Last week I wrote an article entitled "Richard Pearson Responds on Ziopharm" (NASDAQ:ZIOP). Given the volume of feedback I have gotten, I believe that the article was widely read and did in fact clarify some significant misconceptions that were quickly becoming accepted as facts. However I did receive two consistent criticisms. First, although I had stated that I would also be addressing the original ZIOP press release, I failed to address it thoroughly enough due to my focus on a different article. Second, I also failed to address the dynamics of Randal J Kirk / Intrexon's involvement, which became more relevant immediately following ZIOP's latest press release the day before.
In response to those comments, I will address each of those issues in this article today. Given the brevity of the recent press releases, the widespread disagreement on how to interpret it is understandable. Rather than simply post my own biased views on this subjects, I have highlighted 10 very objective and non-leading questions below so investors can simply ask ZIOP management to provide full clarity about the press release.
I will look at the Kirk / Intrexon involvement first.
As of the most recent 13D filed in January 2012, Mr. Kirk's total ownership (including Intrexon's) stood at 11.3 million shares, 14.5% of ZIOP. Following the "compelling" Ad-RTS IL-12 announcement last week, Mr. Kirk / Intrexon will receive an additional 3.66 million shares at no cost, bringing his total share holdings to 14.9 million shares, 18% of ZIOP.
Mr. Kirk / Intrexon's initial investment in ZIOP came in conjunction with a Channel Partner Agreement dated January 2011. As part of that agreement, Mr. Kirk / Intrexon have now (as of last week) received a total of 9.7 million shares in exchange for the $11.6 million in proceeds delivered to ZIOP, resulting in an effective purchase price for Mr. Kirk of just $1.20 per share under the Channel Partner Agreement.
However, many people seem to not be aware of the additional cash payments by ZIOP back to Intrexon this year. Also in connection with the Channel Partner agreement, ZIOP has already paid back to Intrexon $10.7 million in cash as of June 2012. So on a cash-in, cash-out basis, Mr. Kirk / Intrexon's net cost was only $900,000 in exchange for the 9.7 million shares, or approximately 9 cents per share. In addition, that amount does not take into account the further economic benefit that Kirk / Intrexon will receive due to any additional ongoing "service payments" from ZIOP or any additional profit that Kirk might enjoy when Intrexon receives 50% of the profits from Intrexon related drugs. Clearly this has already proven to be an extremely savvy investment by Mr. Kirk, even before any Intrexon based drugs have borne fruit.
With economics like that it becomes understandable why an investor would not even feel the need to conduct due diligence. Biotech stocks are all like lottery tickets, which are typically regarded as a game that only fools play. But on the flip side, for those who can get a lottery ticket for free, it is safe to say that only a fool would not play. Readers should feel free to check the numbers in the relevant SEC filings using the links I provided.
However, it should be noted that Kirk / Intrexon have in fact continued to purchase shares of ZIOP subsequent to the Channel Partner Agreement, acquiring an additional $27 million stake for approximately $5.28 per share, above and beyond his 9 cent block acquired through the CPA.
So, as shown above, if we account for all of these purchases, net of free shares and cash payments back to Kirk / Intrexon, the "all in" investment for Mr. Kirk comes out to be 14.9 million shares at a price of $1.91 per share, equating to 18% of ZIOP.
The First Tranche of the Channel Purchase Agreement closed on January 12, 2011 when the stock was at around $5.50. Since that time (prior to my article) the stock has traded between $3.85 and $7.70. Yet Mr. Kirk / Intrexon were able to acquire 18% of the entire company at a net price of just $1.91 (less than half of the 2 year low). This is one of the many reasons why I continue to regard Mr. Kirk as a genius, as I mentioned in my original article.
Another way to look at this is that Kirk / Intrexon have invested a net amount of $27 million in ZIOP over the past 2 years. The 3.66 million free shares which became issuable last Thursday alone were worth $19 million as of the close on that day.
And a third way to look at is this: In the CPA, Kirk / Intrexon "paid" $4.80 for 2.4 million shares ($11.6 million). But he also received 3.6 million shares for free ($0.001 per share) immediately thereafter. So despite the $4.80 notional price, the reality of this transaction is that Kirk / Intrexon paid $11.6 million in cash to ZIOP and then immediately received 6.06 million shares. Obviously this means that the real ("effective") price per share is $1.92 ($11.6 million ÷ 6.06 million shares). In the two years subsequent, his additional open market purchases, net of the $10.7 million cash payments from ZIOP and additional free shares, have resulted in a nearly identical effective price of $1.91 per share.
