By Ivan Deryugin
The war against cancer has proven to be a difficult war to win. For decades, researchers and doctors have looked for ways to more effectively treat cancer patients, and with fewer side effects. There is no shortage of oncology companies for investors to choose from. The profit potential (to say nothing of the life-saving aspects of the many drugs in clinical trials) in this sector is enormous, and investors are, as a whole, likely to see billions in profit from the sector in the years to come. I would like to highlight one oncology company, a company that has a solid pipeline of oncology drug candidates, as well as several catalysts in the months to come: ZIOPHARM Oncology (ZIOP). Unless otherwise noted, financial statistics and managerial commentary used in this article will be sourced from either trial results the company showed or its latest 10-Q filing.
Catalysts & Pipelines: An Exclusive Focus on Cancer
When it comes to development stage biotechnology companies, investors must focus on catalysts, which include clinical trial results or FDA decisions (either acceptance or rejection, depending on which side of the market you are on). And for current and perspective ZIOPHARM investors, there are several upcoming catalysts.
The first is Phase III data on Palifosfamide, the company's experimental drug for metastatic soft-tissue sarcoma and small cell lung cancer. In Phase II trials for metastatic soft-tissue sarcoma, Palifosfamide showed solid results, with 23% of patients (seven out of 30) showing a positive response, versus 9% (three out of 32 patients) in the control arm (consisting of doxorubicin). Palifosfamide had a hazard ratio of 0.43 in favor of the palifosfamide arm, and a "statistically significant and clinically meaningful" 3.4-month boost to median progression free survival. The drug's safety profile was also good, and, "Preliminary survival data, based on a median follow-up of approximately 9 months, but with a number of patients still on study and data collection ongoing, showed a survival advantage trending in favor of the palifosfamide and doxorubicin combination over doxorubicin alone." Updated data released in February 2012, showed a continued survival benefit, with 40% of subjects remaining alive after 2 years of treatment, versus 30% in the control arm, versus the expected survival rate of 25% based on randomized data. Palifosfamide is now in Phase III trials for its use in the treatment of metastatic soft-tissue sarcoma, and data from the Phase III PICASSO trial is expected within the first quarter of 2013. ZIOPHARM is also testing Palifosfamide for use in the treatment of small cell lung cancer, and it is currently enrolling patients in its Phase III MATISSE trial. Prior data for palifosfamide in small cell lung cancer was positive, and supports the company's decision to move Palifosfamide into Phase III testing in small cell lung cancer.
While Palifosfamide is ZIOPHARM's lead investigative compound, it is by no means the only drug that the company is working on. ZIOPHARM's pipeline contains four other compounds, each of which is nearing Phase II testing. Indibulin is the company's treatment for metastatic breast cancer, and it is currently enrolling patients in a Phase I/Phase II study. Darinaparsin is the company's unique organic arsenic compound, which is being investigated for its potential in treating lymphoma (ZIOPHARM is investigating the drug's role in treating other cancers as well). ZIOPHARM is quick to point out that organic arsenic has been shown in several prior clinical studies to have little toxicity, certainly nothing like the toxicity of inorganic arsenic. ZIOPHARM has partnered with Solasia Pharma to develop Darinaparsin. The drug has received orphan drug status from the FDA for the treatment of peripheral T-cell lymphoma. Darinaparsin has also received orphan drug status in Europe. Existing clinical data for darinaparsin is promising, and Dr. Izidore Lossos (of the University of Miami), who was the lead investigator for darinaparsin in prior trials, has stated that, "this drug is active in highly refractory lymphoma patients and well tolerated. Interestingly a lot of patients I and others have treated with this drug report feeling the best they have felt since first getting lymphoma, having been on many different treatments. The oral data are also promising and darinaparsin could well be effective in treating other cancers as well."
ZIOPHARM has two other compounds in its pipeline. Ad-IL-12 is being tested in the treatment of myeloma, specifically stage III or IV myeloma. Phase I tests showed clinical activity in five of seven patients, and no dose-limiting toxicities. There were three seriously adverse events reported, but one of them was a deep vein thrombosis incident unrelated to Ad-IL-12. The two events related to the trial were pyrexia and cytopenia. The company is currently enrolling patients in the next phase of testing for Ad-IL-12. DC-IL-12 is ZIOPHARM's last compound in the pipeline, and it is a drug that uses dendritic cells to treat cancer. Phase Ib trials of DC-IL-12 showed a disease control rate of 50%, and ZIOPHARM is currently enrolling patients in the next phase of testing for DC-IL-12 as well.
With Phase III data set to be released for its lead drug candidate, ZIOPHARM offers investors the chance to see meaningful gains should it report solid trial data, and the company has a solid pipeline of oncology assets that it is progressing through clinical testing. In my view, ZIOPHARM has the potential to succeed and deliver new cancer therapies to market. Two additional factors support my view: the company's financial condition and ownership profile.
