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

new fool

Not aptly named or you wouldn't be looking at this share seriously! What I like about AZM is that, if they say something is going to happen, it does. They said that Phase IIb trials should complete in October 2003 and they did (nor are they a one horse show). The main point about AZM's solution is that there are no significant side-effects, not the case with existing competition.

Listen to the chats and articles and read articles on obesity. Just this morning, a Doctor was highlighting that the problem is not just diet and lifestyle but the persons genetic make-up. So a drug is part of the treatment. Its not so much the obesity itself, but the illnesses that stem from it.

From a financial viewpoint, AZM raised a lot of funds, abot 20M I think, last Autumn at 168p. The institutions think its worth that and a lot more. Positive news later this month should drive the share price significantly higher - so get in there joehargan1!

In the end of the day, I opened this topic looking for comments from those closer to the action; to what extent should I build up my existing position in the next couple of weeks?

Eric

Had been hoping to flush out some insights on the likely content of the AZM analyst briefings on 27th September. It must, you would have thought, be material. AZM only say something when it is important. They are just 11 brilliant guys who have been working on these 4 drugs for 9 years now (last year saw positive progress on all 4) so it may be that even there own wives (or hubs) don't know what is happening. Not even a twitch in the buying volumes. The silence is deafening! I may have to just go on a gut feel.

From a tip sheet called trend-watch

Since the beginning of this year, the pharmaceuticals and biotech sector has been among the weakest on the market. There are signs that the sector is now at our close to its base. If so Alizyme should benefit, as I regard it as one of the best biotechs on the market.

Possibly the drug with the biggest potential is ATL-962 for the treatment of obesity. The drug inhibits lipase, an enzyme that helps the body absorb fat. Phase II trials were completed successfully last year and showed that the drug was as effective as the only other obesity drug on the market (Roche's Xenical) but caused fewer gastrointestinal side effects.

The Japanese pharma Takeda purchased an option to take up the Japanese marketing rights to this drug before Phase II results were known. It has now exercised this option, indicating that the trial results looked solid.

The obesity drug market is worth $8bn a year - about 300m people in the world are clinically obese. If ATL-962 gets through its Phase III trials, it could make a huge 600m-700m a year in sales.

One reason why the share price took a dip recently was because it takes a long time to negotiate partnering agreements once a product has passed its Phase II trials. A general rule of thumb is that it takes a minimum of 9 months to negotiate a deal. That's because there's a lot of data to evaluate and a lot of money is at stake. The Takeda deal for Alizyme's obesity drug triggered an immediate 3m payment once the Phase II trials were passed, and commits Takeda to further milestone payments of $37m over 4 years as the drug moves along the road to the pharmacist's shelf. When it gets there, Takeda will then pay double-digit royalties on sales.

Alizyme is currently making losses of around 10m a year, and will continue to do so until more marketing agreements bring in more milestone payments. But the balance sheet is currently well funded. At the time of its last full year results, it had about 22m in cash.

Trying to work out 'fair value' for a share like Alizyme is a nightmare. Brokers try to do it by using techniques such as discounted cash flow. But change the assumptions slightly and you finish up with dramatically different answers.

All you can really say about Alizyme is that the share price will initially be news driven as it strikes new deals or eventually gets its drug candidates through the much more expensive Phase III trials. So long as the company is steadily moving towards the ultimate objective of big-money royalties, the share price will keep marching ahead, though you may need to be patient.

Just remember that, as with all biotechs, the ever-present risk is that a drug candidate will fail its trials, which inevitably results in a big hit to the share price. Subject to that one proviso. BUY

Being a part-time investor and full time doctor I thought I would shed some light on this subject. No doubt obesity is a massive health and image issue in the western world. A magic pill would indeed be profitable. However, I am a bit skeptical about the hype surrounding their new anti-obesity medication.

