The biotech environment
It seems nobody's calling the bottom on biotech anymore, but I think biotech is ready for a bounce, if not a full-on recovery. This February, the biotech index (NASDAQ:IBB) crashed through the highs of February, 2014. However, the long-term trend on the index is still positive, given that the price is above the 200 SMA and the same SMA is rising. Prices are currently above any price pre-2013. We have seen a correction, but we haven't seen proof that the biotech "bubble" has really been popped. Until such proof occurs, I am interested in current rebound candidates. The hard-hit CAR T category of biotech was an easy choice for me, as tickers like KITE, JUNO, and ZIOP had performed formidably last year. In the coming weeks, I will be watching closely for performance leaders.
CAR T and ZIOPHARM
I chose to analyze ZIOPHARM (NASDAQ:ZIOP), a company developing chimeric antigen receptor T cell (CAR T) therapies, because its valuation is highly sensitive to general market sentiment. At the best of times, investors are willing to practically ignore valuations for "long-shot" drugs that might cure cancer. When ZIOPHARM acquired Sleeping Beauty in January last year, share price rose from $5 to a 2015 high of $14.93. Now, though, the price is back at $5, possibly confirming the skeptics, who claimed ZIOPHARM's chances were low and even that its intentions were shady. To assume so, however, would require tunnel vision. The majority of biotech stocks have been hammered, with 50% losses being frighteningly common.
What's the rhyme and reason for giant losses? Sentiment, of course. But beyond the sentiment is the company itself. Let's examine the management, brief history of ZIOPHARM, and its recent developments:
MD Anderson Deal - On January 13, 2015, ZIOPHARM made itself a major player in the race for CAR T treatment through its purchase of Sleeping Beauty, a therapy designed at the University of Minnesota and currently under study at the University of Texas MD Anderson Cancer Clinic. The purchase was the largest ever financial transaction between a company and an academic institution, totaling $115 million in stock, divided between ZIOPHARM and its partner, Intrexon (NYSE:XON). ZIOPHARM gave 10,124,561 shares for its share of the rights, in addition to 1,597,602 shares to push the deal through prior to the JPMorgan Healthcare Conference (a $15 million sweetener offer from ZIOPHARM and Intrexon). The share price performed spectacularly, while at the same time, some (investment) writers voiced their concerns over the deal.
Some important specifics of the deal:
- An exclusive, worldwide license for Sleeping Beauty and its applications.
- Certain existing research programs involving studies of the therapy.
- ZIOPHARM is obliged to fund research for a period of three years, in an amount between $15 and $20 million per year.
Management - The CEO who oversaw the deal was Jonathan Lewis, who was also CEO on March 30, 2015, when ZIOPHARM entered into an agreement with Merck Serono, whereby Merck agreed to fund two CAR T studies with a target of their choosing. However, on May 7, 2015, Lewis was replaced by Laurence Cooper, a pediatrician and professor whose main work has concentrated on testing and developing the CAR T therapies at the University of Texas MD Anderson Cancer Clinic. In this video, published by Patient Power in 2013, Dr. Cooper describes CAR T treatment and the goals and future of his research. He describes CAR T therapies with impressive clarity and confidence. However, despite his experience, more has been made of the conflict of interest inherent in the overlapping roles of Dr. Cooper than the obvious benefits of hiring a leading researcher in the field of CAR T.
Technology - As Dr. Laurence Cooper describes in the Patient Power video, CAR T treatment is a highly personalized therapy. Doctors first extract existing T-cell DNA from the patient and alter its genes. The new cells, when re-introduced to the body, alter the patient's immune response to the targeted cancer cells. This existing process, proven successful by companies like Novartis and JUNO Therapeutics, is expensive and highly involved. ZIOPHARM's strategy addresses the issues of these "viral vectors" ("Why Investors are Excited About Intrexon and Ziopharm's New Deal," The Motley Fool). Rather than using a viral vector, ZIOPHARM is attempting to use a "non-viral, DNA-based plasmid system." This system would transform CAR T from a personalized therapy to an off-the-shelf drug treatment. Such a transformation may lead to cheaper and more effective treatment. It has the potential to revolutionize CAR T, which is already on the frontier of cancer treatment.
