutical ingredients included in Zalicus’s product candidates. Our clinical trials in humans may show that the doses 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 we select show efficacy in humans, the resulting doses 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 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 clinical studies and provide more evidence substantiating the safety and effectiveness of the doses selected in a significant patient population. If we need to adjust the doses of our product candidates, we may need to conduct additional clinical trials. We may also be required to make different doses 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.

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 in its various dosage strengths, regulatory submissions, 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 and could result in an impairment of our intangible asset relating to royalties on Exalgo.

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;

 

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the availability of additional dosage strengths of Exalgo and Covidien’s sales of Exalgo at the 32-mg dosage on which our royalties for net sales of Exalgo will not be reduced as a result of Covidien’s settlement with Watson;

 

   

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, including the introduction of a generic version of Exalgo;

 

   

the reduction of our royalty rate on sales of Exalgo following the release of a generic version of Exalgo pursuant to the settlement of the Exalgo litigation, or otherwise;

 

   

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.

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;

 

   

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.

 

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A material component of our business strategy is to establish and maintain collaborative relationships to fund research, 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 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 for Prednisporin and funded discovery research agreements with Novartis, the United States Army Medical Research Institute for Infectious Diseases 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, changes in the competition landscape for a particular therapeutics area, a change in business strategy, a change of control or other reasons.

See “—Our ability to generate ongoing revenue from Exalgo sales 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.

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 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 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 disrupt our business, divert management’s attention, dilute stockholder value or be difficult to integrate*.

On a regular basis, we consider various business combination transactions, collaborations, license agreements and strategic transactions with third parties, including transactions which may result in us acquiring, or being acquired by, a third party. The consummation or performance of any future business combination, collaboration or strategic transaction may involve risks, such as:

 

   

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

 

   

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

 

   

exposure to unforeseen liabilities;

 

   

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 value, return on investment or strategic fit;

 

   

higher than expected transaction costs; and

 

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

As a result of these risks, we may not be able to achieve the expected benefits of any such strategic transaction. If we are unsuccessful in completing or integrating any acquisition, we may be required to reevaluate that component of our 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 company or product candidate 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.

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.

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, 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.

 

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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.

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 the first half of 2014. We may, however, 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:

 

   

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;

 

   

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;

 

   

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

 

   

we determine to enter into a business combination or acquire or license rights to additional product candidates or new technologies.

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.

Additionally, our ability to obtain additional funding may be materially and adversely impacted by a delisting of Zalicus common stock from The NASDAQ Global Market. For more information, please see “—Failure to comply with The NASDAQ Global Market continued listing requirements may result in our common stock being delisted from The NASDAQ Global Market.below.

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 affected.

We have borrowed an aggregate of $20.0 million pursuant to the terms of a loan and security agreement with Oxford Finance LLC, or Oxford. As collateral for these loans, we pledged substantially all of our assets, other than intellectual

 

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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 September 30, 2012, Zalicus had an accumulated deficit of $332.7 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.

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 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 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 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;

 

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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 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.

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 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 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.

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,

 

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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 recently developed a common “Risk Evaluation and Mitigation Strategy,” or REMS, for all opioid drugs. 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 now 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.

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 United States 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.

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

 

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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. 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 pricing for Zalicus’s products in a manner adverse to us.

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. One patent covering Exalgo is set to cease providing protections against generic versions of Exalgo at certain dosage strengths following the settlement of the Exalgo litigation between Covidien and Watson and pursuant to which Watson may release generic versions of Exalgo at pre-approved dosage strengths beginning November 15, 2013.

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-United States 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.

 

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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, 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 product candidates for five years after it has approved Zalicus’s 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 formulation technology related to Zalicus’s planned formulation of a 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 of 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.

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.

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

 

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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.

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.

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.

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.

 

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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 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;

 

   

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

 

   

disclosure of actual or potential clinical or preclinical 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.

Failure to comply with The NASDAQ Global Market continued listing requirements may result in our common stock being delisted from The NASDAQ Global Market.*

Due to the price of our common stock over the last several months, we may not continue to qualify for continued listing on The NASDAQ Global Market. To maintain listing, we are required to, among other things, maintain a minimum closing bid price of $1.00 per share. On October 22, 2012, we received a deficiency notice from NASDAQ advising us that the closing bid price of our stock had been less than $1.00 per share for more than 30 consecutive business days. Under the NASDAQ rules, we have 180 days, or until April 22, 2013, to regain compliance by maintaining a minimum closing bid price of at least $1.00 for at least ten consecutive business days. The price of our common stock has not closed above $1.00 since the date of the receipt of this letter from NASDAQ, has fluctuated significantly and, at the close of trading on November 6, 2012, was $0.56 per share.

