This article is being published in response to "The Bears Weigh in on Ziopharm" which was published on Seeking Alpha on Tuesday and then removed on Wednesday.
Last week I posted an online article discussing a number of very significant and concerning issues at Ziopharm Oncology (ZIOP). The article was quickly pulled from my blog at that site without my knowledge or permission. As of this writing, I still have not been given any reason for why it was pulled. Although many people have taken serious issue with my conclusions, the site raised precisely zero concerns about the accuracy of anything in that article. However, the message that was sent to the world by pulling the article left a very clear impression that I was inaccurate. For those interested, the original article can now be found at moxreports.com, and the site is open for comments by anyone.
I had previously posted negative articles to my blog; however, in the past the simple solution was to give the subject company a forum to publish their own response and then let readers make their own decision. For reasons that are not yet clear, this situation was handled in a dramatically different way.
Following the article, ZIOP issued a very brief press release stating I was "wrong" and then went on to state a number of reassuring facts about the company and about Palifosfamide. Although the press release strongly implied that my individual facts were "wrong", it is interesting that they did not specifically point to anything I said that was different than what they were claiming in the press release. Investors should re-read the press release along with my article to confirm this for themselves. These points are addressed individually below.
ZIOP has now had a full week to issue a more detailed response, but they have chosen to stick with their very brief initial response. And instead they quickly put out another "compelling" press release showing how a different drug just achieved a key milestone. So the message seems to be that Pali just became less important, and now we should focus our attention elsewhere. Due to the timing of this release, I suspect that their upcoming equity offering could be sooner than previously expected. If this isn't obvious to people, it certainly should be.
Although ZIOP has refrained from issuing any further comments on how I was wrong, this message did end up getting out in a prominent way. On Tuesday, an article ("The Bears Weigh in on Ziopharm") came out on Seeking Alpha by a poster using the name Wall Street Teacher which expanded upon the points made in the press release to include the author's own analysis and commentary and which claimed that it pointed out some massive mistakes in my article.
As it turns out, Wall Street Teacher has a notably exclusive publishing history regarding ZIOP. He has written about ZIOP over 100 times on Seeking Alpha, including 8 published articles and 24 instablogs and extensive brief bullish comments. During this time, which spans 4 full years, he has focused on just one other company in just a few short paragraphs on only two occasions. Effectively, Wall Street Teacher has only written on a single company for 4 solid years: ZIOP.
This exclusive publishing history becomes all the more noteworthy when we find out that his most recent article contained numerous material misstatements of fact.
I have posted a printed out pdf of his "The Bears Weigh in on Ziopharm" at moxreports.com. I strongly encourage investors to re-read his entire story.
I address each of his factual misstatements below along with links to the supporting data; however, first it seems more important to address the current investment case at ZIOP. In other words: what do all of these things have to do with the stock price?
My investment thesis on ZIOP is far simpler than the many concerning observations I raised in my article. Those observations are closely related, though, and serve to highlight the non-disclosure pattern which supports my thesis entirely.
The investment thesis is this:
1. As of February 2012, ZIOP disclosed that 70% of "events" had already occurred in Phase 2. 70% of the subjects had already died or their tumors had already progressed. Based on this, and since it is now 10 months later, ZIOP already knows the detailed and final conclusions which can be drawn from the data regarding OS and PFS.
2. If the data were compelling, ZIOP would have already issued a "compelling" press release many months ago. Instead, they have only put forth very preliminary headline data and a new "compelling" press release for an unrelated drug's Phase 1 results.
3. Since the detailed data from Phase 2 has not been publicly released, we can come to the conclusion that it will not be "compelling". Instead we are told to simply wait for Phase 3.
4. In order to get through Phase 3, ZIOP will eventually need to raise money through a stock offering. But because I feel that Ziopharm has already telegraphed mediocre data in Phase 2, ZIOP will complete its stock offering BEFORE releasing any detailed data on either Phase 2 or Phase 3. At this time, we will all know the results. Because if the offering is done before the release of data, then we know that it is not good.
