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

There she goes again - pandering to her grandson, Harry. Who does she think she is? - Helen Mirren?

queen, lovely to see you too. What a day for Alizyme, in fact what a week so far, slipped a little late on today, but all of a sudden there's signs of life, a bit like spring coming, oh joy.

Er, I notice you don't have a little envelope next to your name like some of us do...

Something brewing between Queen and Harry! Unfortunately Harry is off to Iraq whilst the Queen will stay in her palace. Plenty of sellers to match the buyers but I suspect that the sellers will die out before the buyers. Can't see any resistance level for a long time. Its really a one way ticket given the optimism of the report. Lookign for a mark-up again in the morning.

Eric

I have added the following comment on the preliminary results to the header - Eric

No hard news re licensing deal(s) but market has responded positively to statements made. New CEO comments: "Based on my discussions and interactions since becoming CEO, I am confident that 2007 will see the successful conclusion of a number of transforming deals for Alizyme, generating a superior return for our longstanding and loyal shareholders". Alizyme are not prone to exagerration, so this must be viewed as an extremely bullish statement. Not only are they further along the road than last year, but McCarthy supports the view by the statement that they are working closely with Novacrest 'to assist with the commercialisation of our products by utilising their expertise and leveraging their extensive network within the global biotechnology and pharmaceutical sectors.'

At an sp of 100p, the capitilisation is about 200m. According to a Dec. 2005 Evolution analysts report an income growing to 150m and margin of 33% by 2012 would support an sp of 136p. If they rely on licensing income then the gross margin % could presumably be double that; if either that is the case or the income is doubled, then a target price of 272p would be in order. Merrill Lynch have given a target in excess of 200p in the past and trial findings have been very positive since then. Certainly, it is reasonable to expect that the climb this year will exceed those of 2004 and 2006.

Harry, One doesn't need a profile, One is known to all. Take care overseas.

Aww

I agree Eric , AZM hit 190p in may'06 on anticipation alone.
I got in @75p and is by far my biggest holding , thats my confidence in the company.
I'm sure this year AZM will rocket.

Well done, Neil. A really good acquisition and prepared to run the profits. Not sure how high the ceiling (I suspect higher than most analysts predict) is but agree the rocket. Good solid end to the week with a million or so shares traded and a majority of buys. Expect some good weekend comment and hopefully a further rise on Monday. This is really third time lucky and the climbs on the previous occasions were consistent and prolonged.

Eric

a quick look indicates next quite still hurdle is at 120 though sp is already moderately o'bought

The hype continues. Remember SEO and many of the same punters and some of the ramping. Is this going to be another damp squib.

Anybody new to this thread watch your backs.

I think Alizyme will have to wait a bit longer for a deal on Cetilistat, for a couple of reasons.

1) They are unlikely to be able to conclude a deal for Cetilistat until after the competitive position in the US regarding Acomplia has been clarified by the FDA, who are not meeting until 14th/15th June; placing a deal for Cetilistat well into August/September/October, i.e. at least 6 to 8 months away.

2) The new CEO let slip at a conference presentation in New York earlier this month, they still have some modelling and invetro work to do in order to clarify for potential partners why Cetilistat has less side effects than Xenical, plus AZM will then be making a series of presentations to potential partners over a few months; so nothing is likely to happen yet imo.

for a small company in biosciences etc, may i point you at PRX on which i have just started a thread

Cynic: 120p was the upper side of a trading channel last year with thee ventual break downwards. I don't see any aprticularly reason why it should override the previous rising profiles which went straight through 120p although there was effectie resistance at around 115p for a couple of months. I suspect the primary criterion will be the perception regarding potential deal(s) and the level at which they will be set.

Ludlow: Thanks for the post and the feedback from the US presentation. The Phase 2 outcome statistics were ahead of expectations in terms of side-effects; still, its reasonable for potential partners to want to probe the figures. Positive is that indicates serious interest and from more than one partner; competition should improve the terms. Could you clarify what the Acomplia matter is about please?

