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

A revision to my note yesterday. The following quote is from today's Times:
"Richard Palmer, CE, said that talks aimed to finding a partner to help to bring AZM's fat-busting treatment to the market were continuing with several parties, but insisted that the company was unlikely to announce a deal before next year. He said that the main priorities for AZM was to find a partner committed to seeing its obesity treatment ... reach the pharmacy shelves."

I was thus too pessimistic in timing the partnership agreement for 2006. AZM need be in no hurry. At the same time they will be motivated to achieve funding to help the Phase III clinical trials. The value will be helped by positive progess with the obesity in diabetics Phase IIb trial. Given that the Japanese deal alone was worth $42m up-front, together with double digit royalties, one imagines that they will be looking for $200m up-front world-wide, again with double digit royalties. The price should at least double when such an agreement is announced.

One might expect the price to start moving ahead by the turn of the year as the market expects an agreement in a six-month timeframe. Thus we are in an ACCUMULATE rather than HOLD position. I think it is worthwhile keeping this bb alive in order to pick up any movements.

Eric

Merrill Lynch have price target of 190p. Some price recovery. Undoubtedly a buy - can't see this price lasting for long.

Eric

About time too

capa

Broker note for AZM, (copied from today's Trader's Thread). Might have missed a bit off the bottom.

M.Lynch:
*We initiate coverage of Alizyme with a Buy rating.
We expect significant R&D news flow and potential
licensing deals for three late stage drugs during the
next two years.

*Our price objective of 190p per share is based on a
sum-of-parts valuation. Risks include clinical product
failure and a potential cash shortfall in 2H05-1H06E.

*ATL-962 is a potential obesity blockbuster. We
expect launch in late 09E and sales of over $1.5 bn by
2012E based on our analysis of the competitive profile
of both current and emerging obesity drugs. This
report includes a detailed model of the global market
for obesity drugs, which we expect will be worth over
$4 bn by 2012E.

*Our expectations are more cautious for irritable
bowel syndrome drug Renzapride and COLALPRED
to treat ulcerative colitis. We forecast peak
sales of over $200 mn for Renzapride and over
$70 mn for COLAL-PRED. This reflects uncertainty
surrounding patent protection and assumes only
limited market approval.

*We outline a detailed scenario analysis with valuation
impacts. If both ATL-962 and Renzapride are
successfully licensed and reach the market, our sumof-
parts valuation exceeds 300p per share.

*We believe Alizyme could be an attractive
acquisition target due to its minimal fixed assets and
advanced product pipeline. Our analysis of the
partners costs to license ATL-962 suggests a
potential acquisition value of 261p per share,
substantially above the current share price.

ptholden

Thanks for very helpful post. I think it is helpful to think about the psychology of the team, ex the majors, who have been developing these drugs for some nine years. They have given their best working years to developing, not just a typical group of drugs, but those which are tackling several of the major clinical problems of today's society. It is typical of these drugs that the obesity formulation tackles the obesity problem without side effects. I have been tremendously impressed by the fact that this team says does what they say they will do. Two important conclusions. (1) I can't see them selling out at this stage. If they were in it primarily to make money (like we are!) then they will have made enough at the present share price and to double it wouldn't count for much. (2) If Palmer says that they are unlikely to announce a deal for the obesity drug before next year, he means that they will announce a deal early next year and it will be bloody good news. ACCUMULATE (although I have sold a few today to buy into CFP!).

Eric

some serious buying taking place

capa

capa

Serious buying probably caused by piece under Brokers Tips in Shares yesterday, which is worth quoting:

"FAT PROFITS IN STORE FOR ALIZYME

Merrill Lynch initiated coverage of biotech AZM with a BUY. 'We see significant R&D news flow and potential licensing deals for 3 late-stage drugs during the next two years,' says the broker. Merrill expects launch of the obesity blockbuster ATL-962 in late 2009 and sales of over 1.5Bill by 2012. The company could be an attractive bid target - Merrill suggests a potential value of 216p per share, compared with the (then) current 116.75p and its 12 month target of 190p."

I would make the following comments about the above:

1. A licensing deal is likely early next year. The company has said that they are in discussions seeking a partner to take the brunt of the Stage III trials which will be very expensive and are likely to be international. Dr Palmer, CEO, also said that 'an agreement is unlikely before early next year which means, in their cautious speak, that it will probably not be later than early next year. This will hugely boost the price. The confirmation of the Takada deal for Japan alone ($42M) shot the price temporarily up to 220p. What price is likely? I suggest Merrill are being ultra-cautious. If you look at the potential revenues of 1.5Bill and say 150M (minimum 10%) goes to AZM per annum. Most of this will go through to the bottom line because the partner(s) will be bearing manufacturing and marketing costs. Discount this 50% for delayed start to the revenue flow and result is not less than 50M pbt, justifying a cap. of 500M and a share price of 350p. The licensing deal itself, you would expect, will be worth something like 5 times the deal for Japan or $200m. OK, this will cover development cost, but will mean that AZM will probably be cash-flow positive and thus much more attractive to investors.

2. The Board have been working on this programme for 8 or 9 years and I can't see them wanting to sell out until they have seen the programme through - they are putting the best years of their working lives into these user-friendly drugs. The other point in which I suspect Merrill are wrong concerns the licensing of their smaller drugs. Could happen, but mention has been made of the lielihood of developing these in-house. In other words, if the money comes in for the blockbuster, then they will easily be able to raise funds to carry their own development of the other drugs, the objective being to produce a much more rounded company. I suspect acquisition of a company already handling these later development stages may be more likely.

