Header updated on 24th April 2008

Market has been looking for an announcement re a licensing deal for Cetilistat, the obesity drug; instead it has been hit with the withdrawal of Renzapride, colonitis drug, following an unauspicious performance at Phase III. Folloiwng has been edited to reflect the situation

Alizyme is a speciality biopharmaceutical company that has been developing product categories for inflammatory gastrointestinal disorders, obesity and supportive cancer care . It is currently trading at a five year low of around 27p with a market cap. of around 60m. Prudential owned a near 20% stake (reduced in sale today?) There was good institutional taku-up of a placing in March rasing 10m at 50p; no wonder there has been "angry" selling. The directors hold 3.34million shares or about 1.7% of the equity (of which Tim McCarthy, CEO has 1.1million); thus, after some 10 years of development effort, they must be comletely focused on the success of the company and multiplying the value of their holdings (but with real doubts about their marketing competence). Alizyme had previously raised capital sums in the past three years at around 70p and 100p so it was somewhat surprising to see the share fall through its 70p support level. Clearly one reason is the current disaffection with the biopharm. market. Another has to be disappointment for the failure of the CEO, Tim McCarthy, to deliver on his expectation that 2007 would be a transformative year. The key question is whether 2008 will be that year and when is it likely to happen? The following points are relevant:

1. Alizyme did sign one deal in late-2007: with Prometheus Labs (U.S.) for the Colal-Pred, at a potential market of $250m, the smallest potential of their four products. Prometheus pay $2.5m up-front with a total of $15m payable upon future development milestones. They are responsible for all US development costs and will pay Alizyme undisclosed royalty rates which will increase with net sales. The deal was followed by a Japanese licensing agreement (which also gave Alizymen access to additional potential drug candidates).

2. This perhaps sets a precedent for subsequent deals for their other products. Cetistat (obesity) has an estimated potential of $1 billion p.a. sales and ATL-104 (mucositis) has a potential of $500m sales. The U.S. FDA has encouraged AZM to also launch a Phase III exercise for Cetistat for all diabetes sufferer because of positive II results for diabetes sufferers who also suffer from obesity.

3. Whilst the development programmes for the other drugs are on-going and appear to be satisfactorily funded from present resources, this is not the case for Cetilistat. The "Product and Company Update statement" (7th Jan 2008) says that 'the Phase III development programme is now ready to commence following the conclusion of a commercial deal'. So, perhaps for the first time, the development programme would be delayed if there was not a funding deal in either the U.S. or Europe. The reason for the sp shooting to nearly 200p in 2004 was the signing of a deal with Takada of Japan for some $50M development funding.

In response to a question at the Conference to report the Renzapride fiasco, McCarthy seemed pleased that there were six potential bidders for Cetilistat; however, that implies any announcement is some time away. When it comes, however, taking a line from the Takada and Prometheus deals it would seem likely that there would be of the order of $100m funding to support development. Of course, the major cash flow will be from licensing of actual sales. The analysts do their own discounted cash flow exercises; those seen tend to dwarf current valuations of the company.

There is not a strong argument for jumping in unless and until the sp establishes a baseline. Given the peaks in the sp, the time will probably come when there will be a very significant jump. An alternative scenario, is that management continue to rpove their level of incompetence and a buy-our results. Clearly the strength of the company is in their biochemists.

Eric

Think I should probably update the heading piece with an update on the products, wherre they are and what the perceived potential is. Will try to do it at the weekend. I see the aim is to help newcomers evaluating the stock. I think if one trawls through the records you can quantify the earnings potential three years down the line.
Eric

that would be great Eric, liking this one a lot. (but not falling in love, your not allowed to that!,lol) ps dont forget to have a look at corus, creeping up slowly but nicely. great for the long term.

Suspect AZM and Corus have in common that they are going through a period of re-rating by the market, although I prefer the emerging company. AZM is a long-term play in the sense that it'll be around 2008 that its drugs are going commercial. So it is easier to assess the value in 2008, possibly 2billion. But how will the moement be phased form A to B. My point is that the level of uncertainty has dropped substantially with the completion of Phase 2B for cetilistat in the US. Now, news of the support players is treated very positively. The big step will be the licensing deal for the former, but the sp should continue to move in the meantime. I am looking for 250p then a jump to 300p on the deal; may be too cautious!

Eric

Another very good day-looking forward to next week. have a good weekend all.

Well after watching and waiting for a little while I have now taken the plunge with AZM and have joined the party.

very disappointed to seethe directors selling, willl it have an impact.???

http://www.companyannouncements.co.uk/cgi-bin/articles/200603101139446172Z.html

Yes!

thanks!

Got back in after the market closed on Friday to see the fall in share price. Thought at first it was a reaction to the results which seemed strange because there was no reason why one should have expected anything different. As Fred knew, the announcement of director sales would have a knock-on effect and so it proved with a 7% fall. Really, there was nothing sinister. The price has risen during the close period and it is therefore the first opportunity for directors to cash in on the rise in sp. You could also include that news on a licensing deal is not imminent. On the positive side, you can probably conclude that it is not the dierctor's plans to raise the additional funding needed this year from the market.

