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Ziopharm (3) (ZIOP - $4.85, $202M market cap) announced disappointing news with regard to progress towards securing an SPA for the palifosfamide pivotal trial; reiterate Market Outperform rating and $10 price target.

We believe the FDA has likely made a policy change regarding the acceptability of PFS for regular approval but still sees strong PFS advantages as perhaps approvable under its accelerated approval program.

As a result of minor protocol changes and completing discussions with the FDA, the palifosfamide Phase III trial will now start in 3Q10, not 2Q10, and will not have an SPA.

Our $10 price target continues to be derived from a sum-of-the-parts analysis of the palifosfamide revenue opportunity in sarcoma, including both U.S. sales and ex-U.S. royalties.

We view this as a minor setback but expect shares to trade down this morning.

However, we maintain a positive outlook for the long term based on our confidence in the efficacy and safety of palifosfamide in sarcoma.

We believe that the company has been diligent in seeking advise from key experts and the FDA and that the trial design will be consistent with our previous expectations.

While we acknowledge that an SPA would have been seen to lower the risk to the program, the eventual approval decision should still be driven by a compelling demonstration of efficacy.

News highlights risks of over-transparency.

We believe the primary driver of the stock's weakness will be that management had set very clear expectations for the SPA as a near-certainty to be finalized in the very near term.

In our view, the news highlights three points:1) Nothing is certain with the FDA until it is final; 2) Management's credibility will be challenged by investors, especially in light of the recent equity financing; 3) However, we believe this is consistent with recent FDA views on PFS and that the agency appears committed to enabling the development of palifosfamide.
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