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Tuesday, was nothing short of a disaster for the oncologic drug company Ziopharm (NASDAQ: ZIOP) and its shareholders after the company reported that their flagship product palifosfamide performed so poorly in its 447 patient phase III trial for the treatment of soft tissue sarcoma that the company gave up any hope of an FDA approval for this particular indication.

"We know that based on (the) progression-free survival (RATE), there is no way the drug will get approval anywhere in the world," Chief Executive Jonathan Lewis said, according to Reuters

This shocking move sent Ziopharm down by nearly 65% in Tuesday's trading, which moved the valuation of the company to about $145 million, or a price per share (PPS) of $1.82 at Tuesday's closing bell. ZIOP has not seen these levels since 2009, when the stock market was reeling from the possibility of financial collapse. Making things even worse, it seems that the company's cash burn rate during the recent trial have depleted much of the company's reserves, which paves the way for a public offering later this year.

The company has yet to reveal the data from the phase III trial, but we can presume that the palifosfamide and doxorubicin arm did not outperform the doxorubicin arm with statistical significance regarding the progression-free survival component of the trial's endpoint. As implied from CEO Jonathan Lewis' comment, this isn't something that can simply be shrugged off, and basically spells the end of the development program.

But, despite all the bad news, it seems that the market (and the company) haven't completely dismissed palifosfamide's potential in the non-small cell lung carcinoma (NSCLC) indication. This may encourage a number of shareholders to hang onto ZIOP in the hopes that the company will have better luck here, but another phase III trial will be expensive to run. The implication is that ZIOP may use the "hopes of a phase III turnaround in NSCLC" to justify a pretty big public offering later in the year as mentioned earlier.

While it's tempting to consider any stock that falls nearly 65% in one trading session to be "cheap", I would advise investors to be careful about investing in small pharma companies that see phase III failures in their flagship products. Since the market hasn't really factored in the potential for palifosfamide to fail in the NSCLC indication (after a costly phase III trial), and since the market is uncertain on the size and timing of an inevitable equity financing, one can't automatically assume that all the damage has been done and that ZIOP can't drop significantly lower in the near future.

One also can't assume that the significant short interest in the stock (at ~23% of float) will result in a short-covering recovery rally in the near future. Most of these positions should be deep in the green.

The overhang of palifosfamide's disaster in the soft tissue indication will also last for a very long time, and I think there's a better than even chance of palifosfamide being completely abandoned down the road.

Investors who are interested in the rest of Ziopharm's pipeline should probably be paying close attention to the DNA therapeutic programs, although they are in early-stage trials and have virtually no data to prove their efficacy at this point. Since I don't think ZIOP isn't a particularly attractive risk/reward play at this point (on either side of the trade), investors may want to just stay on the sidelines to simply see whether or not palifosfamide will cut it as a NSCLC drug.

Source: Ziopharm's Palifosfamide Fails Its Soft Tissue Cancer Indication, NSCLC Next?