5. At that time, the stock will make a significant correction because the answer has been already telegraphed to the market.
6. The "compelling" press release describing Phase I data for a different drug seems to give investors a new reason to buy the stock, diminishing the current focus on the FDA uncertainty and stability issues with Palifosfamide. This strategy appears to have worked, but only just a little, because the stock closed up 1.98% that day.
7. This sudden new development makes me believe that the follow on stock offering will happen in November, sooner than I had expected.
Because ZIOP has already telegraphed its knowledge of mediocre results from Phase 2 data (by not releasing that data), ZIOP will issue stock well before releasing Phase 3 data and the stock will fall. By December, the market would already have seen this very clearly, so it is more likely that an equity offering would occur in November. The data which has been expected in Q4 will ultimately be released much later (guessing March or April) and will show mediocre results. The stock will fall further.
The points raised in my article all point to a single conclusion: that ZIOP has demonstrated a persistent pattern of non-disclosure and lack of transparency that has extended back many years. Examples include the undisclosed FDA warning letter, the 4 month delay in disclosing an SEC inquiry, the delay in disclosing the termination of their CMO for 7 months, the past reassuring statements that no additional funding would be required and the undisclosed ultra short stability of Palifosfamide.
Those are the reasons why investors (such as myself) remain short the stock despite the obvious and terrible risk reward ratio of shorting any biotech stock with pending data.
Keep in mind, there were nearly 12 million shares short last week and only 7 million shares traded between all longs and shorts. So it is safe to say that there is still a huge short bet against the stock.
Moving on, the mistakes and erroneous conclusions in the Wall Street Teacher's article should be corrected as follows:
#1 - FDA's evaluation of Phase 2 data prior to Phase 3
Wall Street Teacher says:
"Clearly, the Phase II data is fine since the FDA approved the trial design, parameters, and commencement of the Phase III trial. No other conclusion can be drawn. Perhaps Pearson doesn't understand the science."
This is too simple. As it turns out, even Wall Street Teacher himself makes clear that the FDA made absolutely no evaluation of the quality or expected outcomes of data in Phase II, because the FDA's job was only to approve "the design, parameters and commencement of the Phase III trial". Wall Street Teacher's statement that approval of Phase III means good data in Phase II is wrong. Period. And any suggestion to the contrary reflects a distinct lack of ability to "understand the science".
#2 - The independent audit was conducted AFTER the early stopping of the Phase 2 trial. ZIOP conveniently failed to mention this.
Dr. Chawla made no mention of the "independent audit" in his response dated September 14th, 2009. The Phase 2 trial was halted just 2 weeks later, which is not enough time to even conduct such an audit. The FDA's audit in August lasted 3 full weeks just to identify the problems, so the harder job of evaluating the impact of these problems was not possible in just 2 weeks.
Because the independent audit was conducted AFTER the early stopping of the Phase 2 trial, ZIOP had no idea as to whether or not the violations had an impact on the study. ZIOP would have had no basis for calling these violations immaterial. By stating that the site and data were audited without saying when this occurred, ZIOP has given a very misleading impression to readers that the audit was done before the Rodman financing and before the Phase 2 trial was stopped early. This was not the case.
#3 - The Form 483 / warning letter was in fact issued to Dr. Chawla and should have been disclosed by ZIOP under any and all circumstances because it was highly material.
a) Wall Street Teacher incorrectly leads his readers to believe that I had stated that this letter was issued to ZIOP, not to Dr. Chawla. This is not true. In fact, BECAUSE the letter had been issued to Dr. Chawla and not to ZIOP, the words "Ziopharm" and "Palifosfamide" had been redacted from the letter. I made this clear.
b) Even though the 483 and warning letter were issued to Dr. Chawla and not directly to ZIOP, the letter was highly material to investors in the Rodman led stock offering for the following reasons:
· Significance: Dr. Chawla had been the lead / co-principal investigator in the trials, so his role was very important in the trial.
· Severity: The language of the letter was extremely severe, and challenged both the "reliability and integrity of the data," which would be alarming to investors had it been disclosed.
