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

Alizyme raising 30.5m, approximately, by a rights issue and a further 2.3m from a US associate. Out of AZM at the moment: it had been my longest standing holding but sold, correctly as it turned out, when it became apparent that they were playing their products long before striking deals. How should this announcemnent be read?

(1) First, they will get their money as the issue is underwritten by Nomura (except for the smaller tranche).
(2) It is reported that some institutional holders are not that happy and may boycott the issue. The deal for the obesity drug, granting Japanese rights to Takeda showed the potential of their drugs and led to market expectation that other deals would be struck. The sp hit around 220p when that deal was confirmed and is now back to 100p.
(3) It seems clear, from the commentary, that there is no real urgency to strike any deal, even for COLAL-PRED, for which approval of Phase III development has been acheived. The reports talk of adding value in the medium term. Why raise 32m if they foresee any deals this year, which had been expected by analysts?
(4) Stockdog may have hit the nail on the head, which he is prone to do, by suggesting a reversal into an outfit with later stage development resources. That may be fine for the bid company but won't necessarily do much for the AZM sp in the short-term.

So it is difficult to see why holders should take up the rights. It seems Nomura will be left with a large line of shares which will be an overhang in the market. OK, so they make their acquisition, but why should that stimulate the sp? Do the directors of AZM care? Not really, they are playing their development programme long, are rewarding themselves well along the way; eventually the drugs will come to market, the shares will soar and they will retire rich and successful, having acheived what they set out to achieve: bully for them! But, where is the argument for buying in the next year or two or at least until the overhang has gone and the sp starts to move. If shorter-term holders decide to sell, Nomura may even have to drop the price, making a loss themselves and giving a better buying opportunity.

Any other views?

Eric

Have just re-read my post of Monday and feel it is justified by subsequent events. sp down to 85.5 against a placing price of 100p. Somewhat sick, Nomura?

Susanna Twidale in Shares today seems somewhat off-beam. "Existing shareholders are expected to exercise their pre-emption rights and take up the offer." Small chance of that, paying 100p against the market 85.5p? She then says that Evolution have a target price of 140p (actually 147p) and Seymour Pierce 191p. But these are clearly obsolete. The conclusion? "Shares says: the 100p price for the shares is cheap so exisitng shareholders should take the chance to get more. The current level also looks an attractive buy for new shareholders."

The interesting point made is that "Dr Palmer told Shares that regulatory delays had meant theat deals could not be done in time and that money had to be raised to keep the projects going." "...a licensing deal in the future is not a problem." But why raise so much money if they are still going for licensing deals? 32m can probably keep them going for at least two years. Meanwhile the price is quite likely to keep sliding. Do AZM care? Maybe not. Could there be real pressure from the investing community to get them to get cracking with licensing deals? Perhaps so. Worth watching because a licensing deal when it comes could take the sp to the SP figure of 191p and beyond. Views? Or is this share now off everyone's radar so that investors couldn't care less?

Eric

Eric, very good analysis and insight. At today's close I do think AZM once again represents exceptional value if one looks to the long term and beyond the botched rights issue. Nomura must be sick but have agreed to underwrite so the extent of the drop is somewhat quizical. Surely Nomura will not sell their stake out in a hurry while the sp languishes below 100p?

This has proved a cyclical stock and imho is well undervalued when one looks at the fundamentals and pipeline prospects. It might need to stabilise first but I'm pretty tempted to get back heavily at these levels and sit it out for a while. I personally do not think it will take too long to get back above 100p again. A bid is not improbable and at current levels think this will only impact the sp in one direction - north. Certainly not for the faint hearted but I believe there is some very good upside to be had here.

Joe: restored my faith in humanity; there was someone out there after all! Key question is whether there is any hurry. The impatient have made for the exit. Nomura will have a huge line of stock which could be an overhang on the market. They are then the worst losers so how do they get the price moving again. Pressure on AZM to put out an RNS promising best efforts to licence at least one drug? Presumably COLAL-PRED being the futhest down the line and European trials approved. Can't see anything else which will accelerate the pedantic pace. AZM will, no doubt, we worth several quid in a few years time, but I do not have the patience of JOB!

Eric

Well Eric, I managed to get on this morning at level between 85.5 and 86p and I'm frankly very pleased with that! On today's performance some reality is starting to kick in and I still maintain we'll not see sub 100p for very long. I really believe that Nomura must reconsider their position, so the overhang, in my view, is not inevitable and I think the reality in the oversell is that even if it does materialise, the current sp is very attractive to mid-long term investors. Given the pick up in volumes, I think the exceptional value at these levels is being recognised - I wouldn't get over excited because some trading will keep the volatility high but this is still a good time to get back on and heavily. I'm bullish and long.

That looks a good buy, Joe - better than a goodbye! I agree the right view is an investment for the long haul - also agree that it has probably bottomed out even if the new shares at 100p will be bound to overhang the market for a while.

