May
13
Posted by: Dakota on 05/13/2014 at 1:28 pm. Filed under News, Stock Market Opinion.

Mizuho Securities USA Inc.

Healthcare Research Biotechnology Initiating Coverage

Buy

TARGET $11.00U.S. Equity Research March 19,2014 2014

ZIOPHARM Oncology, Inc.

Initiating Coverage with a Buy Rating

Summary

We are initiating coverage of ZIOPHARM with a Buy rating and an $11 price target. We are positive on the potential use of Intrexon’s synthetic biology technologies in oncology, and potentially positive data readouts and several NDA filings this year.

Key�Points

The bull case. 1) ZIOPHARM has the broad and exclusive use of Intrexon’s technology in oncology, 2) data read outs for IL-12 in breast cancer and advanced melanoma in 2014, and 3) eight NDAs to be filed over the next 2 years.
  • The bear case. 1) unproven platform and approach — the use of synthetic biology in oncology is unproven, with no commercially approved agents using this platform, 2) close association with Intrexon — on the positive is access to outstanding technology, capabilities and know-how, but on the negative the technology is unproven and Intrexon is a heavily shorted stock which spills over to ZIOPHARM, and 3) pipeline risk — IL-12 has previously failed in clinical trials due to “cytokine storms” and toxicity, hence is a high risk candidate, Additionally the proposed pipeline is very broad, increasing the chance of clinical failure.
  • Positive catalysts. A series of clinical trial milestones, including; 1) Phase II data for Ad-RTS-IL-12 in melanoma in 1H14, 2) Phase II data for Ad- RTS-IL-12 in breast cancer in 2H14, and 3) phase III interim data from the MATISSE trial of ZIOPHARM’s legacy compound palifosfamide in small cell lung cancer in 1H14 that could facilitate out-licensing of the compound. In addition for 2014 we are likely to see three clinical trial initiations for Ad-RTS-IL-12 in 1H14; glioblastoma (Phase I/II), melanoma (Phase II combination with standard-of-care), and breast cancer (Phase II combination with standard of care), plus multiple IND’s likely to be filed in 2H14.
  • Price target calculation and key risks. Our 12-month price target of $11 is based on a on a combination DCF and discounted P/E analysis. The primary risks surrounding ZIOPHARM’s stock relate to 1) partnership risk, being so closely aligned with Intrexon, 2) pipeline breadth risk, potentially spreading efforts too thin, and 3) reliance on synthetic biology that is largely unproven commercially.

Rating BUY

PMizuho Securities USA Inc.

ZIOPHARM Oncology, Inc.

Investment Thesis — ZIOPHARM Oncology

We are initiating coverage of shares of ZIOPHARM Oncology with a Buy rating and a price target of $11.

ZIOPHARM Oncology is a biopharmaceutical company that uses gene expression and genetic control technologies, or synthetic biology, to develop therapeutics for cancer. The company uses Intrexon’s synthetic biology technologies (http://bit.ly/15V4JXk); for instance RheoSwitch, to turn on and off gene expression at the site of the tumor. ZIOPHARM has one synthetic biology drug in two Phase II trials; Ad-RTS-IL-12 in melanoma and breast cancer, and a Phase I/II trial in glioblastoma multiform to begin in 1H14. Ad-RTS-IL-12 is comprised of the genetic components to direct production of IL-12, along with a second, activating or control molecule using Intrexon’s RheoSwitch technology.

The bull case for ZIOPHARM is three fold: 1) application of synthetic biology to oncology, with broad and exclusive use of Intrexon’s technology in oncology, 2) IL- 12 reads outs for breast cancer and advanced melanoma in 2014, and 3) eight NDAs to be filed over the next 2 years.

Positive catalysts for the stock relate to a series of clinical trial milestones, including; 1) additional Phase II data for Ad-RTS-IL-12 in melanoma in 1H14, 2) additional Phase II data for Ad-RTS-IL-12 in breast cancer in 2H14, and 3) Phase III interim data from the MATISSE trial of ZIOPHARM’slegacy compound palifosfamide in small cell lung cancer in 1H14 that could facilitate out-licensing of the compound. In addition for 2014 we are likely to see three clinical trial initiations for Ad-RTS-IL-12 in 1H14; glioblastoma (Phase I/II), melanoma (Phase II combination with standard- of-care), and breast cancer (Phase II combination with standard of care), plus multiple INDs likely to be filed in 2H14.