· Recency: The letter had been issued just 8 business days before the Rodman financing
· Rarity: It is also extremely rare for clinical trial investigators to receive such a letter (only 18 letters issued to clinical trial operators in that year, despite 13,000 FDA trials ongoing.) This information can be found on the FDA's website and was summarized in this presentation. Wall Street Teacher "checked" this and tells us that this data is false and that Form 483's are not rare. They are rare for clinical investigators - very, very rare.
For one of the violations, the FDA did note that "We find your corrective measures to prevent future recurrence to be acceptable, IF implemented as proposed". Wall Street Teacher would have us believe that this observation applied to the entire letter, which it did not. In fact, the FDA still noted that "we are concerned that the response is not adequate to prevent future recurrence of the violation noted above" with the previous violation.
Pointing out that the letter was issued to Dr. Chawla and not to ZIOP implies that I said otherwise and thus my information should not be relied upon at all. It also implies that this fact makes the letter immaterial. Neither is true. And of course, for Dr. Chawla to receive such a letter is demonstrably an extremely rare event despite our assurances that Wall Street Teacher "checked" this for us and provided no data.
#4 - Stability is an "issue" for Palifosfamide
Wall Street Teacher simply repeats what was said in the press release, and assures us that there the company has no "issues" with Palifosfamide. ZIOP's response to stability consisted simply of one reassuring sentence as follows:
"Further, the company has no issues with drug stability."
Perhaps that solitary sentence could be completely reassuring in addressing such a complicated subject. However, the "issue" is that Palifosfamide must be administered to a patient within 30 minutes of entering an IV bag. Comparable drugs for comparable indications have a stability time which is measured in DAYS, not in minutes. Unless Palifosfamide turned out to be the ONLY alternative AND was demonstrated as being highly effective, then there would undoubtedly be commercial implications. Revenues would be impacted. However, ZIOP made it clear that they simply have no "issues" with instability. Prior to my article, it was never mentioned that this drug had such an abnormally short shelf life, and following my article they have still not addressed this impact. JMP Securities did come out immediately and say that:
"We are confident that the current formulation has no stability issues that would impact commercial adoption should the Phase III data be supportive of regulatory approval."
Thank you JMP Securities for this objective opinion and for the underwriting services and conference exposure provided to ZIOP over the past few years. But given that my article was released on a Friday and JMP provided this opinion on Monday, I find it difficult to believe that JMP spoke with very many oncologists, pharmacists or chemo nurses over the weekend before releasing such a categorical and succinct analysis. I did however speak with many such medical professionals, and it took me two full months to reach a conclusion. In my report, one of my citations was to a report entitled: "Guidelines for the practical stability studies of anticancer drugs".
I strongly encourage readers to download this report and read it in full. I would also encourage JMP Securities to address the findings of this very recent and specific report. To the best of my knowledge, JMP has never produced any findings whatsoever on the subject of drug stability vs. commercial viability for ZIOP or any other company. So presumably they conducted all of their in depth research on this completely new topic over a single weekend.
Aside from single-sentence reassurances about having "no issues" with stability, no one - including ZIOP, Wall Street Teacher or JMP Securities - has addressed the obvious real-world commercial implications of an extremely expensive drug that has an ultra short and impractical shelf life.
#5 - PPHM was highly relevant to ZIOP
Like ZIOP, Peregrine is a biotech company focused on cancer drugs
Like ZIOP, Peregrine has virtually no revenues
Like ZIOP, Peregrine had a market cap of $400-500 million
Like ZIOP, Peregrine was trading at around $5.00 per share
Like ZIOP, Peregrine's near term financial future hinged mostly on a single drug
Like ZIOP, Peregrine encountered issues during its Phase 2 trials
When a pre-revenue biotech company with only one near term commercial drug prospect encounters uncertainty in its clinical trails, there can be tremendous downside in a short period of time. In addition, when these issues are not disclosed, they could be perceived as being even more problematic due to increased uncertainty. Therefore, PPHM is precisely comparable and relevant to ZIOP, despite the assurances of Wall Street Teacher that it is irrelevant.
