Galectin and Ziopharm: Quality Progress or Creative Tail-Wagging?

A tweet from Adam Feuerstein, senior biotech correspondent for, piqued our interest last week.

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The comment caught our eye because of the likelihood that Feuerstein is referring to Galectin Therapeutics (GALT), which is testing two citrus-derived drugs in NASH (non-alcoholic steatohepatitis) with fibrosis, and melanoma. The two compounds, GR-MD-02 and GM-CT-01, are in phase 1 and 2 trials, respectively.

We’ve had an eye on Galectin for quite some time given the company’s poor developmental track record (explained below) and impressive performance this year (+450% YTD), but we believe the valuation has come unhinged from the fundamentals – not unlike many small-cap biotech names in the second half of this year. GALT has a market capitalization of $197 million. The company had cash at October 17 of $10.3 million, enough, says the company, to make it through the second quarter of 2014 and the results of the ongoing phase 1 NASH study. The stock’s performance in the last six months and large valuation are more a product of the biotech landscape than quality, fundamental progress at Galectin.

More importantly, Galectin had a dark history as Pro-Pharmaceuticals before changing its name to Galectin in 2011.

We’re interested because Feuerstein is a skeptic (smart) and enjoys dissecting overvalued or overhyped stories. It’s hard to imagine Feuerstein’s column slanting bullish, and we suspect a diatribe on this company’s deleterious history when or if he publishes. In that situation, GALT will likely fall precipitously (see VNDA, CPRX for an example of this effect). While there’s a chance that Feuerstein is referring to La Jolla Pharmaceuticals (OTCBB: LJPC), which also tests modified citrus pectin in kidney and liver diseases, and cancer, we would be surprised to see Feuerstein comment on a penny stock, despite the company’s lofty fully diluted valuation (LJPC has almost a billion shares on a fully diluted basis).

Whether Feuerstein publishes on GALT or not, the stock provides an interesting hedge as high-fliers in the biotech sector begin to correct – see Celdex (CLDX) and Clovis (CLVS) as an example. The sector has outperformed brilliantly this year, and while it remains to be seen whether the performance continues, we find it prudent to hedge against a market turn, and this is one of a few places in which we’ve initiated a small short position given what we consider an outlandish overvaluation for the company’s stage of development and history.

Galectin’s predecessor, Pro-Pharmaceuticals (PRWP), went public in 2001 through a reverse merger and began a phase 1 trial of GM-CT-01, then called Davanat, in combination with 5-FU (a chemotherapeutic) two years later. Over the course of the next eight years, the company tested Davanat as a chemo-adjuvant, working on the thesis that Davanat may be able to reduce the toxicity issues associated with traditional chemotherapies and allow for lower dosing. A number of trials never went anywhere, and investors were often left with more questions than answers. Fast-forward to early 2011, and the company is talking about starting a phase 3 trial of Davanat/5-FU in metastatic colorectal cancer, but has yet to provide details from the phase 2 study on which it built the phase 3 development program. A few months later and the company has changed its name to Galectin, is focusing investors on a potential filing and commercialization of Davanat in Colombia (yes, the South American country), and is talking up its liver program more than ever. In November of 2012, Galectin scrapped the Colombian project as an aside in a quarterly update. Galectin never started the phase 3 colorectal program; more unfulfilled promises. Galectin no longer calls Davanat by its planned commercial name, now referring to the asset as GM-CT-01 and focusing investors on GR-MD-02 in liver diseases, which, despite being behind GM-CT-01 in development (-01 is in a small phase 1/2 trial in Europe for advanced melanoma, which raises a host of other considerations) is the company’s “lead asset.”

Pro-Pharmaceuticals pulled the wool over the eyes of many investors during the last decade, and we fear that the company is taking another set of investors through the wringer under a new name. We have a tight stop on our position and consider this a highly speculative play, but it’s important that biotech enthusiasts are aware of legacy stories (arguably a “pump and dump”) like Pro-Pharmaceuticals/Galectin.

Galectin brought in a few million in additional cash through the exercise of warrants in the second half, but the company will need to raise more before mid-2014. Given the stock’s performance, we would not be surprised to see a below-market secondary offering soon.