Beyond typical commercialization and regulatory risks, the bear case for ZIOPHARM relates to 1) unproven platform and approach — the use of synthetic biology in oncology is unproven, 2) close association with Intrexon — the ties with Intrexon can be viewed as a double edged sword; on the positive; outstanding technology, capabilities and know-how, but on the negative the technology is unproven and Intrexon is a heavily shorted stock which spills over to ZIOPHARM, and 3) pipeline risk — IL-12 has previously failed in clinical trials due to ―cytokine storms‖ and toxicity, hence is a high risk candidate, Additionally the proposed pipeline is very broad, increasing the chance of clinical failure.

The primary risks surrounding ZIOPHARM’s stock outside clinical failure relate to 1) platform and business risk—company valuation is tied to the success of Intrexon’s technology in developing oncology drugs, 2) partnership risk — reliance upon and very close ties to Intrexon, and 3) pipeline breadth risk — synthetic biology will be used to produce a wide variety of effector molecules. Consequently ZIOPHARM’s R&D efforts may be thinly spread over too large a domain.

Company Overview

ZIOPHARM Oncology is a biopharmaceutical company that uses gene expression and genetic control technologies (synthetic biology) to develop treatments for cancer. To date using this synthetic biology platform ZIOPHARM has completed a Phase I study in melanoma (with DC-RTS-IL-12) and Ad-RTS-IL-12 is currently in two Phase II studies (in melanoma and breast cancer), with additional DNA constructs targeting key cancer pathways to come.

The company uses Intrexon’s RheoSwitch technology to turn on and off gene expression at the site of the tumor to treat cancer. Intrexon’s synthetic biology platform is an inducible gene-delivery system that allows the controlled expression of therapeutic proteins.

The company has one synthetic biology drug in two Phase II trials; Ad-RTS-IL-12 in melanoma and breast cancer, and expects to begin testing in glioblastoma in 1H14. The lead candidate Ad-RTS-IL-12 is comprised of the genetic components to direct production of IL-12, a potent, naturally occurring anti-cancer protein, under the control of a second molecule (veledimex) based on the Intrexon’s RheoSwitch technology.

We expect additional data from a Phase II melanoma study in 1H14 (initial data was presented in December 2013) and from a Phase II breast cancer trial in 2H14 (initial data December 2013 as well). ZIOPHARM also has a portfolio of small molecule drug candidates which are no longer a strategic focus of the company and planned to be out-licensed.

ZIOPHARM Oncology was founded in 2004 and went public through a reverse merger with EasyWeb in 2005. As of mid-1Q14 ZIOPHARM had 43 employees. Most recently, ZIOPHARM raised $55mm in October 2013.

ZIOPHARM Oncology’s pipeline is currently comprised of one molecule in clinical testing, Ad-RTS-IL-12. We expect several new molecules to enter the clinic in 2014 (Exhibit 1).

  •  Ad-RTS-IL-12 is currently in Phase II testing in melanoma and breast cancer and expected to begin trials in glioblastoma multiforme in 1H14. Ad-RTS- IL-12 is composed of a gene delivery system that produces IL-12 inside the tumor, and a second ―switch molecule‖, veledimex, that can modulate the amount and timing of IL-12 production.
  •  Multigenic, immune therapy candidates- We expect ZIOPHARM to bring several multigenic, immune therapy candidates into clinical testing for various cancer settings beginning in 2014, based on the Intrexon technology.

 Small molecule programs- We expect ZIOPHARM to attempt to out-license its three legacy small molecule programs- palifosfamide, darinaparsin, and indibulin.

Exhibit 1. ZIOPHARM Oncology’s Pipeline

Candidate Description Status Disease Type Partner

Ad-RTS-IL-12

Cell signal targeting Multigenic platforms

Immunotherapy programs Palifosfamide

Darinaparsin

Indibulin

IL-12 (adenoviral vector) + veledimex switch

na na

na

small molecule active metabolite of ifosfamide

organic arsenic

Oral tubulin binding agent

Phase I/II Phase II

Phase I

Pre-clinical Pre-clinical

Pre-clinical Phase III

Phase II

Phase I/II

Melanoma Breast Cancer

Glioblastoma Multiforme

na na

na
Small cell lung cancer

Peripheral T-cell lymphoma

Breast Cancer

Intrexon Intrexon

Intrexon

Intrexon Intrexon

Intrexon
Looking to outlicense

Licensing agreement w/ Solasia for Asia/Pac territory; Seeking to license territories not covered by Solasia

Seeking to outlicense

Source: Company reports and Mizuho Securities USA,

Bull Case

The bull case for ZIOPHARM Oncology is three fold: 1) application of synthetic biology to oncology, 2) a series of 2014 catalysts, and 3) multiple IND filings.

