New coverage by JPM Securities: We are initiating coverage on ZIOPHARM Oncology with a Market Outperform rating and $7price target. Ziopharm is developing a portfolio of oncology drug candidates, all of which may offer“capital-efficient” best-in-class approaches against validated targets. Palifosfamide is thecompany’s lead candidate, and it is being developed for the treatment of advanced sarcoma, ahigh-value indication (read: unmet medical need, defined path) with a market opportunity weestimate to be in excess of $400MM at peak. The compound has demonstrated efficacy and safetyin a Phase II trial, and we anticipate that a pivotal trial will begin by the end of 2Q10. We valueZiopharm on the palifosfamide opportunity alone, supported by an analysis of comparable companyvaluations, but note that additional pipeline programs offer upside to our valuation and providefurther clinical catalysts in 2010. Over the next 12 months we anticipate that Ziopharm will undergoa transformation from an early-stage pipeline story to a late-stage development company with ahigh value asset nearing pivotal data. As such we look for the valuation to reflect later-stagecomparable companies with a broader investor base, but without near-term binary risk. We are alsoconfident that management is executing a rigorous development plan to reduce the risk of thepalifosfamide program and therefore the binary risk associated with late-stage drug development.Our $7 price target is based on an NPV of palifosfamide sales, which assumes revenues toZiopharm approaching $300MM in 2016 (and peak sales of more than $460MM in 2020) and adiscount rate of 35%, to which we add our projection for year-end 2010 cash of ~$1 per share. · Palifosfamide risks reduced at multiple points of development. Ziopharm’s palifosfamide isabout to enter a pivotal trial for the treatment of advanced sarcoma. In our view, the risks for thisprogram have been and continue to be reduced by 1) focus on a validated target; 2) positive datafrom a randomized Phase II trial; 3) pre-clinical activity in multiple cancer settings, providing thepotential for multiple label expansions; 4) the receipt of Orphan Drug status; and 5) progress withsecuring a Special Protocol Agreement (SPA) with the FDA for the pivotal trial, which we anticipatesoon. These 5 factors make for a capital-efficient program that we believe investors favor. Pivotal to start in 2Q09, should yield data by early 2012. Related to the pivotal program, it is ourview that the most important focus for the trial design is that it secures the SPA. We are, of course, looking forward to clarity on the details of the trial design, which we expect in 1-2 months; however,in our view, collaboration with the FDA on the requirements for approval is the most importantfactor in terms of ensuring that the product reaches the market in the most timely and cost effectivemanner. We are more compelled by larger, less noisy trials with well accepted endpoints and highpower than “swing for the fence” designs that have a likelihood of “just missing”, as have beenemployed by many biotechs. In our view, with the recent equity transaction, emerging clinicalprofile, and breadth of opportunities for partnering, we believe Ziopharm is well positioned tocomplete a Phase III study that fully meets the FDA’s requirements. · Near-term clinical progress will enhance visibility of palifosfamide and pipeline withinstitutional and “strategic” investors. Ziopharm’s pipeline includes two additional oncologyproduct candidates: darinaparsin and indibulin. Over the next 12-18 months, we expect these twoproducts, as well as palifosfamide, to make substantial progress in the clinic. In our view, thispipeline could emerge into the arms of a pharma or larger biotech company as each of theseproduct candidates represents likely best-in-class, unpartnered, multi-$100 million approaches totargeting well-validated and broadly-applicable anti-cancer mechanisms. In addition to clinicalcatalysts for palifosfamide in 2010 (SPA for sarcoma in 1H10, initiate pivotal trial in 2Q10), weanticipate value inflection with progress in both the darinaparsin and indibulin programs. Fordarinaparsin, a Phase I trial with an oral formulation is expected to be completed in 1H10, and forindibulin a Phase I trial in breast cancer may also be initiated in 1H10. In our view, at the currenttrading ranges for ZIOP shares, investors are getting a “free call” on darinaparsin and indibulin, andour valuation is driven solely by an absolute valuation of palifosfamide. With increased visibility onthe darinaparsin and indibulin programs, we will conduct a similar analysis for these candidates andincorporate the value of these into our price target objective. Smufty (still long ZIOP)
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