Eric

EWRobson, Acomplia is a diet pill from Sanofi which is currently going through the final US pre-launch regulatory process. Although it acts differently to Cetilistat, it is said to be an important potential competitor to Cetilistat, and hence partners for the latter are said to be awaiting clarification on Acomplia's US label (among other things) before finalising terms for a deal on Cetilistat. The FDA are scheduled to meet on Acomplia on 14th/15th June, suggesting a deal for Cetilistat will be delayed until after that date.

Ludlow Obesity is a hige market and there are a number of different appraoches. Cetilistat causes weight loss by blocking the digestion and thus the absorbtion of fat from the diet. Acomplia , in contrast, operates by reducing the appetite. The Cetistat testing has taken the established drug Xenical and proved benefits in terms of reduced side-effects. As I read it, they are viewed as being in separate markets and Acomplia is not therefore in direct competition. Your other point relates to the financial model and therefore could well take in the wider market. As you reported the US meeting this comes over as a task in hand of an analytical nature and not questioning the input in terms of the Phase II testing. I find it helpful to know what is happening and reassured that the process towards obtaining a partner(s) is progressing. Renzapride and Colal-Pred are further down the line with Phase III completion by Q4, bit I suspect that no deal will be done without the crown jewels. Thanks again for your input.

Eric

Acomplia targets the CB1 receptors in the brian, and the common side effects include mood swings, depression, and anxiety.
Sanofi also state that Acomplia should not be initiated in patients with major depression.
It is reasonable to assume that unfortunetly depressive disorders are common with obesity.
Cue Cetilistat.

EWRobson, although Renzapride c-IBS is currently in PIII, the results are not expected until around the end of 2007 (not Q4) and that trial then has to be followed by a second PIII c-IBS trial in the same territory; so it is still at least 5 years from market. There also have to be seperate PIII trials for Renzapride m-IBS, which has not even started PIII. In addition, there are outstanding patent issues still to be resolved with Renzapride.

COLAL-PRED is only in PIII for one of its two indications, and in only one territory (EU).

There has been a challenge to ATL-104 by another company in Europe.

Cetilistat is encountering difficulties due to delays with US regulatory determination of Acomplia affecting clarity of the competitive position and thus deal terms, potential partners asking for more data about its side effects in compoarison to Xenical, and the fact many countries are now refusing to provide state funding for obesity drugs.

Shares comment this morning on results: A lucrative licensing deal for Cetilisat should send the shares soaring. Buy.

Comment covers the following: (i) licensing partner needed to help fund the costly Phase III trials for Cetilistat this year; (ii) the 14.5m share placing leaves the company with a healthy cash balance of 27.5m which management says is enough to see it through to the second half of 2008. I think these comments have to be taken together. The cash drain is presumably accelerating with three drugs at the Phase III stage. They can probably cope with Renzapide and Colal-pred going through Phase III but not Cetilistat which needs a bigger patient population. From the investor standpoint this is positive. Alizyme seem to have been quite happy to take their time but do ned a partner to progress with their drug with the major potential.

Ludlow Castle. (a) Why does Renzapride need a second c-IBS trial in the same territory? (b) If this is the case and trial is mounted in 2008, why are we talking about five years to market? (c) Why can't Renzapride c-IBS procede to market in parallel with Phase III trials on Renzapride m-IBS? (d) What are the outstanding patent issues to be reolved? (e) Why can't Colal-Pred be marketed in Europe whilst undertaking Phase III in US. (f) What is the challenge to ATL-104 in Europe? (g) Acomplia is surely in a completely different market sector to Cetilistat - if there is some market impact, what is the potentil impact on Xenical's market of Acomplia? (h) What is the additional data required by the drug companies in relation to Xenical; is there any reason to anticipate any difficulty in providing such information from the Phase II trials data? (i) Which states are refusing to provide state funding for obesity drugs; how is this impacting Xenical sales and how does it rest with the increasing medical concerns over the impact of obesity on other conditions?

You clearly are approaching this with good background knowledge. Is your negative stance in relation to Alizme's products influenced by other factors?

Eric

EWRobson, in answer to your questions:

(a) Why does Renzapride need a second c-IBS trial in the same territory?

