In the era of Personalized Medicine, when the majority of innovative oncology companies are developing targeted treatments for the individual, ZIOPHARM (NASDAQ:ZIOP) is pursuing a different approach. ZIOPHARM essentially takes proven, older chemotherapy drugs and improves them by reducing their toxic side effects. This expands the number of patients who can benefit from the treatment as the older drugs, while efficacious, have limited use based on their detrimental impact on a patient’s quality of life.
ZIOPHARM has three promising drugs in various stages of clinical development. Their lead candidate, Zymafos™, entered Phase III development in Soft Tissue Sarcoma [STS] in 2010 with results expected in early 2012. Zymafos™ is a much better tolerated version of ifosfamide, a standard of care treatment for sarcoma, and demonstrated statistically significant improvements in survival in a Phase II trial in STS in early 2010. ZIOPHARM’s second candidate, Zinapar™, is a much less toxic form of arsenic, a chemical that has been used to treat cancer for thousands of years. Zinapar™ has demonstrated its cancer fighting ability in lymphoma and other hematologic and solid tumors, and ZIOPHARM received FDA Orphan Drug status for Zinapar™ for Peripheral T-Cell Lymphoma in Q3 2010. ZIOPHARM’s third candidate, Zybulin™, is being tested in combination with existing, successful cancer treatments Tarceva (erlotinib) and Xeloda (capecitabine). Zybulin™ is a novel anti-cancer agent that improves upon the side effect profile of widely used anti-mitotic (i.e., taxanes) and Vinca alkaloid (i.e., vincristine) agents, and has progressed to the point in clinical development to merit testing in breast cancer, one of the largest tumor types worldwide by incidence.
While ZIOPHARM’s business model, developing lower cost better tolerated older chemotherapy drugs, may not sound as exciting to some as buzz words like Personalized Medicine and targeted chemo-treatment, ZIOPHARM’s approach offers real value to the healthcare system. There is a great need for effective, lower cost cancer drugs, and developing novel, targeted agents is both expensive and risky. Often, these targeted agents offer only moderate improvements in survival at a substantial cost. Cancer regimens can cost $100,000 per patient per year, and we are already beginning to see agencies like the UK’s former agency NICE and even the FDA push back on expensive treatments based on the cost-benefit. In this environment where regulatory bodies and payers are becoming stricter, ZIOPHARM offers a safer bet by improving upon existing, tried and true treatments.
I believe the market is punishing ZIOPHARM’s valuation for two reasons: 1) unsexy business model and 2) ZIOPHARM advanced lead candidate Zymafos™ into Phase III STS trials without gaining formal FDA Special Protocol Assessment (NYSE:SPA). To address the latter, the FDA had stated that ZIOPHARM could use their Phase III study design with PFS as the primary endpoint outside of SPA for approval if PFS improvement was large enough. Large enough in this case mirrors what Zymafos™ demonstrated in the Phase II trial that was stopped early due to positive results. Management felt confident enough in Zymafos™ to advance the drug into Phase III trials without formal SPA, and this was punished, I believe incorrectly, by the market.
To address the first reason I believe ZIOPHARM is undervalued, Abraxis Biosciences Inc., the company that developed and marketed Abraxane, an improved version of once worldwide top selling cancer treatment Taxol, was purchased by Celgene for $2.9 Bn. At the time, Abraxane had worldwide revenues in the low-mid hundred million dollars and Abraxis had a pipeline of five oncologic candidates. To put this in perspective, ZIOPHARM has a market capitalization of around $375 MM, and lead candidate Zymafos™ has blockbuster potential ($1 Bn in peak sales) if approved by the FDA (as early as 2012). With FDA approval of Zymafos™, I believe ZIOPHARM has a valuation above $12 per share just based on the three pipeline candidates mentioned above, which says nothing of the recent partnership with Intrexon.
Position: Long on ZIOPHARM