We are currently actively monitoring the bid price for our common stock, and are considering available options to resolve the deficiency and regain compliance with the NASDAQ minimum bid price requirement. There can be no assurance, however, that we will be able to regain compliance with the NASDAQ minimum bid price requirement prior to April 22, 2013, if at all, or will otherwise continue to satisfy other NASDAQ listing criteria. The delisting of our common stock would significantly affect the ability of investors to trade our common stock and negatively impact the liquidity and price of our common stock. In addition, the delisting of our common stock could materially adversely impact our ability to raise capital on acceptable terms or at all. Delisting from The NASDAQ Global Market could also have other negative results, including the potential loss of confidence by our current or future third-party providers and collaboration partners, the loss of institutional investor interest, and fewer outlicensing and partnering opportunities.

 

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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.

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. Mine Safety Disclosures

Not applicable.

 

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

Executive Vice President and Chief Financial Officer

(Authorized Officer and Principal Financial Officer)

Date: November 8, 2012

 

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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

   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   

        4.5

   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   

    #10.7

   Amendment to Employment Agreement with Jason Cole, dated December 15, 2008.      10-K         10.13         03/16/2009         000-51171   


Table of Contents
            Incorporated by Reference to:  

Exhibit

No.

  

Description

  

Form or

Schedule

    

Exhibit

No.

    

Filing

Date with

SEC

    

SEC File

Number

 

    #10.8

   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   

    #10.9

   Employment Letter Agreement with Justin Renz, dated as of August 31, 2006.      S-4         10.14         08/07/2009         333-161146   

    #10.10

   Letter Agreement Re: Severance Arrangements with Justin Renz, dated December 12, 2008.      S-4         10.16         08/07/2009         333-161146   

    #10.11

   Employment Agreement with Mark H. N. Corrigan, dated as of March 8, 2010.      8-K         10.1         03/08/2010         000-51171   

    #10.12

   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   

    #10.13

   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   

    #10.14

   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   

    #10.15

   Revised Offer Letter from Neuromed Pharmaceuticals accepted by Christopher C. Gallen, dated May 27, 2004.      S-4         10.45         08/07/2009         333-161146   

    #10.16

   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   

    #10.17

   Separation Agreement, dated as of February 22, 2012 between the Registrant and Christopher C. Gallen.      10-K         10.20         03/09/2012         000-51171   

    #10.18

   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   

    #10.19

   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   

      10.20

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

      10.21

   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   

      10.22

   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   

      10.23

   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   

      10.24

   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   


Table of Contents
            Incorporated by Reference to:  

Exhibit

No.

  

Description

  

Form or

Schedule

    

Exhibit

No.

    

Filing

Date with

SEC

    

SEC File

Number

 

      10.25

   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   

    †10.26

   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   

      10.27

   Amendment to Research Collaboration and License Agreement, dated April 12, 2012, by and between Registrant and Novartis Institutes for BioMedical Research, Inc.      10-Q         10.30         05/04/2012         000-51171   

      10.28

   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   

    †10.29

   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   

    †10.30

   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   

      10.31

   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   

      10.32

   Consent and First Loan Modification Agreement dated as of February 15, 2012, by and among the Registrant and Oxford Finance LLC.      10-K         10.41         03/09/2012         000-51171   

      10.33

   Equity Distribution Agreement, dated January 10, 2012, between Zalicus Inc. and Wedbush Securities Inc.      8-K         10.1         01/11/2012         000-51171   

      10.34

   Equity Distribution Agreement, dated June 19, 2012, between Zalicus Inc. and Wedbush Securities Inc.      8-K         10.1         06/20/2012         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 Calculation Linkbase Document            

**101.DEF

   XBRL Taxonomy Extension Definition Linkbase Document            


Table of Contents
            Incorporated by Reference to:

Exhibit

No.

  

Description

  

Form or

Schedule

  

Exhibit

No.

  

Filing

Date with

SEC

  

SEC File

Number

**101.LAB

   XBRL Label Linkbase Document            

**101.PRE

   XBRL Taxonomy Presentation Linkbase 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.