Ziopharm Oncology's Global Strategy Provides Potential Upside for Investors

| About: ZIOPHARM Oncology, (ZIOP)

ZIOPHARM Oncology (Nasdaq: ZIOP) with operations based in Boston, MA (and an executive office in New York, NY) engages in the development and commercialization of a small molecule cancer therapeutics portfolio. Despite no major upcoming catalyst date, I decided to take a closer look when I read the company is using variations of mustard gas and arsenic to treat cancer. The stock has risen 50% over the past 6 months, culminating in an agreement with RJ Kirk’s Intrexon and a positive write up in Forbes.

ZIOP’s portfolio is based off one very simple (and powerful) idea: improve the side effect profile of current treatments. By targeting pharmaceuticals with known cancer-killing properties and horrendous side effects, ZIOP aims to synthesize modified versions which maintain the potency and reduce these side effects. Currently in phase III trials for the lead indication of advance stages of soft tissue sarcoma (PICASSO 3), the lead compound palifosfamide is the active metabolite of the drug ifosfamide. Ifosfamide itself is a prodrug (and is a member of the broader class of DNA-alkylating cancer drugs), and is metabolized into many different components including acrolein and chloroacetaldehyde, both highly toxic. By removing these unneeded compounds, the drug regimen should be better tolerated. The clinical data has validated this notion; the phase II trials showed median progression free survival (FPS, the primary endpoint of the study, and also the primary endpoint for accelerated approval for the current phase III trial) of 7.8 months in combination with Doxorubicin vs. 4.4 months with Doxorubicin itself, a statistically significant improvement of 3.4 months. As with other drugs of this class, the drug is administered intravenously, although an oral formulation is entering phase I trials. Based on the similarity of the phase III trial design with the successful phase II trial, it appears likely that the phase III trial will prove successful, although accelerated approval is by no means certain. Furthermore, ZIOP has received Orphan Drug status in the US and Europe for palifosfamide.

As mentioned earlier, ZIOP has inked a partnership with Intrexon (privately held) to develop and commercialize a synthetic biology-based platform, based on intrexon’s proprietary technology. This program furnishes unprecedented control over the function and output of living cells by providing external control over in-vivo activation and regulation of potent effectors, thereby overcoming challenges inherent in current therapeutic strategies (recombinant protein therapies and constitutive gene therapies). Profit for joint products will be split 50:50 between ZIOP and Intrexon.

Pipeline and Future Developments: While the lead candidate, palifosfamide, has recently entered phase III clinical trials for treatment of soft tissue sarcoma, the compound is in various stages of testing for additional indications. Behind Palifosfamide, the pipeline is stocked with additional candidates.

Darinaparsin, which has received Orphan Drug status as well, is a modified version of arsenic (and the inspiration for the title of this article) whereby arsenic trioxide has been refitted with organic components, rendering it more tolerable for patients without destroying the potency. Ironically, arsenic trioxide has previously been shown to cause cancer of the skin and lungs in humans! Darinaparsin is also undergoing phase I trials for an oral formulation.

Indibulin is a tubulin inhibitor, which are among the most prescribed anti-cancer drugs today. However, indibulin binds to a site on tubulin that is different from the taxanes or Vinca alkaloid binding sites. In contrast to taxanes, which stabilize tubulin polymers, indibulin destabilizes tubulin polymerization. Indibulin is potentially safer than other tubulin inhibitors with no neurotoxicity being observed in therapeutic doses in rodents and in the phase I trials. It has also demonstrated synergy with approved anti-cancer agents in preclinical studies.

Below is a summary of the upcoming events expected with this pipeline.

Fundamentals and Financial Position: ZIOP’s financial position is currently strong with $66 MM in cash and securities on the balance sheet at the end of the 3rd quarter. The recent deal announced adds another $11.6 MM to ZIOP’s coffers, but given the cash burn is starting to increase with the larger, more expensive trials, the company likely now holds roughly $72 MM in cash ($6 MM cash burn in q4 2011). According to the most recent 10q, “the company currently believes that it has sufficient capital to fund development and commercialization activities, principally for palifosfamide, well into mid-2012.”

Additionally, I view the potential $50 MM future equity commitment from Intrexon and half of all eventual sales derived from the partnership as a positive for ZIOP, offsetting the immediate dilution (near term issuance of 3.6 MM shares (7.5% of shares of outstanding) for no consideration, and 2.4 MM shares for 4.80). Following dosing of the first patient in a phase II of an Intrexon oncology candidate, an additional 3.6 MM shares will be issued to Intrexon for no additional consideration.

Insider Transactions: Neutral. No common stock purchases or sales reported in 2010, other than tax withholding sales. (Insider ownership is 7%)

Analyst Opinion and Activity: 2 strong buy rating, 2 buy rating.
1/11 - Rodman & Renshaw maintains market outperform, price target of $18.00.
1/7 - Canaccord Genuity maintains buy, price target of $7.00.
1/7 - JMP Securities maintains market outperform, price target of $10.00.

Conclusion and Future Directions: While ZIOP’s cancer portfolio is very promising and palifosfamide appears to be headed towards eventual approval (possibly even accelerated approval) for multiple indications, valuing the recently announced collaboration with Intrexon is a challenge. The synthetic biology approach of Intrexon is intellectually fascinating and represents a possible game-changer down the road, but at this early stage it is ultimately still speculative, unproven, and (understandably) thin on details. However, the recent agreement with Intrexon and the access to capital with RJ Kirk on the board (and his proven track record) externally validates ZIOP’s potential. More globally, Ziopharm’s strategy of pursuing orphan drug status for its compounds, coupled with rapid expansion into additional indications not yet mentioned, provides further potential upside for investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.