It is also clear from the results statements that they will do licensing deals: this is the 'pivotal year' for that purpose. It really is an amazing performance to get all their four drugs successfully through to late-stage development. There must be a significant jumponce we can quantify licensing deal(s) but it amy need some patience.

Eric

I think there is one other problem and that is Cash Burn. I am not sure whwt the cash in hand is at present or whether there will be futher cash raising before sufficient cash flow to come costs.

I will have a look later. I am happy to get out with a good profit, but may buy again later after the dust has settled.

Fred, the cash position is strong with cash at the year end at 30.8m. Don't know the ratio of phase 2b to phase 3, but suspect it is not less than 1 to 3. In other words, and I think this is confirmed by company comment, the present cash may see them through the two smaller drugs but certainly not cetilistat. My feel is that they will not acheive a licensing deal before June, but that they will not return to the amrket for more capital. I would see that as a credibility issue havein stated that they are looking for the licensing deal. I remain somewhat surprised at the amount of director cashing in of options which suggests that the size of such deals may be less than I for one have anticipated. Any views? I have reduced my holding, via cfd, substantially, really for defensive reasons; anyway its banking a decent profit. I could see more selling as the weeklies report the director disposals.

hope you had a little dabble in corus eric. glad i stayed in azm when everyone else was bailing out.

Good analysis in IC stating AZM to be good value (where was the Shares comment, if you please?). One thing AZM always do is an analysts briefing n announcement days: thus a consistent press loyalty as well as investment funds. The thing that came out in the IC, consistent with previous customer statements, is that, whilst they are recruiting for Phase III on the two smaller drugs, they do not intend starting Phase III for cetilistat until they have a licensing partner. That lends urgency to the search for a partner, even though they will not want to sell the crown jewels cheaply. I recall reading comment that such a deal can take 6 months to negotiate which suggests a June target. But that is only 3 months away. Its likely to leak out, as much from the other side as their own. There is also a piece in IC about the good value of the sector as defensive investments. AZM seem to win every way. So I am happy to go on building my holding.
Eric

Eric - Yup, agree totally. Started buying at 1.56 and then thought about selling in the 1.90's but fought off the impulse to take a profit, and now see the current slide as a fortuitous buying opportunity. *crosses fingers*

Eric, Harry

I also viewed the recent sharp drop as a building opportunity and, since in the enviable position of having taken some profits elsewhere, have topped up...now I need to be careful that my ISA a/c doesn't get too AZM heavy...see Eric I'm learning to be prudent...well, a bit moreso!!

Regards Ruthie

do you ever get the feeling your are invisible.

Thanks ERIC and HARRY glad you like me you building your portfolio in azm. i still think this is a long term investment before we see the very best of it.

Kivver - tipped in the IC again this week at 1.82 although not as strongly as before - 'The shares have almost doubled since we suggested buying at 1.01 (11 November 2005). But with the potential for new licensing deals, more upside could be on the cards'.

The 4 main drugs all look good and are a fair way along, but the unexpected 17m R&D costs hit the sp initially (although AZM did end the year with 30m cash).

The directors then decided to exercise options on 1.65m shares which they then sold onto the market at 1.75. This may have caused a depression in the sp for a while, but in fact the options were all 10 year duration which ended in June/July this year anyway, and so had to be exercised at some time very soon.

I like this stock and will be adding on any further weakness.

Ruthie - interesting comment re being over azm'd in your pf. I sort of agree but if a stock is a good one with loads of potential, maybe this doesn't matter.

I have it in my ISA which I will take profits on at some point - hopefully - and I'll also buy some for the SIPP and it can just sit there.

Harry
You may well prove correct in this instance but I have been burnt badly in the past and since this is my pension pot I am learning to be ultra cautious.
Kivver
Did not intend any slight by ommision I do appreciate all info posted as it helps to focus my old brain...good luck
Regards Ruthie

Sorry, Kivver; I did respond when you suggested Corus as not falling in my focus area: really very narrow in a way; emerging companies in niche markets (AZM, ASC, DGT, SEO, PXS at present). Principle is to get to know these companies as well as possible, something that the institutions find it difficult to do as they are spread over many companies, e.g. for a fund.

Ruthie, Harry: Couldn't think of a better share at present for a pension pot. Its disadvantage to many is that the roll-out is still two or three years away, but the risk of it not happening (for any of their drugs) must now be very small. Also the upside is very considerable - we are talking about 10 figures! All for a bit of patience; not a commodity I am graced with. Harry: your observation that they had a 10 year time limit was something I missed; I would not then have been as anxious as I was. I note that they had to act together and, if it wasn't with the results, what would trigger it. If they waited for the licensing deal for Cetilistat to emerge they could have been caught with insider dealing claims. So my concern that this might mean a delay in such a deal was unfounded; the later news (IC) that they would not start the Phase III for this drug until a deal was concluded puts real urgency into the situation. My expectation is therefore Q3 based on earlier informed comment that such deals can take 6 months; the likelihood of competition for the deal puts AZM in a strong negotiating position, including the timescale.

Eric

have you spotted the rise at corus eric???? been a good one since i brought to your attention. c'mon azm follow suit please.