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

Delay means money wasted in the stock market, Robson.

hyleo My point too. With AZM you need to be patient; lock it away for - how long I don't know. But five years form now, will be many times its current value or taken over at some multiple, depending on teh executives wishes. Most investors have a short fuse which is why the sp has come back so much. But if you understand that, the strange thing is there is some quite short term money to be made. Hope my point is made.

Eric

AZM seems to have convinnced a few investors at 80p which in this climate for small caps is no bad feat.

Remains a wait for main drug --- see EWR point above --- a stock that looks underpinned for the long term. But timing means you can wait for the big impatient or forced sellers, to make so extra trading cash on the side

Well the Chairman and Chief Exec seem convinced....

Drug developer Alizyme PLC said its chairman Brian Richards and new Chief Executive Tim McCarthy, have each bought 50,000 shares in the company at 84p.

It added that following the transactions Richards holds 552,301 shares, or a 0.28 pct stake, whilst McCarthy has 1,080,000 shares, or a 0.54 pct stake.

McCarthy, the co-founder of Alizyme and up until now the company's finance director, takes over as chief executive following today's surprise departure of Richard Palmer.

It appears to be quite logical at this time to replace the scientist by the business/financial man. Doesn't smell of failure but rather re-organisation to take the company into the commercial phase of development.

From AZM point of view the fund-raising buys time. Not so good for impatient investors like me. If you are happy to stache away for two or three years then this should be a very profitable investment. If in between and prepared to take at least a one year view it doesn't seem unlikely that there will be a price run up next year as occurred this year. I think I can live with that expectation!

Eric

Just revisited the statement from 1st December. Consider:
(1) 'Going forward Alizyme will be evaluating all options for commercialising the protfolio through securing partnerships and alliances to bring each product to the market.'
(2) ' To assist and accerate this process A.. will be working closely with NovaQuest...'
(3) ' The Board .... recognises that a greater focus and emphasis on commercialising the portfolio in 2007 is required in order to realise the inherent value of each of the products'.

It is clear therefore that (a) the reason for Dr Palmer's departure is his failure in commercialisation; (b) that the key step is to gain partners, possibly for each of the products; (c) that we should expect significant progress in 2007; but (d) there is still a way to go.

Looking at the sp: the investment community are content to support at 80p and this should provide a support level. I expect the market to look for progress by the 2006 results, presumably about March. It may be sensible to establish a position around the present level ready to participate in a significant jump when positive news emerges. It may well be, though, that mid-year is a more reasonable timescale.

Interested in other views.

Eric

Morston Nominees have just announced a purchase of 3.666m shares increasing their holding to 6.2mill shares or 3.4% of the company. Shares up 2 to 89.

Well that would seem to support your view EWR.

An advantage of the first trading day of the year is that you at least take a 'long view' i.e. one year. Ridiculous really: in Germany that would be short-term. So where will AZM be at the year end: optimistic, pessimistic, most likely. Optimistic is that partner agreements in place by the end of the year for each drug, including Cetilistat and this on its own confirms it as a $1billion blockbuster: sp moves to 500p. Pessimistic is that nothing much happens, company continues to push development forward but doesn't find partners and therefore continues to operate on its own: sp remains around 80p to 100p. The middle road, not necessarily the most likely, is that significant developments are made but valuation remains uncertain, perhaps because announcements do not include projections: sp though justifies around 200p. My own view? We will leave 200p behind in third quarter, perhaps to around 250p. Other views?

Eric

Optimising and hope seem to have been around for ages, or is it me. I keep hearing they might have a multi-million blockbuster on their hands but nobody wants to partner them, i find that slightly confusing. I remain in at a big loss but still hopeful and agree a year probably is short term. Roll on 201?

Personally I believe the introduction of Quintiles (NovaQuest) into the mix will mean that things move a lot more quickly than before.

The problem with a lot of UK Biotechs, such as AZM and OXB, is that they are controlled by their founders, who don't always have their financial hat on. They can scupper talks by "over egging" the negotiations.

NovaQuest are professionals at this and do it many times a year. They also have a vested interest in AZM so would obviously like to see the SP many times higher than where it is currently.

They are US based, so will have better access to the investors and US pharmas than AZM's management, and will also know the best way of getting AZM noticed.

Because of this though, I believe that we will have to bite the bullet in regards to the potential of our compounds, as NovaQuest will want to broker a deal quickly and as TM stated in the interims AZM will be more accomadating in their talks.

I know it has been said before but this will be the make or break year for AZM and on paper it is a no brainer, but as we all know it is not always that simple.

Accomplia has fallen into more trouble, so the market is widening for Cetilistat and obesity is certainly the topic of the moment, so hopefully rulers are being held up to AZM both sides of the Atlantic.

