Ziopharm Oncology: Attractive Entry Level After A Recent Pullback

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Summary

  • ZIOPHARM declined 30% despite the absence of company-specific negative news.
  • ZIOPHARM’s lead candidate has demonstrated promising results, and the company recently initiated a Phase II trial in combination with Libtayo for recurrent glioblastoma.
  • The company’s balance sheet shows sufficient funding for the next 12 months.
  • Options markets have a 30% move in October priced in.

Today, we want to share our analysis of ZIOPHARM Oncology (ZIOP) with you. The company's stock price has declined by over 30% from their July peak despite the absence of company-specific negative news. However, upon taking a closer look, we see that the company has an adequate balance sheet, and its lead candidate has shown strong trial results. So, let's consider this biotech in-depth.

Company description

ZIOPHARM Oncology is a clinical-stage biotechnology that concentrates on developing of immuno-oncology therapies for heterogeneous types of cancer. The company, based in Boston, Massachusetts, was founded in 1998 and went public in November 2005. ZIOPHARM Oncology is led by Laurence J.N. Cooper who joined the company in 2015 from MD Anderson Cancer Center. Currently, the company has a market cap of ~ $900M and trades around $5 per share.

Ad-RTS-hIL-12 Franchise

In our opinion, the most promising medicine in ZIOP's pipeline is Ad-RTS-hIL-12, a potent, anti-cancer protein obtained from its proprietary platform which has been developed to treat various types of cancer. The drug has been granted Fast Track Designation by the Food and Drug Administration (FDA) and Orphan Drug Designation by the European Medicines Agency (EMA).

ZIOPHARM's Phase 1 of Ad-RTS-hIL-12 plus veledimex (Ad+V) showed encouraging immune-mediated anti-tumor effects, improving overall survival (OS) to 17.8 months. The drug also was well-tolerated with no unexpected toxicities. With these outcomes as a basis, the company recently announced that it had initiated a Phase II trial designed to evaluate the safety and efficacy of Ad-RTS-hIL-12 in combination with veledimex and Regeneron's (REGN) PD-1 antibody, Libtayo, for the treatment of recurrent glioblastoma (rGBM). Sequential secondary endpoints: Progression Free Survival (PFS) and Objective Response Rate (ORR). We think adding PD-1 to Ad-RTS-hIL-12 combined with veledimex will deliver synergistically greater anti-tumor activity, thus leading to an increase in the frequency of complete responses. The study is currently enrolling patients with a data readout anticipated by June 2021. If the results turn out favorable, it could lead to a Phase 3 study in 2021-2022 and potentially to a U.S. NDA filing in 2023 with a launch in 2024.

Moreover, based on the triple combo's encouraging safety and efficacy profile, the company recently announced it had initiated an additional dose-escalation Phase 1 trial for Ad+V in combination with Bristol-Myers' (BMY) Nivolumab in subjects with rGBM. However, we do not expect initial results before later next year.

Recurrent glioblastoma majorly affects approximately 5 in 100,000 individuals, which translates to about 189 cases per year (at the 2018 US birth rate of 3.7M). We would estimate ZIOPHARM's treatment to be used in 1/5, or 38 cases per year, given that few marketed drugs (Avastin, GLIADEL Wafer, and Optune) for rGBM exist. If we use the Optune price tag of $252,000 per year, Ad-RTS-hIL-12 could thus bring in revenues of about $10M per year. However, significant opportunity exists if we consider treatment of the approximately 16,455 existing cases (5: 100,000 in 329M Americans). Even if only 5% of these existing cases were to be treated, it would translate into revenue for ZIOPHARM of about $200M per year.

ZIOPHARM Oncology also expanded its pipeline with a CAR-T program for the treatment of patients with B-cell leukemia, lymphoma, and other solid tumors. Given that all trials are still in the preclinical stage, we will not go into further details at the moment.

Financials

As is typical for a clinical-stage biotechnology company, ZIOPHARM Oncology is currently bringing in no revenues while spending significant amounts on R&D and G&A:

Source: Company's 10-Q filing (As of June 30, 2019)

In Q2, operating expenses increased modestly, growing from $12.3M to $14.7M, driven primarily by an increase in the research and development (R&D). More precisely, R&D expenses for ZIOPHARM registered at $9.9M compared to $7.4M for the same period year ago. The 33.7% year-over-year (YOY) R&D increase is related to a milestone payment to NCI and increased nonclinical research and product development costs. That aside, the general and administrative (G&A) expenses came in 3% lower at $4.7M. The decrease was related to decreases for consulting and advisory services costs.