Application of synthetic biology to oncology — ZIOPHARM has acquired broad and exclusive use of Intrexon’s technology in the realm of cancer biology, which we view as probably the best and earliest demonstration of synthetic biology.

A series of 2014 catalysts —The most relevant to our thesis are additional Phase II data for Ad-RTS-IL-12 in melanoma in 1H14 and in breast cancer in 2H14. Phase III MATISSE interim data for ZIOPHARM’s legacy compound palifosfamide in small cell lung cancer should read out in 1H14, with potential out-licensing of the compound. In addition for 2014, we are likely to see three clinical trial initiations for Ad-RTS-IL-12 in 1H14; glioblastoma (Phase I/II), melanoma (Phase II combo), and breast cancer (Phase II combo), plus multiple IND’s likely to be filed in 2H14, along.

with preclinical data from the undisclosed multigenic and immunotherapy programs. Interim glioblastoma results could be ready in 2H14 as well.

IND filings — ZIOPHARM has up to eight NDA’s to be filed over the next 2 years – and notably multiple IND’s are likely to be filed in 2H14. IND filing in part will act as a proof of concept for Intrexon’s base technology and ZIOPHARM’s ability to develop and execute on preclinical candidates.

Bear Case

Beyond typically commercialization and regulatory risks, the bear case for ZIOPHARM relates to 1) unproven platform and approach, 2) close association with Intrexon, and 3) pipeline risk.

Unproven platform and approach — the use of synthetic biology in oncology is unproven, with no commercially approved agents using this platform.

Close association with Intrexon — the ties with Intrexon can be viewed as a double edged sword; on the positive; outstanding technology, capabilities and know-how, on the negative the technology is unproven, and Intrexon is a heavily shorted stock which spills over to ZIOPHARM.

Pipeline risk — IL-12 has previously failed in clinical trials due to ―cytokine storms‖, hence IL-12 is a high risk candidate, plus the proposed pipeline is very broad, increasing the chance of clinical failure.

Positive Catalysts

Positive catalysts for the stock relate to a series of clinical trial milestones, including, 1) Phase II data for Ad-RTS-IL-12 in melanoma in 1H14, 2) Phase II data for Ad- RTS-IL-12 in breast cancer in 2H14, and 3) Phase III data MATISSE interim data for legacy compound palifosfamide in 1H14, potentially enabling the out-licensing of the drug (Exhibit 2).

Ad-RTS-IL-12 in melanoma — We expect additional Phase II data for Ad-RTS-IL- 12 in melanoma in 1H14, although we view this as a high risk high reward trial. The benefit is the additional data around the Ad-RTS-IL-12 vector; toxicity, side-effect profile, and on-off dynamics will help bolster the case for synthetic biology. Initial data was reported in December 2013.

Ad-RTS-IL-12 in breast — In addition to melanoma, we expect additional Phase II data for Ad-RTS-IL-12 in breast cancer in 2H14. Initial data was reported in December 2013 as well.

MATISSE interim data for palifosfamide — We expect to see Phase III MATISSE interim data for the legacy compound palifosfamide in small cell lung cancer in 1H14. Importantly this could cement potential out-licensing of the compound.

In addition for 2014, we are likely to see three clinical trial initiations for Ad-RTS- IL-12 in 1H14; glioblastoma (Phase I/II), melanoma (Phase II combo), and breast cancer (Phase II combo), plus multiple IND’s are likely to be filed in 2H14 (Exhibit 2).

Exhibit 2. Catalysts and Milestones

Candidate Disease Trial / Milestone Time

Ad-RTS-IL-12

Melanoma

Breast cancer

Glioblastoma multiforme Melanoma
Breast cancer

TBD

P2 data- Additional (longer-term)

P2 data- Additional (Mono and combo w/ palifosfamide

Initiate P1/2 study Initiate P2 combo study Initiate P2 combo study

Submit INDs

Announce new partnerships

P3 data- MATISSE interim analysis (OS)

P2 data and outlicense US, Europe rights P1/2 data and outlicense

1H 2014

2H 2014

1H 2014 1H 2014 1H 2014

2H 2014

2014

1H 2014

2014 2014

Preclinical programs

Palifosfamide

Darinaparsin Indibulin

Small cell lung cancer

Peripheral T-cell lymphoma Breast cancer

Source: Company reports and Mizuho Securities USA,

Risks

The primary risks surrounding ZIOPHARM’s stock outside clinical failure relate to 1) platform and business risk, 2) partnership risk, and 3) pipeline breadth risk.

