Threshold Pharmaceuticals – A Derivative Trade on Ziopharm’s Upcoming Data

Investors in Ziopharm Oncology (ZIOP) eagerly await the release of top-line data from the phase 3 trial, PICASSO III, of Palifosfamide in first-line metastatic Soft Tissue Sarcoma (STS). We believe that Threshold Pharmaceuticals (THLD) represents an attractive derivative trade on ZIOP’s data event as outlined herein.

In a previous article, we described the attractiveness of derivative trades on biotech binary events. Briefly, a derivative is a security thats value is directly or indirectly linked to another, the primary equity. In our case, we’ll be utilizing the stock of a related company for risk-adjusted involvement in the upcoming binary event of a similar company. These related companies often see similar reactions in their stock price on a positive outcome for the primary company, with a less significant downside move on a negative outcome. Take for example Orexigen’s (OREX) rally in the middle of last year in tandem with the approval of Arena’s (ARNA) weight-loss drug Belviq. Despite having 18 months to go before it’s own obesity treatment, Contrave, might receive FDA approval, shares of Orexigen climbed 25% in sentiment to Arena’s approval. A note of caution on the THLD/ZIOP derivative: unlike OREX, THLD does not have a history of trading in parallel to ZIOP.

Now, Ziopharm’s lead candidate Palifosfamide (PALI) is isophosphoramide mustard (IPM). As seen in the figure below, Threshold’s lead drug candidate, TH-302, is a prodrug of PALI. Once metabolized in the body, its active molecule (circled below) is highly similar  to PALI, except PALI’s chlorine atoms have been replaced by bromine..


According to Threshold, under the hypoxic conditions within the margins of tumors, the ring on the left-hand side of the TH-302 molecule is removed, yielding Bromo-Isophosphoramide mustard (BR-IPM).  It’s believed that under normal oxygen levels (normoxic conditions), the electron exchange reaction that separates the ring from the Br-IPM is offset by the reverse reaction, the combination of Br-IPM with oxygen to produce the prodrug again. For an overview of hypoxia activated prodrugs see this presentation from ASCO 2007. Given that PALI and TH-302 have very similar active components, and given that both of these compounds are derivatives of the anti-cancer drug Ifosfamide, it is reasonable to expect that TH-302 may have similar cancer fighting capabilities to PALI.

TH-302 is undergoing a phase 3 trial in combination with doxorubicin in STS and, unlike ZIOP, Threshold obtained a special protocol assessment (SPA) for their trial — read more about SPAs here. The company has a collaboration with Merck, and due to milestones under this partnership, the company has over $100 million in cash on hand.

In a separate article, we laid out the bull and bear cases for Palifosfamide as well as a risk-weighted fair value calculation for the stock ahead of the data. Our analysis indicates that on a risk-weighted basis, ZIOP’s fair value ahead of the data event is $6.17 based on a 60% probability of trial success. If PALI fails to show a significant Progression Free Survival benefit, we see ZIOP’s downside to below $1.50, and on positive data, we see upside in the range of $8 – $10.

Meanwhile, and as the chart below shows, THLD has been trading in a channel since November. The stock began a downward slide after announcing updated data from a phase 2 trial of TH-302 in pancreatic cancer that showed that, while TH-302 plus gemcitabine resulted in a Progression Free Survival (PFS) benefit, the Overall Survival (OS) benefit in the trial was not statistically significant.


We believe that THLD potentially benefits no matter which way Ziopharm’s Palifosfamide data turn out. If the data are positive, the inference is that since TH-302 is a prodrug of PALI, TH-302’s STS trial should also work.  On the other hand, if ZIOP’s trial fails, the differentiated nature of TH-302 (activated in hypoxic regions of the tumors) means that there is still reason to believe TH-302 could work. And with Palifosfamide out of the running, TH-302’s addressable market increases significantly.

THLD is currently supported by the 20-day and 50-day exponential moving averages (EMA), which stand at $4.76 and $4.86 respectively. The 200-day EMA creates overhead resistance at $5.12. Should ZIOP announce positive data, we expect that THLD should break above the overhead resistance and may begin to establish a new base at a higher level.

THLD’s trial in STS is ongoing, with final data collection by the summer of 2014.  When Threshold announced their partnership with Merck in February of 2012, the stock climbed from the $2 range to the $9 range, a 350% increase. Last September, when the company reported the lack of a statistically significant OS benefit in the phase 2 pancreatic cancer trial, THLD retraced by 50%, taking the stock down to a more attractive valuation. Given the impending catalyst for ZIOP, the similarity of PALI and TH-302, and the fact that THLD is well-capitalized and has a global development partner that is funding the majority of TH-302’s development, we see a long position in TLHD as an attractive and risk-mitigated way to trade the palifosfamide phase 3 data event, due the last week of March.

In connection with THLD, PropThink has taken a long position.