The current Renzapride PIII c-IBS trial in the US (results expected around end of 2007) has to be followed by a second PIII c-IBS trial. I do not know why but it was mentioned on a number of occasions by the former CEO and in various documents.

"This PIII study protocol was developed following discussions with the FDA...in July 2004, and subsequent correspondance. The agency confirmed that a second PIII study would normally be required for approval....Alizyme intends to gain FDA agreement on this first PIII study protocol and the study will be undertaken in the USA. The second PIII c-IBS study protocol will then be developed..."

Source: Placing and Open Offer document, Page 38, Spring 2005


b) If this is the case and trial is mounted in 2008, why are we talking about five years to market?

1 year to current PIII c-IBS results + 1 year to assess data and prepare for second PIII c-IBS trial + 2 years for second trial + 1 to 1.5 years for final regulatory approval and launch, etc = 5 years away from market for Renzapride c-IBS USA


(c) Why can't Renzapride c-IBS procede to market in parallel with Phase III trials on Renzapride m-IBS?

It could be but Renzapride has not yet even commenced PIII m-IBS, in any territory.


(d) What are the outstanding patent issues to be reolved?

Renzapride's patent has expired and so only has 5 years US protection and 10 years EU protection (under special arrangements). AZM have applied for further patents covering the manufacturing route/different salts, to extend the protection, but the response from the patent offices is still awaited and therefore a risk.


(e) Why can't Colal-Pred be marketed in Europe whilst undertaking Phase III in US.

COLAL-PRED could be marketed in the EU whilst undertaking US trials, but the point is the total market for the two COLAL-PRED indications in the US and EU is only small at approx 200m pa; so the market for just the lead one indication in the EU will be even smaller, at approximately 50m pa, giving very low initial royalties to AZM from what is their lead drug and certainly not justifying the current market capitalisation of the Company.


(f) What is the challenge to ATL-104 in Europe?

The European patent to ATL-104 was opposed after grant and was revoked after a hearing at the European Patent Office in February 2005. I believe AZM were considering an appeal.

Source: Placing and Open Offer document, Page 19, Spring 2005


(g) Acomplia is surely in a completely different market sector to Cetilistat - if there is some market impact, what is the potentil impact on Xenical's market of Acomplia?

Cetilistat will be in competition with Acomplia and Xenical (and other drugs) which are all obesity pills. The competitive position impacts on the deal terms for Cetilistat, so partners first need clarification of the situation before concluding a deal, e.g. they are awaiting a decision from the FDA on the approval of Acomplia in the US, which is not expected until mid June.


(h) What is the additional data required by the drug companies in relation to Xenical; is there any reason to anticipate any difficulty in providing such information from the Phase II trials data?

TimMc C has said potential partners for Cetilistat have asked for additional info on why the side effects profile of Cetilistat are apparently different to Xenical. AZM are undertaking further modelling and in vetro studies to try to provide this information. This obviously adds to the time, further delaying a deal. Ultimately, it remains to be seen whether AZM can provide a sufficient explanation.


(i) Which states are refusing to provide state funding for obesity drugs; how is this impacting Xenical sales and how does it rest with the increasing medical concerns over the impact of obesity on other conditions?

Several countries across Europe are refusing to provide state funding for obesity pills such as Acomplia and thus potentially by implication for Alizyme's Cetilistat. These include Germany and France (funding restricted to obese diabetics in the France). Obviously, if state health care providers are unwilling to provide state funding for obesity drugs, it will have a major negative impact on sales of those drugs, including potential products like AZM's Cetilistat and thus the value of Cetilistat in terms of reduced deal terms and sales royalties, e.g. for Germany, the considered opinion is:

"As a non-reimbursable drug, sales of Acomplia in Germany are likely to be far lower than if it was covered by the state health insurance program."

Alizyme has an SPA for Renzapride so only one PIII trial is needed for this particular indication. The sales for Zelnorm were more than $500m in the US alone, so even one indication in one trial group (the PIII are in women, which constitute the largest market) will be a substantial market. Presumably further trials will be needed for other indications.




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adequately address objectives in support of a regulatory submission.