#6 - The SEC inquiry and termination of the CMO were not disclosed until a much later date.
Wall Street Teacher points out that ZIOP did actually disclose the SEC inquiry and termination of the former CMO, and he states that I simply had not even seen the relevant 8K.
In fact, not only did I see it, but I also included a quote from it and a link to it in my article. The 8K was filed in December 2011, 4 months AFTER receiving notice from the SEC, and 7 months after the termination of the CMO. The announcement that a new CMO was hired only came 2 months after the termination of the former CMO, during which time we had no clue that the company had no CMO in place, or that the reason for this was a termination.
This illustrates a pattern of disclosure behavior at ZIOP which makes me believe that "the only news is good news". This pattern is highly relevant in taking an outlook over the next few months.
#7 - The options activity highlighted by Wall Street Teacher is not only inaccurate, but it is also surprisingly LOW, not surprisingly HIGH.
This one seems too obvious to be an oversight. His data can be seen in his article. The Teacher encourages us to "take a long hard look at the trading in the Oct. 4 and 5 puts. ". And he even points out that "these puts expired on the same day the article was released."
Unfortunately, once again the Teacher has materially misled his class and has stated some very obvious factual errors. First, he highlights options for the WRONG month, showing puts which expire in November - a full month after the article was written. Second, he states that, "It is amazing that someone had the foresight to purchase these soon-to-expire contracts prior to the publication of Pearson's article". Yet even in his already incorrect data table, he only cites end of day numbers, including all activity before and after the article was published. Given the volume and volatility of the stock, one would assume that there would be substantial activity AFTER the article was published when the stock dropped as low as $3.36. Third, although the Teacher made it a point to mention in his article that over 7 million shares traded that day, he failed to point out that in his table only 2,592 options traded all day, representing just 259,200 shares which is just 3% of the share volume that day. Again, this is relatively small, not relatively large.
Wall Street Teacher provided erroneous data which was not even connected to his assertion (wrong month) and furthermore, that data does not even support the conclusion which he draws because options activity was surprisingly LOW, not surprisingly HIGH on a day with such volume and volatility.
Don't trust me, don't trust Wall Street Teacher, because we both have a vested interest in the share price of ZIOP. But please keep in mind that I use my real name in my articles and bio information, so you know exactly who I am. Also keep in mind that I have written about hundreds of companies over the past 4 years in both long and short articles on a variety of websites. Wall Street Teacher seems to have a long and peculiar history of writing about just one company over 100 times without revealing who he is or what his connection is with ZIOP. Perhaps he's just a very passionate shareholder who has been hanging on and buying more for a 4 year period without looking at any other stocks. Or perhaps not. Contacting him to ask would be a great first step for anyone who is curious. I have already done so, and continue to look into it elsewhere.
The raw data is verifiable and tells a very clear story. A comparison of all these documents can be done in one easy place at moxreports.com, for those who care about knowing the facts for themselves, as opposed to the interpretations of others.
With short interest standing at around 10 million shares for most of 2012 and only 7 million shares traded (by both longs and shorts) last Friday, it seems clear that large investors continue to make a very big bet against ZIOP despite the apparently terrible risk / reward ratio based on something other than just the undisclosed FDA warning letter or the longer term revenue impact of instability.
It is highly likely that ZIOP will conduct a follow-on stock offering BEFORE releasing any Phase 3 data, and this will telegraph to investors the mediocrity of the results for Palifosfamide. At that time, the stock will see a disproportionate drop.
So as a result, I am planning on staying short this stock until after the pre-data follow on equity offering which I expect to occur in November. (Hint: By December, anyone would know what is going on here, so it would be too late. Hence, November.)
Disclosure: I am short . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. I can be reached at moxreports.com. For full information and disclosure, readers should also refer to the link included to a copy of "The Bears Weigh in on Ziopharm."
Additional disclosure: For full information and disclosure, this article should be read in conjunction with "The Bears Weigh in on Ziopharm", which can now be found at moxreports.com.