Eric

Starting to rally well...100p getting close now.

anybody bought this at 90p?

Had these for a few years. Bought more this week at 86p instead of subscribing to the open offer. Always difficult to value a stock like this, but they have been up at 2.00, and could get there again with a licensing deal imho. Agree that they could hang around at this price a while for the overhang to clear and more news flow,but they now have the funds to wait for the right deals.

Well done. I wish I had had your courage. Chewed it over and ducked. One of the problem was the NMS and being overweight in them already. But perhaps next time.

Good to have AZM holders posting. I came out around 130p as my goals have turned short-term and felt I couldn't wait for AZM to get their licensing deals together. Then we have this placing of an amount of stock which seemed hard to justify. Certainly the price looked impossible as was quickly proven. However, a million bought per day will soon put the overhang behind us. Well done on the buy canary; not completely sure we might not go back there. To me, the mystery remains - why so many shares? One plausibe answer is that they have a buy out of a company with skills in later stage development and marketing to complement their own research, product and clinical management skills. Other views?

Eric

Hello People
This is less technical than the advfn thread and doesn't have it resident Troll (I hope).
I shorted from 120 down as hedge for my holding and got stopped out at 94 on the reverse and put my profits from the short in to a long targetting 111.
Idea is to leave the profits as more "free" shares
Well, we shall see

In case anyone wonders I hold a diverse portfolio of stocks and bonds in US and UK...I am not an "all or nothing" biotech punter but I did buy in when the stock was at 80p, averaged down (I was inexperienced), at 40p ..took up the rights (very inexperienced) and.........rode back up to 150 with a 50% topslice so...I now have a free holding.I like AZM and will stick as long as the news flow remains clear. If they get foggy/tricky with words...I will bail out - always the first sign of wailing and gnashing of teeth

My guess is that for a period 2-4weeks sp drop to 92-94 before gradually climbing back about 125 over 6-8 week period. Nice if it doesn't drop!

daly: helpful to have your background. I bought in at the bottom of the amrket at around 30p, around the time they raised funds at that level. Topped up in 70s, mroe funds raised, and then followed ride up to around 180p. Took most of profits; had one or two sallies around 130p when it seemed that a licensing deal was on the cards but got out before the latest fall when it became clear that they were playing things long.

There is little doubt in my mind that this will come good and will become a billion company but that is voer a 3 to 4 year period. For those preapred to take that term view then its a very sound investment for a protfolio. But when will there be a significant rise in the sp? Management are very happy to play it long, I suspect particularly on the obesity drug. It could be, however, that the institutional holders may want some action more quickly and persuade them to licence a drug earlier, say in the next 12 months. Its worth keeping a close watch.

Just taken a look at the Hemscott 'detailed broker forecasts'. Panmure Gordon and Merrill Lynch both give pre-tax profits of around 6.5m and eps of 4.47 and 3.74 respectively in 2006. 5 brokers state BUY, 2 HOLD and 1 ADD. That's a pretty positive picture. Could be that presentations have led to a more positive picture than that we observe. Mat tuck away a CFD as they are unlikely to drop lower.

Eric

Eric
Have a care with interchanging value and price. We may all agree that the share in undervalued for the long term but that doesn't control the share price in the short term.
Value Stanelco and tell me something with a 1.3M turnover and embroiled in patent infringement cases is worth 250M ........price can be anything and is sentiment driven...value isn't. The further the price diverges from a fair value, the greater the buying opportunity and the likely price spike when good news hits. The longer time passes, the greater the degree of uncertainty removed from the pipeline, the higher the potential value of any deals

IMHO the lasck of news will allow price drift and cause a spike when something good is announced. Te problem is that without any sign of news...I can find better places for my money than leaving it to sit in a no-yield drug development company giving risk but no income.

I hold AZM but will take CFD positions to either hedge my holding or go overweight without tying up significant additional capital. At the moment I am long targetting 111p but...I think I may have called this wrongly...I ran a short from 122 to 94. I have no idea where this is going next LOL

M

will this ever come good. they say 'the trend is your friend', well it aint being friendly to me. someone give me some hope!!!! bought near the top!

AZM will come good. R+D is good, but you may have to hold for quite a while. AGM 17/6/05 and Interims 27/9/05. Either will be informative. I think the brave may try and trade it, but I think it will be dangerous to go short unless it is for the next few days or so.

I have quite a large holding of these, bought a number of times but luckily average price is quite low as I didn't buy at its height. (Luck(:-)

W/W with TLC

AGM will see a positive outlook and overhang cleared. Sure to spike up by end of week. Bargain basement at 84p surely?

I have grouped together the feedback from the AGM off the BB's at:

http://www.ukbiotechs.com/phpbb/viewtopic.php?t=135

Seems to be a generally good event, although slightly tense. Also RP apparently displayed a presentation of the possible news flow over the next two years. It would interesting to see that if they eventually display it on their website.