Cash used to run the company's operations during the first half of 2019 was roughly $15M (net loss adjusted for non-cash items such as stock-based compensation and D&A). As of June 30, 2019, the company reported an adequate balance sheet with approximately $43.5M in cash and cash equivalents. As trials are ongoing, we think the company will continue to spend significant amounts on R&D and G&A in the coming quarters. Based on that, we would expect funds to be sufficient for at least 12 months. Management also expects that its cash, cash equivalents, and marketable securities will be sufficient to fund the company's operations into the first half of 2021.

Additionally, ZIOP recognized $14.6M ($0.09 per share) net loss compared to $17.5M ($0.12 per share) decline for the same period a year prior.

Ownership and Analyst Coverage

Institutional ownership is approximately 40.67% of diluted shares. Most of this is White Rock Capital Management LP, which owns around 12.38M shares or 7.63%. Next are MSD Partners LP, The Vanguard Group, Inc., and BlackRock Fund Advisors at about 6.77%, 6.74%, and 6.03%, respectively. According to CNN Business, approximately 6.2M shares were bought by institutions, and only 464K shares were sold during the second quarter of 2019.

What is more, a few analysts upgraded the company in the last six months, targeting the share price in the $5.5-7.0 range.

Source: Market Beat

Technical analysis

Looking at the daily chart, we can see what is going on with ZIOP. Currently, the stock has held firm at technical support around the price of $5.00. It is also trading 30% off the 52-week high reached in July. If the stock can rise towards $6.00 and start to climb, it would not surprise us to see the stock soar close to its previous high, around $7.25. Also, the chart shows that the money flow index value (34.95) is below its relative strength index (42.32); this highlights the stock rise in the near term.

Source: Think or Swim platform

Options analysis

Looking at the October 18, 2019, options, we see a bid/ask for the $5.50 CALL option of $0.55/$0.65, and a bid/ask for the $5.50 PUT option of $0.95/$1.15. Keep in mind that the options strike closest to the previous ZIOP closing price of $5.14. We can calculate the expected price move using the mid prices of these options:

1.05 (5.50 Put) + 0.6 (5.50 Call) = 1.65/5.14 = 32.1%

As seen above, the options imply that the stock could rise or fall by ~30% by the October expirations from the $5.50 strike price using the long straddle strategy. It would place the stock in a trading range of $3.59 to $6.68 by the expiration date. Moreover, the calls at the $5.50 strike price outweigh the put options about 5 to 1 with 2,636 open calls to 532 open puts. A buyer of the calls would need the stock rise to $5.79 by the expiration date, a gain of about 12% from the stock's current price.

Risks

Investing in clinical-stage biotechnology firms is associated with many risks, including a significant amount of cash required for R&D in the absence of revenues, risks around drug development, and competition from other firms in the biotechnology industry. Although the company has demonstrated promising outcomes for the Ad-RTS-hIL-12 franchise, it is possible that future trials will not reiterate those results. If its lead program was to fail, the stock is likely to fall substantially. However, regarding the downside, the company has ~$43.5M of cash on the balance sheet, equivalent to $0.25 per share, with a burn rate of approximately $0.04 per share, per quarter. We would not find it unlikely for the stock to decline below these levels.

Additionally, rGBM is a competitive space, and several companies like Tocagen Inc. (TOCA), DelMar Pharmaceuticals, Inc. (DMPI), AbbVie Inc. (ABBV), AstraZeneca plc, and Istari Oncology are developing competing therapies. Also, there are inherent multiple risks as biotech stocks move out of favor in the market. However, in our case, ZIOP has tracked the SPDR Biotech ETF (XBI) insignificantly over the last year at a correlation coefficient of 0.161. Finally, the company is well-funded for now. However, it would likely be dependent on a funding raise to maintain its operations, which may cause a further dilution of shareholders' equity.

Recommendation

We believe ZIOP at these levels of $5.1 per share is a "Buy". According to TipRanks, ZIOP is a "Moderate buy" with an average Price Target (PT) of $6.50, representing a 27% upside. However, investors should be careful when purchasing the stock at current levels and use limit orders to avoid negative surprises in a volatile stock like ZIOP.

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This article was written by

PylBio Investment profile picture
317 Followers
PylBio Investment is an investment research team focused on biotech companies that represents a lot of "shots" on goal. We focus our trade strategy around "special situations" (such as catalysts, potential acquisitions or spin-offs) and how to make money from those catalysts, as direct stock purchases, combined with option-based approaches for risk minimization or through our option-based strategies.

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.

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