Based on this analysis, I now have limit orders in to purchase substantial amounts of ZIOP at a price of $1.91 per share and I concur that it is fairly priced at that level.
As for the press release, Ziopharm put out its press release at approximately 3:19 pm on Friday October 19th, 2012, in response to an article I had posted on my blog online. I fully recognize that ZIOP would feel a need to issue a statement quickly, so I take no issue with the fact that their initial statement was extremely brief.
However I also observe that ZIOP has now had a full week to supplement and expand upon that very brief initial press release, but has not yet done so. Instead we received new and unrelated information on Thursday October 25th, describing the "compelling" Phase I results for Ad-RTS IL-12.
The share price briefly rallied to as high as $5.25 on this new headline, but then retreated by as much as 9% to as low as $4.80 on Friday, upon the realization that the simple completion of a Phase I trial with just 13 patients is not a particularly epic milestone to achieve in exchange for the 3.66 million new shares that became issuable to Intrexon valued at $19 million on the day of the announcement.
So now that the effect of this last bullet has been spent, ZIOP shareholders may be left wondering what will be the next news driven catalyst which could drive the stock upwards again.
Fortunately, in the event that further headlines are not forthcoming, investors can obtain their own new information by asking a few key questions requesting further detail on from the first press release.
The ZIOP response press release consisted of just 6 sentences and 156 words. The brevity and very specific wording of the press release has resulted in a widespread disagreement as to what the press release was actually saying. Even people who agree about their views on ZIOP (ie. long investors) still disagree about what the press release actually says.
I address these points in the order that they were made in the press release, but I note that the most important question for investors is Question #9.
Since I did make some mention of several of these items in my previous article, I will not repeat those observations here. Readers should feel free to refer back to my previous article.
ZIOP begins by stating its own views with:
"The statements made in Mr. Pearson's blog entry are misleading and wrong and, given his disclosed investment position, we call into question the entire credibility of this piece.
In the 5 sentences that follow, ZIOP then states a number of verifiable facts about the company and Palifosfamide.
For example, in the next sentence ZIOP states that:
The Form 483 was issued directly to the independent investigator, not to ZIOPHARM, and had nothing to do with any outcome measures of the Phase 2 PICASSO study.
While this is reassuring, the brevity of it leaves some new questions. Anyone who read the FDA Warning Letter could already see that it was addressed to Dr. Chawla and not to ZIOP. So stating this in the press release does not provide new information. It does however strongly imply that this fact makes it not material to investors in ZIOP. Many investors have assured me that ZIOP would have definitely received a legal opinion on this, but since this was not stated in the press release, it is best to simply ask the question:
Question #1 - Did ZIOP ever receive a legal opinion confirming that a Form 483 / warning letter issued during its clinical trials was not material to investors in ZIOP ?
I have received many emails from readers who point out that "the Form 483 / Warning Letter were not issued in connection with Phase II" and that "the Form 483 / Warning Letter had nothing to do with any outcome measures". These readers felt that this is clearly what ZIOP meant by the word "wrong" in reference to my original article. I have pointed those readers to the specific text and dates within the warning letter which show that it was clearly issued in connection with Phase II (as well as Phase I), and that PK samples were in fact a prior outcome measure.
I realize that I am perceived as being biased due to me disclosed short position, so I have suggested that these readers contact ZIOP and ask 2 simple, non-leading questions to resolve this uncertainty.
Question #2 - Was the FDA warning letter issued in connection with Phase II or not ?
Question #3 - Did the FDA warning letter address ever address any outcome measures in the study for Palifosfamide ?
(Note: as noted by JMP securities, the patient overdose occurred during the Phase I dosing study for Palifosfamide. Given that the overdose would have no impact on data, I have never chosen to make an issue of it, noting only that it would be potentially alarming to investors in a stock offering just 8 days later. Some readers have mistakenly come to the conclusion that the overdose "proves" that the entire warning letter "had nothing to do with" Phase II. Asking question #2 above should serve to clarify this.)
In the next sentence, ZIOP tells us that:
All regulatory matters raised in Mr. Pearson's blog entry were resolved by the investigator in full in 2010, and had no impact on the Company's transition from Phase 2 to Phase 3.