My conclusion is that a price objective for 250p by next Easter is reasonable. It was a bit of a toss up whether I should put forward YOO or AZM for the ASOS Challenge Portfolio (see ASC stream) where each participant had to nominate a share to beat ASC in doubling in price. I suspect ASC will beat that once the results of Xmas trading are known. I thought YOO had the better chance as all the bits of the puzzle were already in place. But AZM should really have a 10% weighting in your portfolio (mine is 15%).

Good luck!

Eric

Thought I would make a post to keep AZM on the front page! Read, in particular, post 22, giving Merrill Lynch forecast. The analysts quote Biotech sector as high risk. It would be hard to find a share which gave such a level of comfort from the knowledge of: (1) first class management committed long-term; (2) first class drug portfolio focussed on minimising side effects; (3) high confidence in medium-term projections (150% over 2 years) and probably 6-month as share is rerated on positive news/results.

Eric

watching AZM carefully. I thought the information about another company and their obesity trials could be interesting in light of the ever growing obesity crisis

Metabolic Pharmaceuticals is just about to announce (Nov) it's phase 2B trials of its obesity drug, which is a drug that acts specifically on the body's fat cells to enhance the breakdown of stored fats and inhibits the synthesis of new fat...It is believed that this drug may provide a safer and more effective treatment for obesity than currently availalble drugs or others currently known to be in clinical develpment...
Anyhow worth a look at their website www. metabolic.com.
Have been long this stock for 2 years and is rewarding handsomely.Like AZM if their drug trials are successful and they get FDA approval there will be plenty of major drug comppany interest.
I am certainly going to do some more research on AZM.
Well done on your informative thread

Jules

Thanks for that. Will appeal to maddoctor (above) and others that are concerned about dirty pants! Will take a look. AZM predictions take into account other developments and existing markets and are well-founded.

Eric

Close on a million buys today so far. Could it be that news is on the horizon and is leaking out ?

Noticed last year substantial activity a few days prior to Takeda announcement
I wonder whether history is repeating itself.

capa

capa

Funny thing was that their was negligible business until 11.30am, then a rush of purchases, some quite bulky. Most interesting are two transactions marked as sells at 122p: for 200,000 at 12:03 and 186,048 at 12:04. They are not included in cumulative volumes until 13:08; i.e. posts have been delayed an hour and wrongly shown as sells rather than buys. Bad weakness in the reporting system.

You can almost see investors tumbling out of a meeting at Alizyme, rushing to get their buys in. No smoke without ... Mind, the timing is not good: I just cannot cope with excitment from AZM just when PET are probably closing their Iraqi deal and I'm looking to do a CFD on ASC. I can't stand this synchronicity thing - not only can I not be in two places in one time, I can't have my money in two places; worse still, it is sitting in my account or moving between accounts. Oh well, I do at least have a decent stake waiting for the licencing news.

Eric

LOL Eric, yes I know how you feel, too many buying opportunities presenting themselves at once. In the last few days I have wanted to top up on ASC, NLR and MPH in addition to grabbing a few ACE.

I have a core holding of AZM which I bought at 55p which I topped up by 50% with the rights issue. I have added a few more today just in case there is something going down, you know these 40% in a day on an announcement.

Good luck with PET, I'm out of oil at the moment.

capa

Agreed Eric those trades of 200,00 and 186,048 are buys.

Something is going on here, I can just feel it.

capa

Trouble is my hunches are not normally that reliable.

capa

capa

Well done! There have been several false dawns since the Takeda deal. But its only a matter of time. CEO, Palmer, said probably not before nearly next year at the briefing following the interims. They tend to do what they say, so I would be surprised if the announcement did come before January. They were in discussion with several parties and they would need time to dot the i's and cross the t's before contract and an announcement. I suspect that the buying rush was more likely the result of a newsletter recommendation. Interesting that the buying run today on ASC started at about the same time. A warning! do not look at the PET BB as you are likely to be seduced!

Eric

A bid approach could be a possibility though Eric. I know this has been muted for a time and personally I would prefer AZM to go it alone but with the price at this depressed level it wouldn't be a total shock

capa

These seem to have support around the 120p - they have done for a few months.

capa

Obviously an option but it is worth considering at what price. AZM raised funds from the institutions a year ago at 168p and have made positive progress since then. Merrill Lynch forecast a price of 190p at the interims and also discussed a potential bid which they saw as attractive to a company wanting to control the drugs rather than licence them - they came to a price of 261p (see above). So there is an option for an agreed bid at about that price which would imply that the directors were happy with it. A hostile bid must be out of the question because much of the knowledge must be in the director's heads. The reason why I think that would be unlikely at the moment is the question of why the directors who have put 10 years into the drugs development programme should want to follow that course of action. Admittedly they don't control the company financially. But I would have thought that the last thing that the major stakeholders would want is to go against the directors.

As RobRocket says, the shares have a resistance level around 120p. They are trading well below the levels of a year ago although progress reports are good. Its one of those OOSOOM situations. But six months is probably the pessimistic estimate of when the good news will land via an RSN and the price will go to appropriate elvels; my estimate would be 250p. No doubt, there are analysts who think the same way and who will be advising their clients. I have had three approaches from companies with AZM analyses, trying to sell their services but find that I know as much as they do; the exception probably being Merrill Lynch who clearly have been allowed closer access to the company.

My judgement is not much movement until the New Year. I do hope so because AZM is still not my priority for building up a stake beyond 10% of my portfolio at the moment. I might well do a CFD, though, if the ASC one works!

Eric

They have bounced off 1.20 a number of times recently its true, personally think bid approach unlikely at moment but do consider Alizyme to be attractive at these levels. Just a bit perplexed at the sudden volume today and trying to rationalise it.

capa