As mentioned by Kivver, Xenical is already available and has been for quite some time. It is a lipase inhibitor similar to Alizyme's ATL-962. Unfortunately, undigested fat has to go somewhere, and it often ends up in the patients pants. Anal seepage is a problem with Xenical. So much so that almost all the patients that I have put on Xenical stop after about two months. Stomach upset did not seem to be a significant issue, but buying new underwear every week was. Of course the more fat in the meal the worse the problem would be.

I doubt that ATL-962 would be able to avoid the problem of anal seepage or proove to be significantly better than Xenical which already has FDA approval and is prescribable on the NHS. Furthermore, appetite suppressants are also already available (eg. Sibutramine/Reductil) which give very good results. ATL-962 seems to have gained all the media attention as it appeals the our image concious society. Investors should bear in mind and research the other products in Alizyme's portfolio which appear to have very good potential. But I do believe they will take longer to get on-line.

But this stock does seem to react well to good news, so postive news could push the share price higher than it should be.

Thanks in-front, that is an excellent piece and answers some of my questions. I think i will follow the old adage 'buy on rumour, sell on fact'.

Good buying today ahead of interims next Monday.

Prefer to be in than out at the moment, you know how these shift on good news.

capa

Kivver

Thanks for the very helpful post. Eurotraders report on AZM covers much of the same ground. there is some helpful commetn which supplements trend-watch:

"Drugs have to undergo three phases of clinical trials before regulators approve them for market. Small biotech companies usually cannot afford to market a drug so tend to license their most promising experimental drug to bigger pharmaceutical firms in exchange for a one-off signing fee and a royalty on sales.

Alizyme currently has four key products all at impressively advanced stages in their development but lacks early stage projects. To become a substantial company it will probably need to acquire early stage projects or even a whole company with a pipeline that fills the bill.

Alternatively, Alizyme could be viewed as an attractive take-over target as it could slot easily into a bigger organisation and would add weight to the alte stage pipeline of any potential acquirer as it has the three products close to phase III.

There is also the potential of new licensing deals for the group's key obesity and IBS drugs which are now getting ready for phase III trials. However nothing is likely on this front until late in 2004 at the earliest." Incidentally the recommendation in April was HOLD given the low likelihood of early news.

Volume has jumped today to approaching 1% of the equity. The fact that press and analyst presentations are scheduled for next Monday makes it seem quite likely that there will be material progress to report. There seems little to lose in taking an aggressive position before then and a lot to gain considering the effect of the positive Takada news, re the licensing of the obesity drug, last Autumn.

in-front

Many thanks for an inciteful clinical viewpoint. I don't know whether you have a copy of the 2003 annual report, but I would appreciate your comments on the following points:

"In a total of 5 Phase 1 clinical studies .... ATL962 (the obesity drug) was found to be safe and well tolerated at does up to three times the anticipated therapeutic dose. (In Phase 1b studies) subjects excreted similar levels of faecal fat, .... but had substantially fewer gastrointestinal side-effects than subjects similarly dosed with orlistat, the active ingredient in Xenical ...". This seems to be the main argument for AZM and the experience of your patients with Xenical suggests that ATL962 could be far more successful. Reasonable?

The second point relates to the application to patients with diabetes with a view to establishing a Phase IIb trial this year. "Successful results from this trial should further enhance the value of ATL-962 ...". Significant to you?

Referring to the commercial opportunity, they claim that the potential market is in excess of 160M patients in major territories. "The two main marketed products for obesity, Xenical and Meridia, currently have safety and/or compliance issues. The only potential significant competitor, that is currently in Phase III development" (and thus ahead of AZM) "is ... Accomplia. An effective drug with no patient compliance issues could provide potential sales in excess of US $1billion per annum". Fair comment?