A casual read of that sentence leads readers to believe that because Dr. Chawla's regulatory matters were eventually resolved in 2010, the issues raised in the warning letter were of no concern going forward. But in its brevity, ZIOP failed to tell us when these issues were resolved in 2010 and this is actually quite important. The FDA warning letter was received in March of 2010. Presumably we would like to know if the regulatory issues were resolved before April 2010, when Dr. Chawla co-authored the abstract for Palifosfamide for its selection in "Best of ASCO". Obviously this is quite important and ASCO would certainly want to know if there were unresolved regulatory issues with the study particularly since the letter was issued to the lead investigator who co-authored the abstract.
Question #3 - On what date did the FDA notify Dr. Chawla and ZIOP that these issues were resolved ?
Question #4 - Was ASCO made aware of the violations in the FDA warning letter when they selected Palifosfamide in April 2010 for "Best of ASCO" ?
Similar to the previous statement on the Form 483, we already knew that Pali has proceeded to Phase III, so stating this fact did not really add any new information. But there seems to be widespread disagreement as to what elements of the Phase II trial the FDA actually evaluates when approving the commencement of a Phase III trial. Does the FDA review the quality of the data ? Does it make a judgment about the observed effectiveness of the drug ? Or does it just review the design and structure of a new trial and let ZIOP decide if it wants to proceed ?
A knowledge of the FDA approval process is imperative for anyone who invests in risky biotech stocks. Yet again, even investors who share the same view on ZIOP (ie. long investors) seem to widely disagree about the answers to these very important questions. So it is best to ask ZIOP directly to get an unbiased and factual answer.
Question #5 - What elements of the Phase II trial did the FDA evaluate in approving commencement of the Phase III trial for Palifosfamide?
Given that the only data we have seen is preliminary data for Phase II, this is all we have to go on in handicapping the odds for Phase III. No one (including ZIOP) has any insight into the expected results of the double-blind Phase III trial. As a result, it is extremely important to know as much as possible about Phase II data.
Question # 6 - Did the FDA make any evaluation of the quality of Phase II data or the effectiveness of Palifosfamide in approving the commencement of the Phase III trial ?
So far I have received dozens of emails from readers who are absolutely certain that the answer to Question #6 is "yes". I have also received dozens of emails who are sure that the answer is "no". Asking ZIOP would provide the needed clarification beyond any doubt and the answer would not be subject to my well known short bias.
ZIOP goes on to let us know that:
Further, the Company has no issues with drug stability.
This single sentence is again reassuring, however once again it doesn't really give us any relevant new information. What we really need to know is how Pali will be received in the real-world market relative to other comparable drugs, as well as how we are reaching that conclusion. So many investors would likely want to know:
Question #7 - How does Palifosfamide compare to other chemotherapy treatments for either Soft Tissue Sarcoma or Small Cell Lung Cancer in terms of post reconstitution stability time and life in the bag time ?
Question #8 - Has Ziopharm conducted any internal analysis of the impact that a 30 minute in the bag limit would have on commercial viability ?
In other words, we know the company "has no issues with drug stability", but we don't really know what that phrase even means. Has it even been discussed as a potential issue, or was it simply left as an "issue" to be resolved post-approval ? Asking ZIOP will provide an answer to these questions and asking them for their data and analysis supporting their statement above would certainly be instructive.
In the final two sentences, ZIOP tells us that:
We stand by the clinical data generated at this investigator's site. Consistent with best practices, all data from ZIOPHARM's Phase 2 PICASSO study at this site were reviewed by an independent, former FDA good clinical practice (NYSE:GCP) auditor, and the auditor concluded that the study site's violations had no impact on the PICASSO study or the quality of data."
This categorical reassurance seems clear beyond all question, but again, its brevity may leave investors feeling less than fully informed.
In fact, this is the single most important question that needs to be clarified.
And of course, the key issue that needs is whether or not the audit was conducted before or after the early halting of the Phase II trial in September 2009 when "it was determined that the data are compelling". Since Dr. Chawla's response to the FDA on September 14th, 2009 did not indicate any audit had been done at that time, there would not be much time to complete the audit in the remaining two weeks. For reference, the FDA's audit of Dr. Chawla's clinic took 3 full weeks and its much simpler purpose was just to identify problems, not to ensure that each piece of data in hundreds of individual appointments was bullet proof.