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Platform and business risk — Excluding legacy drugs that are potentially being out-licensed, most notably a Phase III drug, the entire company valuation is tied to the success of Intrexon’s technology in developing oncology drugs.

Partnership risk — Intrexon’s novel synthetic biology platform is controversial at the scientific, clinical and investor level. Consequently, with Intrexon being ZIOPHARM’s primary partner, ZIOPHARM has partnership risk by virtue of their reliance upon and very close ties to Intrexon. Intexon is alsoZIOPHARM’s top shareholder.

Pipeline breadth risk — Synthetic biology will be used to produce a wide variety of effector molecules, and ZIOPHARM’s R&D efforts may become too thinly spread over a large domain.

ZIOPHARM’s product candidates use a synthetic biology platform. There are multiple concerns around synthetic biology; safety, ethical, scientific basis, clinical benefit and potential for increasing regulation in the future.

INTREXON

ZIOPHARM entered into a partnership (an Exclusive Channel Partner Agreement) with Intrexon in January 2011, to use Intrexon’s genetic engineering technology (in vivo expression of proteins; currently Ad-RTS-IL-12 + veledimex and DC-RTS-IL- 12 + veledimex) for the treatment of cancer. In return ZIOPHARM will pay Intrexon on a quarterly basis 50% of net profits derived in that quarter from the sale of ZIOPHARM products, or 50% of revenues for out-licensed products.

ZIOPHARM paid Intrexon an upfront technology access fee of 3.6mm shares and received another 3.6mm shares upon dosing of the first patient in a Phase II trial in Ocotober 2012. Intrexon also purchased an additional 2.4mm shares upon execution of the ECC, and agreed to purchase up to an additional $50.0mm of ZIOPHARM common stock in the future. Approximately $19mm remains under this commitment- the latest being a $10mm purchase in October 2013 (2.9mm shares) Intrexon owns approximately 17% of ZIOPHARM’s shares outstanding. Intrexon’s CEO Randal J. Kirk serves on the ZIOPHARM Board of Directors, and is also Senior Managing Director of Third Security, which owns 18% of ZIOPHARM.

The agreement grants ZIOPHARM worldwide license to use patents and other intellectual property of Intrexon in connection with DNA administered to humans for the expression of anti-cancer effectors for the purpose of treatment or prophylaxis of cancer. ZIOPHARM is responsible for development, commercialization and certain aspects of manufacturing. Intrexon is responsible for the costs of establishing manufacturing capabilities and facilities for the bulk manufacture of products, platform improvements and costs of filing, prosecution and maintenance of Intrexon’s patents.

Intellectual property licensed from Intrexon covering Ad-RTS-IL-12 + veledimex and DC-RTS-IL-12 + veledimex includes 32 issued U.S. patents (start expiring in 2018 until 2030, with the largest number of expirations 9 in 2022), with 42 pending U.S. patent applications, 305 issued foreign patents in Europe, Canada, Japan, Australia and ten other countries, and 202 pending .

Synthetic Biology

ZIOPHARM’s development strategy is based on access to Intrexon’s synthetic biology platform in the cancer biology arena. Intrexon’s synthetic biology outlook emanates from the belief that we are at a tipping point as genomic and cellular engineering moves away from the labor intensive, hit-or-miss approach of individual artisans, to an industrialized process, much like electrical engineering moved from switches to semiconductors. Synthetic biology for the first few decades was the ad- hoc exploration and tinkering with DNA and cellular components. Synthetic biologists believe we are potentially at the point where biology can be used to construct new genes, proteins, cells and even organisms that can be used in a range of applications in health, food, energy and the environment. Synthetic biology has the goal of constructing biological tools (such as effector genes that produce antibodies that can kill cancer cells) and processes (switching molecules off and on at the site of a tumor) from discrete molecular parts.

ZIOPHARM/Intrexon’s synthetic biology platform uses an inducible gene-delivery system that allows for the controlled delivery of therapeutic proteins to treat cancer.

