Is ZIOPHARM Poised For Acquisition?

| About: ZIOPHARM Oncology, (ZIOP)
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Summary

With the recent silence in ZIOPHARM, I'm led to think something is coming.

Is it a new partnership? Could it be new clinical data?

I make the case it could be much bigger than either.

ZIOPHARM Oncology (NASDAQ:ZIOP) is an immuno-oncology company that in collaboration with Intrexon (NYSE:XON) and the leading cancer research hospital in the country MD Anderson has developed breakthrough technology in the field of immuno-oncology. These include chimeric antigen receptor-modified T cells (CAR-T), T-cell receptor (TCR)-modified T cells, and other adoptive cell-based approaches that use non-viral and viral gene transfer methods for broad scalability. The approach is based on generating products from patients (autologous) as well as from third party (allogeneic) as off-the-shelf therapy. The company is utilizing Intrexon's proprietary gene control approaches such as its RheoSwitch® platform and advancing programs in multiple stages of development. The company's preclinical and clinical pipeline focuses on the treatment of hematological and solid tumor malignancies, as well as GvHD, using cellular therapeutics.

The CEO of Intrexon, Randal J. Kirk, who also sits on the board of directors for ZIOPHARM, has an esteemed record of creating shareholder value through the selling of multiple pharmaceutical companies. Kirk sold his drug company Clinical Data to Forest Laboratories for $1.2 billion in 2011, and before that he sold New River Pharmaceuticals to Shire (NASDAQ:SHPG) for $2.6 billion in 2007. He also sold Scios to Johnson & Johnson (NYSE:JNJ). Could ZIOPHARM be next?

Let's set the stage of what could generate such a bold statement. In Q1 of 2015 during the BAC/ML Healthcare Conference in Las Vegas, Kirk was asked:

"Yesterday you said the dividend of ZIOP will make an acquisition of ZIOP by XON simpler and more tax efficient...Can you expand on that and would it also allow for a simpler and more tax efficient acquisition by another large pharma or bio company other than XON?"

And Kirk replied:

"Yes definitely the acquisition by ANY company was just made much easier and more tax efficient (actually said that as the question was being asked). First of all I will be able to vote my shares including the new shares... Second of all from a tax standpoint you get favorable tax treatment with capital gains vs. XON holding and selling and paying a much higher corporate tax on the large gains...Yes and it is certainly now much easier and more tax efficient if the companies interested in ZIOP now decide to make the acquisition. Yes."

Kirk gave Intrexon shareholders ZIOPHARM shares (about 17 million) in 2015 as a dividend. Any acquisition announced now would likely not close until after June 15, making the dividend shares last June long-term capital gains.

In an article published in July 2015 named, "101 Reasons To Own ZIOPHARM Oncology," Seeking Alpha member Options2Wealth, with help from Rob Cos, make the case to own ZIOPHARM. They make the argument with, you guessed it, 101 quantifiable reasons to own the company. With the recent market turmoil, a Big Pharma such as Merck KGaA (OTCPK:MKGAY) Germany could be a potential acquirer of ZIOPHARM for a steal of a price.

Merck KGaA's recent immunotherapy drug evofosfamide was dropped after the treatment failed in the last stage of clinical tests, but this is not the only reason an acquisition makes sense. ZIOPHARM and Merck Serono already have a collaboration in which Merck Serono handed over a $115 million upfront payment along with a commitment of up to $941 million more in milestones for the first two CAR-T programs. Under the collaboration, Merck Serono will elect CAR-T targets, two initially, for which it will provide certain research funding. Through its agreement with Intrexon, ZIOPHARM will be responsible for any additional research and development expenditures. Once these candidates reach investigational new drug (IND) stage, the programs will be transferred to Merck Serono for clinical development and commercialization.

ZIOPHARM's current market capitalization is about $940 million. With Merck Serono's commitment of $941 million already, it doesn't seem too far off for Merck Serono to be obliged to acquire the whole company at a good price. The current earnings report for ZIOPHARM shows the company ended the quarter with cash and cash equivalents of approximately $140.7 million. Given the current development plans, the company anticipates that current cash resources will be sufficient to fund planned operations into the fourth quarter of 2017.

The current immunotherapy industry that ZIOPHARM is affiliated with is quite a large and growing market with 2018 estimates pushing close to $70 billion. With ZIOPHARM having what some are calling, the best team in immunotherapy XON/MD Anderson/NCI. As well as ZIOPHARM's CEO Lawrence Cooper and Intrexon's Peter Emtage, who combined are the top leaders in immunotherapy, it is safe to say ZIOPHARM has the potential to be a driving force in the immunotherapy field.

This is just speculation, and we are dealing with a small-cap biotech stock which does have potential downside if bad data were to come out. ZIOPHARM is still in phase 1 and 2 with its main products which are still a couple years from commercialization. All in all ZIOPHARM is in a good financial position in that it currently has enough cash and cash equivalents to fund research and operations into Q4 2017. During this current quarter, revenue was $1.91 million (+461.8% Y/Y), which beat expectations by $.17 million. This puts the company in no rush to raise capital in the near future. That being said I believe the current upside potential to outweigh the low-end risk at the current stock price.

Disclosure: I am/we are long XON, 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.