It is understandable that due to time constraints in putting out the press release, key details such as dates were omitted. An it is also completely understandable that the compelling results in the Phase I study for an Intrexon drug would take priority over providing additional disclosure. Fortunately ZIOP should be able to quickly dispel any confusion on this topic for those who ask the following simple question:
Question #9 - On what date was the independent audit conducted and completed ?
Question #10 is also important because most audits do not evaluate the quality of data or its impact on study results. Instead, they simply evaluate the processes and verify consistency of data between forms. In this way, audits are typically used to identify potential areas which might contribute to data errors, but they do not evaluate the implications of the data itself. So investors need to know if ZIOP had conducted some sort of special audit, different than what is normally conducted. Investors would likely want to know what the scope of work was in this independent audit.
Question #10 - Did the audit evaluate the quality of the data itself, or just a verification that the data was simply consistent between various forms ?
As I mentioned above, the brevity of Ziopharm's press release was perfectly understandable when taking into account the time constraints they faced. However the lack of subsequent clarification in the week that followed leaves a number of unanswered questions. Investor relations departments are there to help provide information to investors, so making use of them is always advisable. By now it is safe to assume that many investors have already asked ZIOP these questions and have already learned the answers, so it will not entail any new work for ZIOP to tell a few more people and end any speculation as to what was meant in the press release.
In other areas however, some speculation is necessary.
Last week I speculated that ZIOP would conduct its anticipated equity offering in November. That is definitely speculation, since only ZIOP knows this for a fact.
Although ZIOP knows the detailed results of the Phase II study for Pali, we know that ZIOP does NOT know the results of the Phase III study because it is still ongoing and is a double blind study (unlike the Phase II open label study).
Only the preliminary data from the Phase II trial (which ZIOP knows) has been released even though that data is very well mature. So I speculate that it must be far less than compelling, otherwise ZIOP would have put out a press release many months ago. This is speculation, but at least it is well informed speculation based on observable precedent at numerous biotech companies.
Since ZIOP does NOT know the results of Phase III, it would be an epic corporate gamble to wait for this data and then conduct a financing afterwards. There are many uncertainties for any biotech company with bringing a drug through Phase III double blind trials. If for any reason the results are mediocre or there are any further glitches in the trial itself, the setback would cause the stock to take a very big hit and ZIOP's ability to finance itself would become massively more difficult and massively more expensive at a dramatically lower share price. This is not a certainty or any kind of prediction regarding ZIOP, it is just one scenario that any biotech company, including ZIOP, would need to consider.
Waiting until after such a "digital" event to raise money would be downright reckless for any biotech company, so I continue to expect ZIOP to issue stock before the data are released. It's the only responsible thing to do.
In addition, a full week has passed and JP Morgan has been notably quiet. Some have suggested that perhaps JP Morgan shares some of my concerns. I have no way of knowing that so I express no opinion.
A different possibility is that JP Morgan has already been mandated as bookrunner on a ZIOP equity offering in November and now has the company on JP Morgan's restricted list (See Section X) such that it won't issue new research reports on ZIOP in advance of a deal. This seems very intuitive and would fully explain JP Morgan's silence in such a high profile public debate. Consistent with JP Morgan's compliance policy, the firm has made no change to its recommendation on ZIOP, but has simply reiterated its $7.00 share price target, which is permissible during a research "blackout". Investors also will likely remember that JP Morgan hosted investor meetings for ZIOP on October 16th in Denver and October 17th in San Mateo.
That is obviously more well-informed speculation, and there is no way to confirm it until the day that it actually happens. I am simply expressing my opinion based on my 9 years of experience as an investment banker in equity capital markets running equity and convertible offerings for numerous public companies. Clearly only ZIOP and JP Morgan would know the answer today. But I am confidant enough that the likelihood is so high that I am now supplementing my previous prediction to say:
"ZIOP will issue stock in November in a deal bookrun by JP Morgan".
If this does or does not happen by December 1st, 2012, readers should feel free to refer back to this prediction and congratulate or chastise me accordingly.
Disclosure: The author is short ZIOP.
The author can be reached at email@example.com and at moxreports.com
Disclosure: I am short ZIOP. 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.
Additional disclosure: The author has spent several months conducting due diligence and has extensively interviewed dozens of relevant medical professionals.