The first example of this regulated controlled delivery is achieved by producing IL- 12, a potent, naturally occurring anti-cancer protein, under the control of Intrexon’s proprietary biological ―switch‖- termed the RheoSwitch Therapeutic System (RTS)- to turn on and off the therapeutic protein expression at the tumor site.

ZIOPHARM’s initial synthetic biology platform drug candidate is Ad-RTS-IL-12 plus veledimex (the switching agent). A second system that uses dendritic cells versus adenovirus vectors, known as DC-RTS-IL-12, was developed but will not be advanced as Ad-RTS takes the lead (Exhibit 3).

ZIOPHARM has also shown in preclinical studies the simultaneous expression of multiple effectors (drugs) from the same piece of DNA (or construct), and express multiple genes in the same construct in stem cells (mesenchymal stem cells, or MSCs).

Exhibit 3. Ad-RTS-IL-12 Technology

Source: ZIOPHARM Oncology

Synthetic Biology Pipeline

ZIOPHARM is pursuing several synthetic biology approaches, including gene delivery with human MSCs, functional single chain (Fc) fusion proteins and multi- gene constructs, under their channel agreement with Intrexon. ZIOPHARM is also seeking to out-license their small molecule programs to further support their synthetic biology efforts.

DC-RTS-IL-12

Currently, ZIOPHARM has focused their development efforts on Ad-RTS-IL-12, but in 2Q12, ZIOPHARM completed the enrollment of a Phase I dose escalation study of DC-RTS-IL-12, an intratumoral injection of modified dendritic cells that were used to produce IL-12 at the tumor site, to demonstrate in vivo expression of IL-12 and the

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safety profile. At this time, there are no actively enrolling studies using DC-RTS- IL- 12.

Ad-RTS-IL-12 + Veledimex

Ad-RTS-IL-12 + veledimex is currently in two Phase II studies; metastatic melanoma and unresectable recurrent or metastatic breast cancer. A third trial, in glioblastoma multiforme, is expected to begin in 1H14.

Ad-RTS-IL-12 + veledimex is ZIOPHARM’s lead drug candidate, using Intrexon’s gene delivery system to produce IL-12. Unlike the dendritic cells used in DC-RTS, Ad-RTS uses and adenovirus vector to carry the genetic components that guide production of Interleukin-12 at the tumor. Interleukin-12 (IL-12) is a potent immunostimulatory cytokine which recruits and activates the immune system; recruiting and activating dendritic cells which prime T-cells that can kill tumor cells. IL-12 is a potent anti-cancer protein. By varying the amount of activating compound (veledimex) IL-12 gene expression can be modulated to reduce systemic toxicity and increase efficacy through high intratumoral expression.

Ad-RTS-IL-12 in Melanoma

In December 2013, ZIOPHARM presented data from an ongoing Phase I/II study of Ad-RTS-IL-12 in stage III/IV melanoma The primary objective was to evaluate the safety and tolerability of intratumoral injections of Ad-RTS-IL-12 in combination with the veledimex switch, with secondary objectives of dose selection for combo studies. 11 of 16 evaluable patients demonstrated a response of stable disease or better on a per lesion basis. The most common severe adverse events were pyrexia, hypotension, mental status changes, and cytokine release syndrome. Four of seven patients with adverse events had veledimex dosing stopped during cycle 1. Three had adverse events during subsequent cycles, and stopped veledimex dosing at that time. All adverse events were reversed after discontinuation of veledimex, demonstrating the ―on‖ and ―off‖ control.

Ad-RTS-IL-12 in Breast Cancer

In March 2013, ZIOPHARM initiated a randomized, open label Phase II clinical study of Ad-RTS-IL-12 + veledimex alone or in combination with palifosfamide to treat metastatic breast cancer. Part one of the study is a safety assessment, and part two assesses efficacy. The primary endpoint is progression-free survival at 16 weeks, with secondary end points of objective response rate, duration of response and assessment of tumor biomarkers.

In May 2013, ZIOPHARM provided a preclinical and Phase I clinical update. Controlled expression of IL-12 could limit the systemic toxicity while providing clinical activity. Further details were provided at ASCO 2013 — IL-12 mRNA could be switched on and completely switched off with the addition and removal of veledimex, and tumor invading lymphocytes (TILs) could be observed in the tumor microenvironment.

