On Thursday morning, Ziopharm Oncology (ZIOP) priced its recently announced secondary offering at $3.50 per share, a 30% discount to ZIOP’s $4.93 closing price on Tuesday, when the deal was announced. Ziopharm will sell 14.3 million shares of common stock for gross proceeds of $50,050,000. If the underwriters exercise on the full over-allotment, the company will see an additional $7.5 million. The company should net around $54 million from the deal.
ZIOP opened on Thursday at $3.64, just above the deal price, and continued higher in morning trading to $3.74.
We’ve been expecting this raise for quite some time given the stock’s recent performance and the company’s weak balance sheet. We’re skeptical of the technology around which Ziopharm is structured, and you can read what we previously wrote to PropThink Premium subscribers, below.
In the accompanying 424B5 filing with the SEC, Ziopharm reported 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.” This is central to the story and could create a quality trade early next week. Note that the deal is expected to close on October 29, next Tuesday, and if Intrexon participates at $10 million or more, R. J. Kirk’s involvement will be a central theme in the associated press release. We’ll look to go long ZIOP into the deal’s close as investors rally around Kirk’s involvement. In addition, the Long ZIOP/Short XON trade seems to be gaining popularity among buyside investors.
Here’s what we wrote to Propthink Premium members early this month.
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.