Eric

Eric

I haven't read the annual report but I will try and answer your questions the best I can. Your first statement confirms what I had suspected earlier. I had expected that anal seepage would be a problem with ATL-962 which was confirmed from the statement "subjects excreted similar levels of faecal fat...". This is what troubles patients most and reduces compliance drastically. Most people were happy to put up with a bit of gastro-intestinal disturbance but soiling their pants was not acceptable. However, both of these problems are controlled if the person sticks to a reasonable diet. But when large fat meals are consumed these problems become untolerable. Most people that start xenical feel that they have a licence to eat whatever they want and thats when the side effects kick in. In that respect, if Alizyme's claim of reduced stomach upset is true, it would provide a slight advantage but not a major one because both drugs would cause anal seepage which is the biggest problem for patients.

Furthermore, the results that you have highlighted are from Phase I trials. Traditionally, Phase I trials are animal studies. Human subjects are usually not incorporated until phase II and beyond. Are these results being extrapolated to a human system? Or was Phase 1b just a typo and meant to be IIb?

Your second statement is interesting and a logical step for the study. Type 2 diabetics are prone to being over weight (unlike Type 1 where the reverse is true). Diabetics suffer from many problems and being overweight aggravates this issue. Xenical/ATL-962 could be used as an effective measure to reduce caloric intake (fat contains more than double the amount of calories in protein or carbs per gram). If ATL-962 is proven to be safe and effective in diabetics then that can only be positive.

For your third statement, I have to be honest and say I haven't heard of Meridia or Accomplia. Guess I'll have some more reading to add to my pile. But I would't dispute that the treatment of obesity is a massive money maker.

The only problem is whether it gets approval for use. Here in the UK medicines are tightly regulated because the NHS foots the bill. It won't support the use or pay for a new drug unless clinical trials can prove a significant clinical advantage over an already accepted medicine that does the same job. In North America, FDA approval is also notoriously difficult.

When a company has millions of pounds and several years invested in a new drug, you'll be suprised at what it will get up to to prove their new drug is best (cf. Paxil). What statisical analysis was used? was the data skewed? were the trials double blinded? were the studies conducted at independant sites with no ties to alizyme? etc etc. Be critical in your analysis.

In my opinion Alizyme's portfolio looks very promising. But they seem to be burning alot of cash with widening losses and they still have the hurdle of FDA approval to get by. I'm a bit too much of a coward for this one, but have a gut feeling that I'll be kicking myself later for not getting in on this.

in-front

Thanks for your prompt response. I find this very helpful - I have just increased my holdings ahead of next Monday, your comments notwithstanding. This is primarily on the view that the market is with Alizyme and obesity is a hot potato. At the same time, the issues raised do affect a longer term judgement and whether the holding should be considered long or short-term. Incidentally, the AZM annual report can be obtained through the free FT service.

It wasn't a typo and the report harked back to Phase Ib. However, it is clear that the study was on humans as they are referred to as volunteers - not really applicable term to an animal! The Phase II study was of three levels of ATL-962 plus placebo. There was no real difference between the three dosage levels but all were significant against placebo. One matter that I am convinced on is that the company team is very professional which comes across in their documentation. It is noticeable that they were successful in raising funds early in 2003, when the market was at its pit of depression, and also at its peak later that year, at the then market prices which indicates their ability to convince the financial analysts face to face. I can understand gasto-intestinal side effects putting people of using the drug, but if the price of overcoming obesity, and particularly its side-effects, includes attention to diet alongside the drug, I would have thought many would persevere. The press seem to be doing a much better educational job these days and presumably you doctors are too.

Against the concerns re approval is the very significant funding from Takeda Chemicals, the largest pharmaceutical company in Japan, which is being used currently to offset the development costs. My viewpoint is that it is likely, as per the Eurotraders view, that they will have been negotiating a similar agreement(s) for other markets. If nine months is the norm then they have had time to select a partner and to be well advanced in achieving an agreement. We will presumably know on Monday which way they are going. I accept that Phase III is a very expensive stage; they may be able to cope with the other three drugs but they have already admitted that ATL-962 is beyond their scope alone. If they are raising funds to do it themselves, I think that would be bad news. I have increased my stake against a licensing outcome: I have expressed the view above that it seems a one-sided bet, with substantial upside and minimal downside. But still need to understand better the heart, or gut, has acted, but the head is a step behind!

