Challenging Targets Could Pay Off For Ziopharm Oncology

| About: ZIOPHARM Oncology, (ZIOP)
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Give the management at Ziopharm Oncology (NASDAQ:ZIOP) credit - they're not looking to be a me-too player in easy drug categories. Although Ziopharm isn't initially targeting oncology markets with huge top-line sales potential, offering decidedly better mousetraps could nevertheless translate into very solid market shares and attractive partnership economics down the line.

Old School In A New Way

There's no question that there has been a lot of excitement around new targeted approaches to cancer. Whether it's monoclonal antibodies like Amgen's (NASDAQ:AMGN) Vectibix or Roche's (OTCQX:RHHBY) Avastin, antibody-drug conjugates, or cancer vaccines, dozens of experimental drugs have been advanced on the basis of the sometimes severe systemic toxicity that often goes with chemotherapy.

Ziopharm is taking a different approach. The company's lead compounds are advanced chemotherapeutic agents that aim to offer considerable safety advantages over traditional chemotherapies, but with less clinical risk and lower manufacturing costs than novel therapies. Basing its technology around "similar, but safer" should lower some of the clinical development risk and give the company an edge in pricing economics should the drugs get FDA approval.

Mostly About Palifosfamide For Now

The lead compound at Ziopharm today is palifosfamide (also known as "Zymafos"), an active metabolite of ifosfamide. Ifosfamide is a proven chemotherapy agent (it works as an alkylating agent that inhibits protein synthesis and DNA synthesis) but one with significant safety and tolerability drawbacks. In early studies palifosfamide has been shown to be significantly less toxic; so much so that it could potentially be administered on an out-patient basis, whereas ifosfamide usually requires a brief hospital stay.

Ziopharm is presently conducting a pivotal Phase 3 study (PICASSO 3) of palifosfamide in metastatic soft tissue sarcoma - a relatively uncommon cancer, but one that can be quite difficult to treat at the metastatic stage. Early-stage studies have been quite small, but enrollment in a Phase 2 study was halted early because of strong efficacy (progression-free survival). While early results showed a median 3.4 month survival benefit and overall survival data has been trending positively, full and final data won't be released until the fourth quarter of this year.

The trial design for PICASSO is such that progression-free survival will be the primary endpoint and can serve as the basis for accelerated approval, while final overall survival data will support the full approval. That's admittedly a bit convoluted, and it does raise the possibility of a little extra volatility as those numbers emerge, but it's actually a good design for Ziopharm.

PFS data should be available in the second half of 2012 and if it's good enough, the company should be in place to submit an application early in 2013 and potentially get accelerated approval in 2014. Overall survival data from the PICASSO 3 study should be available in 2014 as well.

Beyond sarcoma, Ziopharm is also looking to develop palifosfamide for small cell lung cancer (SCLC) - a disease that has attracted a little attention lately, but has suffered from a relative lack of clinical development. As in mSTS, ifosfamide is often used in combination therapy for SCLC, so development of this indication is logical and the odds of success are better than might normally be the case for a novel therapy.

Assessing The Market Opportunities

As it's the closet to prime time, the mSTS indication is the lead value driver for these shares. What might palifosfamide be worth to investors?

The addressable market is relatively small, as there are about 10,000 to 12,000 sarcoma patients in the U.S. and Europe each year, and about 40% are metastatic at the time of diagnosis. That said, there are relatively few treatment options if initial treatments like surgery are not successful. With pricing likely to fall between $45,000 and $65,000, and the potential for 50% or better market share, this mSTS indication could be worth around $5 to $6 a share to Ziopharm shareholders.

There is some potential oncoming competition. While ridaforolimus (which is under development by Merck (NYSE:MRK) under agreement with ARIAD (NASDAQ:ARIA)) has been filed with the FDA, this drug could very likely be used in conjunction (instead of as opposed to) with palifosfamide. Other drugs to watch include Threshold's (THLD) TH-302 (which is also a DNA ankylator), GlaxoSmithKline's (NYSE:GSK) pazopanib, and Johnson & Johnson's (NYSE:JNJ) trabectedin.

Investors should also pay attention to potential non-drug competition. Both Accuray (NASDAQ:ARAY) and AngioDynamics (NASDAQ:ANGO) are working on building clinical data supporting the use of their respective machines for treating sarcoma - the CyberKnife radiosurgery system for Accuray and NanoKnife tissue ablation system for AngioDynamics.

Although the SCLC indication is further back, the company could begin a pivotal study later this year. This lung cancer indication could be potentially far more lucrative, as the incidence is much higher in the U.S. than sarcoma (approximately 35,000 to 45,000 a year), and considerably higher in Europe and countries like China. In contrast to sarcoma, there are relatively few late-stage drugs targeting this indication, with Celgene's (NASDAQ:CELG) amrubicin arguably the most notable.

While the long-term potential for palifosfamide in lung cancer is indeed quite large, the somewhat longer development timeline today and less robust data package results in a lower present value of approximately $2.50.

Multiple Other Shots On Goal

While palifosfamide is the lead candidate, it's not the sole candidate. Darinaparsin is under investigation in another hard-to-treat cancer (peripheral T-cell lymphoma) and could also be advanced into studies for solid tumors and/or pancreatic cancer. Ziopharm is also looking to begin clinical trials for indibulin in breast cancer during 2012.

Beyond this programs, the company also has a development program with Intrexon for DNA-based therapeutics. This is something of a step beyond Ziopharm's current core technology, and it looks like stage 3/4 melanoma will be the first target - a potentially valid target for assessing the technology, but an increasingly crowded market from a competitive product standpoint.

The Bottom Line

Clearly Ziopharm is a risky stock, as there is no guarantee that these pipeline candidates will survive to become approved drugs. But then again, that's the boilerplate warning that applies to almost all biotech stocks.

Mitigating this risk is a clean patent portfolio, with only indibulin potentially rolling off before 2020 (but potentially eligible for orphan drug protection). Moreover, the company's portfolio is unpartnered (apart from the partnership with Intrexon) and strong data from palifosfamide could well make it a strong target for partnerships or acquisition by a large drug company.

Totting it all up, I think Ziopharm is worth at least $7.50 a share today ($5 from mSTS and $2.50 from SCLC). What's more, that target gives no credit to the remaining pipeline (which is probably worth $0.50 to $1 per share today), and incorporates pretty conservative estimates for lung cancer. Trading at about $5 a share and with enough cash on the books to last into 2013, Ziopharm looks like an attractive risk/reward trade-off among oncology biotechs.

Disclosure: I am long OTCQX:RHHBY, ARAY.