Financial & Ownership Profile: A Vote of Confidence in ZIOPHARM
ZIOPHARM ended Q3 2012 with $95.333 million in cash & equivalents. Based on its burn rate of $57.332 million for the first 9 months of 2012, the company has stated that it expects to have sufficient cash to fund operations through the second half of 2013. While I fully expect a stock offering sometime in 2013, I do not think that investors should view this in a negative light. Dilutive offerings are a fact of life when it comes to investing in the biotechnology sector, and if additional capital is what ZIOPHARM needs to proceed with the development of Palifosfamide and the other compounds in its pipeline, I see no reason why investors should worry over a stock offering.
While ZIOPHARM may be a development stage company, that has not stopped institutional investors from recognizing its potential. Fidelity owns nearly 15% of the company, and Third Security, a venture capital firm specializing in the biotechnology sector, owns over 14% of ZIOPHARM. But ZIOPHARM's support does not end there. Interexon, ZIOPHARM's main drug development partner, owns over 16% of the company. Some might argue that this is not an endorsement of ZIOPHARM, as it was a stake claimed when the two companies struck their partnership agreement. The data, however, tells a different story. The terms of the agreement, struck in January 2011, called for Interexon to purchase 2,422,542 shares of ZIOPHARM (5% of the company), and gave it warrants to purchase another 3,631,391 shares (representing 7.495% of the company). Interexon's chairman, Randal Kirk, also joined ZIOPHARM's board of directors. However, Interexon has not stopped buying ZIOPHARM stock. As of December 7, the company owns 13,533,162 shares of ZIOPHARM, and RJ Kirk owns 1,346,462 shares of the company. (In an interesting twist, Randal Kirk is also the CEO of Third Security). Third Security's latest 13-F filing with the SEC shows that it owns 11,285,275 shares of ZIOPHARM, meaning that there is no double counting of shares occurring. Interexon and Third Security each own millions of shares of ZIOPHARM, and Randal Kirk himself owns over 1 million shares. Collectively, Interexon, Randal Kirk, and Third Security own 26,164,899 shares of ZIOPHARM. Based on the company's 79,619,597 outstanding shares, together Randal Kirk and his companies control 32.86% of ZIOPHARM, something I see as a meaningful vote of confidence in the company's future.
An Options Trade to Minimize Risk and Preserve Upside
On the surface, it would seem as if there is little in the financial world more volatile and risky than the combination of a development-stage biotechnology and options. But, when used properly, options can reduce risk while preserving a great deal of the upside potential that exists when investing in the biotechnology sector. ZIOPHARM is set to report Palifosfamide data in the first quarter of 2013, so this trade needs to capture the release of that data (that being said, investors can substitute the April 20, 2013 calls and puts for other dates). The options trade I would like to present utilizes both calls and puts, in order to minimize costs, but traders can customize it to suit their individual risk tolerance levels.
ZIOPHARM Options Trade
Current Stock Price
Cost of April 20, 2013 $5 Put
Proceeds from Sale of July 20, 2013 $7 Call
Net Cost per Share
% Change Needed to Break Even
The key to this trade is the utilization of a covered call with a different expiration date. The reason for this is because the nature of covered calls leads to an asymmetric payoff in this particular case. If ZIOPHARM reports poor Phase III data for Palifosfamide, the call will likely expire worthless. With no other catalysts on the horizon, it is difficult to see how shares of ZIOPHARM can rise to $7 a share or higher by July 2013, unless the company is taken over (in which case the whole issue is rendered moot). And if ZIOPHARM reports solid Phase III data for Palifosfamide, investors who continue to hold ZIOPHARM stock after their puts expire (and can therefore no longer protect them from a fall) will see reduced risk. Because ZIOPHARM has no clinical trial data to report after the first quarter of 2013, it is unlikely that the company's stock will plunge sharply. While the company will post its Q1 2013 earnings sometime in April (perhaps before the puts expire), its clinical trials for Dariniparsin and Indibulin are set to end in June 2013, and it is unlikely that ZIOPHARM will be able to report data before the $7 calls expire on July 20. This option trade gives investors a maximum loss of just over 7%, a small amount when it comes to development-stage biotechnology companies. And the maximum upside of almost 30% is acceptable, in my view (the potential upside rises and falls depending on which strike prices are used). In my view, should ZIOPHARM report solid Phase III data in the first quarter of 2013, it can easily rally by more than 35% (the threshold needed for the trade to be profitable). In the world of development-stage biotechnology companies, that is a relatively small increase when it comes to good clinical trial data.
ZIOPHARM Oncology has a solid pipeline of oncology drug candidates, and it is set to report crucial Phase III data regarding Palifosfamide within the first quarter of 2013. The company's financial state is decent, and I believe that its ownership profile demonstrates a solid vote of confidence in the company's pipeline and future prospects. Investors who choose to invest in ZIOPHARM can use options to minimize a great deal of the potential downside, while still preserving a decent amount of upside potential. In my view, ZIOPHARM is a worthwhile investment at these levels, and risk-tolerant investors should consider adding it to their biotechnology portfolios.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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