Adam. Many thanks for a really helpful post. Just my reading of the NovaQuest appointment but you have added helpful detail concerning what they bring to the party. Also your comment re the founding CEO - fortunately Palmer has stepped down. I expect he had set his targets too high and is a better researcher than business man. I expect that we still need to wait six months but should have one or more deals by then. Even if the price is a compromise this should still justify a significant multiple on the cap.

Eric

I note that Prudential (including M&G) have a 13.65% stake whilst Fidelity have 10%. Thus a level of clout with Board. I suspect influential in change of CEO. Tim McCarthy (new CEO) has around 1 million shares (before the placing) plus options so is not really a fat cat (yet!). Dr Palmer with 365K shares plus options doesn't have that much to show for the last 10 years - he'll probably make more money in retirement from the shares! 80p placing price gives support to present price so downside potential limited.

1.5million VW trade - volume worked average trade. Likely to be a fund acquisition.

Kivver: just noticed your post. Repeating the point made above by Adam and myself: Board were content to play it long, wanting to optimsie deals rather than negotiate a compromise. Dr Palmer's departure indicates that institutions, likely to be main holders, became impatient. I believe likely to be a Cetilistat deal by mid year: even if it not optimal it must still have a very positive effect on price.

Eric

AZM is very much OOSOOM. Yet things are likely to be very different by the end of the year. Arguments:

1. Renzapride and Colal-Pred are due to report Phase III trials in h2 2007 (year ends December). Last news of cetilistat is that recruitment is currently taking place for Phase III. Perhaps a year behind the smaller products.

2. Raised 14.5m in placing announced 1 Dec 2006. This probably about 1 year of cash burn so that it must be envisaged that partners will be in the bag somewhat prior to the end of the year.

3. There was clearly disappointment that the drive for partner(s) last year was unsuccessful; as a result Dr Palmer has fallen on his sword and Novaquest have been appointed to takover the search. There are implications of investor concern.

I am not knowledgeable in the sector but recall a statement that it takes not less than 6 months to identify and sign-up a partner in this sector. This suggests that Q2 is possible but Q3 most probable. Last year, the prelims were 10th March so we get an update at around that time. Probably, the finals, 31st May last year, are an internal target.

One gets the feeling that the buzz has gone out of AZM. The stockmarket is notoriously fickle and impatient. Thus the sp getting stuck around 85p. The fundraising was at 80p so this must give a support level. So the downside hardly exists. What about the upside?

I have an old evo statement saying that the then price of 136p would be justified by operational revenues rising to 150m in 2014 with 33% operational margin. If a partner does the marketing then all depends on the terms but that would be equivalent to 50m licence fees going though to the bottom line. I can't see the point in AZM setting up marketing and production facilities themselves so the licencing route seems almost certain. The other option, not unlikely, is a takeover. At what price? Surely there would be competition.

Rather than take any projections further, I would be interested to hear other views, particularly from anyone who has yardsticks for comparison.

I have added a 4 year chart on the header. The sp reached 200p in 2004 on speculation following the Takada licencing deal for Japan. The price was driven up to 190p on news that AZM was looking for a partner for cetilistsat. We now know that Dr Palmer lost his CEO role because that was not brought to fruition and Novaquest have picked up negotiations. The market will expect a deal for Q2 but in the meantime the sp has come back to juct below 80p, a support level because of the last institutional placement.

In my view the sp will start moving in the next month or two in anticipation of news and previous experience would indicate that the sp will climb back to the previous resistance level. I have moved some speculative cfd funds back into the share with a deal of confidence. Looks like a one-sided bet. Margin is 25%. I will build up the holding as the price rises (!). Anyone joining me?

Eric

Waiting & seeing Eric....

do you think our patience will be repaid???? im now down nearly 50%.

do you think our patience will be repaid, im down nearly 50% now. I am not sure about all this hype we read about this type of share and it seems there nothing but disappointment. Skyepharma skp, cenes cen, and bioprogress bprg, (and others) all seem to have similar stories. Could they all just be just of of favour at the moment or something more sinister. Why are the shares higher at pjase 1 than they are phase 3 it dont make sense to me.

Kivver Sometimes you just have to do your analysis and then stick with it. Ofter a falling price does not say anything specific about the real value of the company. I think in this case somehave become impatient. We are just not used to the longer timescale for investment, as for instance in Germany. If you look at pe ratios for instance, investors are typically looking one year, perhaps two, ahead. That is why there remain such good obvious investments as ASOS where you can see the run ahead for three or four years at least due to the pretty well definite continued switch to the internet. With AZM, I feel that I am sitting there with a really good hand of cards playing a pretty long game; others are staching theirs in because they are bored. But there hand is stacked full of trump cards! Do challenge me further.

Incidentally, they are testing their support level at the moment. It was encouraging to see the strong buying in the last hour (the late 50K sale was from an hour earlier). Good time to average down!

Eric