Beneath the obvious excitement and profitable exhilaration of the deal between ZIOPHARM, Intrexon, and MD Anderson, was a latent group of sellers. The most predictable of this group was the University of Texas Investment Management Co. (which managed the shares paid to MD Anderson Cancer Center), which controlled 12 million shares as of Q3, 2015. As of February 5, 2016, the company had sold all but 2.5 million of those shares. In the meantime, the company's share performance declined nearly as drastically as it had risen. Selling from the University of Texas was coupled with short selling from The Street Sweeper, which published a negative piece on the ZIOPHARMA deal. This piece attacked the deal as expensive, over-sold, and shady. The company's short position was disclosed at the bottom. A similar piece (though somewhat less biased) was published in Seeking Alpha by Investing Healthcare. Notably, as of 1/15/2016, there were more than 39 million shares short and an average trading volume of roughly 3.75 million. 39 million is 36% of the company's float.
Aside from the massive amount of selling that arose from share issuance to MD Anderson, the anticipated cash raising from 10 million common shares in February 2015 (at a fortuitous price of $8.75/share), the short selling campaign, and the severe and ongoing biotech correction, investors did have some reason to be sensitive to the new risks of the company. The risks are common to developmental biotech companies, but I'll list them here:
- Need for ongoing cash-raising to continue research
As mentioned, ZIOPHARM initially agreed to provide at least $15-$20 million for research and development of Sleeping Beauty. Current cash and equivalents are at $163 million, as of Q3, 2015. The yearly burn was previously $28 million (according to a previously linked Motley Fool article). The research agreement with Merck could help the company prolong its considerable cash balance.
- Potential for drugs to fail in the trials
Relatively little is known about the safety or efficacy of ZIOPHARM's technology. The treatment has shown potential, but like most of the company's drugs/therapies, it is still in early development. There is a high likelihood that Sleeping Beauty will never be approved by the FDA for commercial treatment.
- Possibility of being misled by management
Many months ago, writers were accusing ZIOPHARM of leading investors on for the sake of raising cash and profiting from the news of the mega-deal. The Street Sweeper wrote: "Ziopharm has quite the promotional history, increasing chances that this experimental technique also won't develop into a commercial product." A failed phase III trial from 2013 was cited as support. However, claims that investors were intentionally misled appear unfounded, especially with Laurence Cooper as CEO.
Cause for optimism
Ultimately, the company has staked itself on a risky bet. And, personally, I find the coupling of a for-profit company and an academic institution ethically troubling. However, the appointment of Laurence Cooper as CEO has legitimatized the company's research, development, and its investment in Sleeping Beauty. One important reason for ZIOPHARM's ambitious move is its desire to leverage access to Intrexon's RheoSwitch technology. The technology helps control the modification of certain genetic targets. Chris Bunge presents a fine explanation of the technology is his post Intrexon: Endless Opportunities With Derisked Business Model, for those interested in learning more. Success in this area would make ZIOPHARM a definite leader in the cutting-edge field of synthetic immunology.
As far as data is concerned, not much clinical data is available. This paper from January 2014, written by researchers at the University of Minnesota, covers some important technical details of Sleeping Beauty and its applications in mice. Use of the drug on humans has been documented by researchers at MD Anderson in the report "'Sleeping Beauty' Technique Modifies T Cells to Treat B Cell Malignancies". At the time of the report, May 2014, studies were ongoing, but tolerance of Sleeping Beauty was acceptable. In November 2015 3Q report, the company stated that an update on "Sleeping Beauty non-viral gene transfer technology (including data), will be presented to the medical and scientific community prior to year end." Other than an older report from September, however, there has not been much for investors to mull over.
ZIOPHARM will report Q4 earnings on February 24. Laurence Cooper's business leadership is certainly being put to the test by the strains of massive price per share losses. Although the saying goes that no news is good news, it certainly doesn't feel that way for impatient investors. At least there are some major reassurances:
- The University of Texas is mostly done selling the shares paid to MD Anderson in exchange for Sleeping Beauty.
- Large short-interest encourages chances of a short-squeeze.
- Lots of cash after recent $87.5 million cash raise.
- Progress on other trials, such as the Phase 1b/2 Study of Ad-RTS-hIL-12 Gene Therapy in Patients With Locally Advanced or Metastatic Breast Cancer.
- Experienced doctor (Cooper) leading the team.
Of course, so much depends upon the biotech tide rising yet again. The hottest sectors often fall fastest, and I can only speculate as to the chances for CAR T cancer treatment technologies becoming favorable to risk-tolerant investors.
Disclaimer: Perform your own due diligence. I am not an investment advisor.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.