Inside Wall Street: This Tiny Biotech Has Some Giant Backers

Gene Marcial's Inside Wall Street
Gene Marcial's Inside Wall Street

What's attracting some of the top global investors and scientists to little-known ZIOPHARM Oncology (ZIOP)? For a tiny biotech, ZIOPHARM has enticed several major institutional investors to put their money in it. And it has an-all star group of cancer scientists joining its committee to design Phase 3 clinical trials for its chief product, palifosfamide, a treatment for sarcoma, a form of cancer.

It's rare that the likes of Fidelity Management or Essex Woodlands Health Group invest in a young biotech with no products on the market and that has yet to make a penny. But they did: Fidelity acquired 2.73 million shares of ZIOPHARM stock on Apr. 30, 2010, increasing its total stake to 5.5 million shares, or 13.12%. Woodlands purchased nearly 2 million shares, or 4.58%, of the stock, on May 7, 2010. Other recent big buyers include Abu Dhabi Investment Group, which purchased nearly 1 million shares, or 1.55% of the stock, on June 9, 2010. And Deutsche Bank, which acquired 423,472 shares, or 1.01%, as of Mar. 31, 2010.

What's the scoop? Evidently these big backers have developed a liking for and placed a lot of faith in ZIOPHARM's sarcoma treatment, trademarked as Zymafos. Phase 3 trials started on July 19, with 424 patients afflicted with metastatic soft-tissue sarcoma who have never been treated with chemotherapy for the disease.

Attracting Wide Attention

Also a big factor: Some analysts believe that within the next 12 to 18 months, a major global pharmaceutical company would either partner with ZIOPHARM on the sarcoma drug or make an offer to acquire the entire company. Analysts put the value of the stock, now trading at $3.25 a share, at $8, or $204 million. The stock traded as high as $6.09 a share on May 5, 2010.

ZIOPHARM Chairman and CEO Jonathan Lewis, who bought 390,025 shares on May 7, 2010, raising his total stake to 645,475 shares, or 1.55%, declined comment on the speculation. But he acknowledges that Zymafos has attracted wide attention among some investors.

Based on the positive efficacy and safety profile Zymafos showed during its Phase 2 clinical trials -- and the lack of active therapies for the disease -- the drug "could attract a large pharma or major biotech player" to form at least a partnership with ZIOPHARM for the compound's development and commercialization, "if not an acquisition over the next 12 to 18 months," says Simos Simeonides, biotech analyst at investment firm Rodman& Renshaw. Obviously, he says, such a partnership or outright sale "would be a significant event for the stock."

An All-Star Lineup

He cautions that extrapolating the potential for success of the new Phase 3 trials -- even as rigorous and well designed by the top oncologists in the field -- based on the positive Phase II studies, "is obviously always risky." But he believes that given the data presented thus far -- the strong efficacy and relatively benign safety profile -- make for an attractive drug profile. Sarcomas are cancers affecting the body's soft tissues, including muscle, fat, nerves and blood vessels. ZIOPHARM has two other compounds now in clinical trials -- Zinapar for the treatment of lymphoma and leukemia, and Zybulin for treating breast cancer.

Simeonides says the all-star lineup of scientists behind the Phase 3 trials is impressive, and includes Jean Yves Blay, president of the European Organization for Research and Treatment of Cancer; Robert Maki, immediate past president of Connective Tissue Oncology Society and co-leader of Adult Sarcoma Management at Memorial-Sloan Kettering Cancer Center in New York; and Peter Hohenberger, chairman of the European Connected Tissue Oncology Society.

Chrystyna Bsdrij, senior biotech analyst at Griffin Securities, says Zymafos is expected to be "the first new front-line sarcoma therapy in decades in the U.S. for patients with high unmet medical need." The compound is expected to expand its use to other cancers, she says, including breast cancer, ovarian and lymphoma. Rating the stock a buy with a price target of $8 a share, Bedrij says it offers an attractive investment as progress in all ZIOPHARM's cancer drugs "remains superior."

"Convincing Results"

Bedrij notes that the phase 2 trials' data the company presented at the Connective Tissue Oncology Society's recent annual meeting "were astonishing, with convincing results in sarcoma against a well-validated endpoint." ZIOPHARM has established, says the analyst, "a strong reputation and record of advancing innovative drugs in clinical development," and she expects that progress in expanding drug pipeline should drive its stock higher.

It's uncommon to see these kinds of attractions in such a young biotech. ZIOPHARM may indeed be a good addition to investors' health-care portfolios.