New Dosage Boosts Zalicus

Biopharmaceutical company Zalicus (NAS: ZLCS) has announced that the Food and Drug Administration approved a 32 milligram dosage for Exalgo. The extended-release tablet is used in the management of moderate to severe pain for opioid-tolerant patients requiring continuous, around-the-clock opioid analgesia for an extended period of time.

What it means
The FDA approval primarily benefits Covidien (NYS: COV) . Zalicus sold the U.S. commercial rights for Exalgo to Covidien's Mallinckrodt subsidiary in 2009 for $15 million in up-front payments, development funding of up to $16 million, and a $40 million milestone payment. Zallicus also receives tiered royalty payments for Exalgo.

Covidien's CEO publicly stated that he expected the drug's peak sales to be in the $200 million range. With analysts estimating that Zalicus' royalties are around 12.5%, Exalgo sales should have provided a nice bit of ongoing cash for the company. However, as of June 30, 2012, Zalicus received only $6.5 million in royalties. That's a disappointing sum.

That's not the only bad news for Zalicus. Earlier this year, Watson Pharmaceuticals (NYS: WPI) reached a settlement with Covidien over patent disputes regarding the Exalgo. The terms of the settlement allow Watson to make generic versions of the drug beginning in November 2013. Zalicus' royalties will be cut in half once the generics are introduced.

The 32 milligram dosage, though, was not included in the terms of the settlement between Covidien and Watson. That means that Zalicus will receive its full tiered royalties for the higher dosage since no generics will be introduced for it under the current settlement.

Sales of Exalgo should increase with the recent FDA approval. Rival drug Opana ER, made by Endo Pharmaceuticals (NAS: ENDO) , is already available in 40 milligram dosage. The higher dosage version of Exalgo will likely be seen as a good alternative for physicians prescribing extended-period pain medication. Yesterday's near-10% rise in Zalicus shares following the FDA announcement reflects this improved sales outlook.

Waiting for more news
While the approval of the 32 milligram dosage of Exalgo is definitely good news for Zalicus, the company is eagerly anticipating more news that will be even more important to its future. It is currently in a phase 2b clinical trial for arthritis treatment Synavive and is in phase 1 trials for Z160 and Z944 pain medications.

These products in Zalicus' pipeline hold the potential to catapult the company into the next level -- or cause it to flame out. Results from the clinical trials will make this week's good news on Exalgo largely irrelevant.

Zalicus is one of many biopharmaceutical companies with high risk and potentially high reward. Another firm with this risk/reward opportunity is Arena Pharmaceuticals. Arena's primary drug, Belviq, is used for weight management in obese adults -- an area of huge opportunity and high investor interest.

However, investors need in-depth information to make informed decisions before buying stocks like these. To help out, one of our top biotech analysts has created a new premium report on Arena Pharmaceuticals. In it, you'll learn all about the key risks, opportunities, and things to watch as the company rolls out Belviq. It also comes with a full year of analyst updates, so click here to get your copy now!

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Fool contributorKeith Speightsowns no shares in the stocks mentioned above.Motley Fool newsletter serviceshave recommended buying shares of Covidien. The Motley Fool has adisclosure policy.
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