Eric

AZM pretty quiet today and no movement in price. I find this surprising given the interims on Monday with both press and analyst briefings. Notwithstanding the gentle discouragement of our medical fraternity, I have switched funds out of my overweight, but potentially dramatically positive, holding in ASOS and increased my AZM holding. I see three possible outcomes: (a) it is a nice, professional presentation but essentially steady as she goes (50% prob.) and the price meanders on; (b) there is good positive news on drugs in Phase III and they report positive progress on talks for funding the obesity drug worldwide (25% prob.) and the price recovers its late last year levels around 180p; (c) they announce a partner for obesity or late stage negotiations (25%) and the price takes off (where to?). Seems a one-sided bet to me with no downside. Can't see that dirty knickers are too much of a problem - what about nappies? Anybody else buying? - if not, why not?

EW , been thinking a lot about this and watching the programmes on the telly re obese kids. What is needed to me is for them to stop eating junk NOT take pills to suppress appetite or make the stuff come out of their bum. If your hooked on junk food and obese you will no doubt have deep psychological problems associated with this and smelly pants as well I would have thought was just a step too far.

I have no position and would welcome any argument - I just cannot see this drug ever becoming huge unless it is associated with dietry help.

Having said that support is close at 125 and I will be watching carefully.

maddoctor

Attitude is far from mad. However, the market does exist and it is generally accepted that AZM's drug is a potential blockbuster. Really the only important thing at this stage is whether one of the pharma. majors is sufficiently impressed to want to take it on board. Takeda were prepared to pay $42m for the Japanese market alone, so worldwide markets must be worth several times that. It seems to me that AZM have to follow that route because the Phase III trials would be far too big for them to handle by themselves. Hopefully there will be positive news on Monday. A cautionary note is that the price has subsided a bit today although volumes have been small. Can't understand why there are not others wanting to take a punt! Having said that, have acquired a holding in Alltracel Pharm. (AP.) today who tackle the obesity problem from the 'other end', in particular, reducing cholesterol. Looks very good recovery situation on 12 to 18 month view.

Eric

EW , AP. on my list as well but chart not telling me anything and volumes excepting today too low for me at present. Was that your 337,000?

As for azm "a potential blockbuster" is a phrase which has been used for a long time - I want to know how it can become that.

I will look with interest at what they say MOnday and good luck

maddoctor

Wish I had the lolly to invest the odd 70K here and there! No, I took up a slice of the shares being offered by Hoodless Brennan; the note against AP. says they have disposed of quite a substantial holding. I see them as a medium term buy but would have thought that they are far better value now than when trading at around 50p. The fundraising being out of the way berhaps will start a gradual ascent - turnover for the year forecast as up to 4m+ against 1m, perhaps looking for break-even next year. At least they have on-going fund generating products to go alongside the more esoteric research.

Eric

Interesting results today from Alizyme. Probably most noteworthy is that loss is down to 1m, explained by their use of outsourcing and that they have been in between clinical phases on each drug. Their successful fund-raising last Autumn should therefore see them beyond 2006. Their tactics, to obtain partners for expensive Phase III trials from a position of strength, make sense. Independent projection (published in Datamonitor) puts ATL-962 share at $945 of $2.5 bill. worldwide market. Very positve forecast also for Renzapride. Interested to hear from in-front in particular on clinical aspects of report.

Where are we in investment terms? Given the sort of numbers above and their continued delivery against their plans, the cap. of well below 200K should be a fraction of that in two years time. On the other hand, there may be a fair wait before the next real stimulus to the price comes: collaboration for funding for Renzapride during 2005; completion of Phase IIb trials for ATL-962 with obese diabetic patients in later 2005; partnership agreement for ATL962 not until 2006. Its an ideal share to lock away for a couple of years with potential for a gain of 2 to 3 times and relatively little downside risk for a share in this sector. I will hold onto the shares in my wife's name, for whom patience is a virtue, but have already moved on my more impatient funds to pastures new!

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