In addition, recall that in a note to PropThink Premium subscribers early this month, we discussed Ziopharm Oncology (ZIOP)’s impending capital raise. Here’s what we said then:

Ziopharm’s Financing is Imminent

Ziopharm Oncology (ZIOP) has been on our radar since the stock began a tremendous rally on September 27th. We found it odd that ZIOP started trending on such high volume given a lack of real catalyzing events. The company presented on the 27th at BioCentury’s NewsMakers in the Biotech Industry Conference; that day, more than 4.28M shares traded hands, vs. the stock’s 30-day average of 850K. We found the move odd because so few buyside investors take the company’s synthetic biology drug candidates seriously, and the company so desperately needs capital. By ZIOP’s own admission, existing resources won’t last beyond the first quarter of 2014.

While we were originally looking for a short opportunity when the company raises capital, likely at the top of this current rally and on highly dilutive terms, we’ve tempered our enthusiasm for the time being, although we have low expectations for the RTS platform.

Ziopharm licenses the technology behind its two lead candidates, Ad-RTS-IL-12 and DC-RTS-IL-12 , from Randal J. Kirk’s Intrexon Corp (XON). The Rheoswitch Therapeutic System, or RTS, is essentially a “gene switch” controlled by an activator ligand taken orally. These therapeutic candidates involve the intratumoral injection of an adenoviral vector containing IL-12, an anti-cancer cytokine, into the patient’s cells. Production of IL-12 within the cells are in turn regulated by RTS. Under the licensing agreement, Ziopharm will pay Intrexon 50% of net profits from future sales of these products, or 50% of revenue obtained from a sublicensor, if either ever materializes.

AD-RTS-IL-12 is being tested in two Phase II studies, in breast cancer and late-stage melanoma. Early results from these studies are due late this year or early next year. The exact timing is unclear but the events are likely contributing to ZIOP’s recent rally.

Human data for the candidates are scant and lacking, and based on standard reporting methodologies, it seems Ad-RTS-IL-12 hasn’t worked to date. In investor presentations, Ziopharm does not delve into the details of the completed Phase I study of Ad-RTS-IL-12, but instead focuses on pre-clinical evidence that Rheoswitch does what it’s intended to do. Based on the one completed study, it’s clear why. In a Phase I study of Ad-RTS-IL-12 in unresectable Stage III/IV melanoma patients, Ziopharm reported no Complete or Partial Responses among 13 evaluable patients. The company does, however, suggest that “clinical activity” was observed in patients dosed at the two highest dose levels. We don’t consider Stable Disease very indicative of clinical activity; essentially, Ad-RTS-IL-12 has yet to generate a meaningful response in cancer patients, raising questions about the Rheoswitch platform in general.

More importantly, and integral to our initial thesis, Intrexon and Ziopharm entered into a Stock Purchase Agreement in 2011 that suggests Intrexon will participate in Ziopharm’s next financing. We expect retail investors, caught up in the fervor of Intrexon’s IPO and founder RJ Kirk’s successful past, will tout Intrexon’s participation in the financing as validation of the technology. Under the agreement, Intrexon has agreed to purchase Ziopharm securities in conjunction with qualified offerings. Intrexon’s aggregate purchase commitment is capped at $50 million, and following Ziopharm’s February 2012 public offering, the remaining amount of Intrexon’s equity purchase commitment is $29 million.

In other words, ZIOP will likely raise capital before the year is out, Intrexon will participate, and investors will cheerlead.

Based on existing data, we have low expectations for the forthcoming Ad-RTS-IL-12 Phase II results, but won’t be shorting the stock given the malleability of these early read-outs (“PR spin”). And, while we would generally expect a small biotech company like ZIOP to raise cash at deleterious terms (discount to market, possibly warrants), Intrexon’s involvement will likely generate some fervor and may continue to prop up the stock. We would not be surprised to see ZIOP do a secondary offering in the near-term given that the stock is up 40% in the last eight trading sessions and the company is running on fumes.

Sure enough, on Tuesday, Oct 22 after the close, Ziopharm announced a $50 million offering. In the associated 424B5 filing, the company revealed that “Intrexon Corporation, or Intrexon, which is affiliated with Randal J. Kirk, who serves as one of our directors, has indicated an interest in purchasing up to $10,000,000 of shares of our common stock in this offering at the public offering price.”

Although the deal has yet to price, ZIOP closed down 18% from Tuesday’s close, at $4.03. Depending where the deal prices and how involved Intrexon is, we would not be surprised to see the investor base “ra-ra” RJ Kirk’s involvement. We’ll be watching for an intra-day trade as details of the deal emerge. In our view, Ziopharm remains overvalued.

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