At the San Antonio Breast Cancer in December 2013, ZIOPHARM announced preliminary results from the ongoing Phase II study of Ad-RTS-IL-12 + veledimex with and without palifosfamide in patients with unresectable recurrent or metastatic breast cancer. Of the six monotherapy patients the most common severe adverse events (SAEs) were neutropenia, AST elevation and pyrexia, all reversed following discontinuation of veledimex. Preliminary monotherapy PFS rates were reported for two patients, with one subject progressing at 12 weeks and a second at 16 weeks. Recruitment for the Phase II clinical trial is ongoing to refine the dose, schedule and optimal combination regimen.

Glioblastoma Multiforme

ZIOPHARM is beyond proof of concept, already showing the controlled local expression of IL-12 in brain cancer (glioma, AACR-NCI-EORTC in October 2013), with a dose-dependent increase in survival the mouse models. In December 2013, the Recombinant DNA Advisory Committee (RAC) approved the Phase I study of Ad- RTS-IL-12, with recurrent or progressive high grade gliomas, which is expected to start 1H14.

Glioblastoma is the most frequent malignant glioma (brain cancer), an aggressive form of cancer, with a poor prognosis and requiring an aggressive treatment regime. Approximately 18,000 glioblastoma’s are diagnosed each year in the U.S. Glioblastoma patients have a median overall survival, or OS, of 11-17 months. The standard of care is surgical resection, followed by radiotherapy and concomitant adjuvant temozolomide.

Earlier-Stage Programs

ZIOPHARM’s early stage synthetic biology programs give us insight into the direction of the synthetic biology pipeline – the expression of multiple drugs or immunotherapies from one construct, , and the use of Fc fusion proteins- simplified versions of full-length monoclonal antibodies, which are generally not effectively expressed as in-vivo constructs. In mice, ZIOPHARM has shown the ability to express three distinct immune effectors from a single DNA construct (AARC-NCI- EORTC 2013). These results are particularly relevant for combo trials of multiple targeted molecules.

Small Molecule Programs – ZIOPHARM is actively out-licensing its legacy small molecule programs to focus on synthetic biology.

Palifosfamide (ZIO-201) – Palifosfamide (also known as isophosphoramide mustard) was licensed from DEKK-Tec, Inc in 2004. Remaining potential milestone payments by ZIOPHARM amount to $4.0 million and single digit percentage royalty payments on the sales of the drug. Of the five palifosfamide patents, the first start expiring in 2020, and extend to 2031. Palifosfamide is a proprietary small molecule drug that is an active metabolite of the pro-drug ifosfamide. In March 2013, ZIOPHARM announced that the Phase III study, PICASSO 3 (palifosfamide in combination with doxorubicin in patients with soft tissue sarcoma), did not meet its primary endpoint of progression-free survival, and terminated their development program in metastatic soft tissue sarcoma (European Cancer Congress 2013).

Small-Cell Lung Cancer & palifosfamide – Based upon the redefined company strategy and failure of PICASSO 3 trial, enrollment for MATISSE (a small cell lung cancer trial with palifosfamide) was suspended with 188 patients enrolled. Interim survival data for MATISSE is expected in 2H14. ZIOPHARM is seeking to out- license palifosfamide.

Darinaparsin (ZIO-101) – ZIOPHARM is seeking to out-license the remaining geographies for Darinaparsin. Darinaparsin (organic arsenic) is an anti-mitochondrial compound. Phase I and 2 testing is complete. This molecule was licensed from the University of Texas M. D. Anderson Cancer Center and the Texas A&M University System. ZIOPHARM may be required to make additional milestone payments of $4.5 million, and single digit percentage royalty payments on sales. Phase I in the IV form was tested in solid tumors and hematological cancers. Phase II was in advanced myeloma, primary liver cancer and in certain other hematological cancers. A Phase I trial with the oral version of the drug in solid tumors has completed enrollment. The drug has Orphan Drug Designation for the treatment of peripheral T-cell lymphoma (PTCL) in the U.S. and Europe.

The Asian and Pacific territory is out-licensed to Solasia. ZIOPHARM is entitled to receive additional payments of up to $32.5 million in development-based milestones and up to $53.5 million in sales-based milestones, and a double digit royalty upon net sales. Clinical studies are currently ongoing with Solasia. Of the 8 US-issued darinaparsin patents, the first start expires in 2023 and the last in 2029.

Indibulin (ZIO-301) – ZIOPHARM is seeking to out-license indibulin on a global basis. Indibulin was licensed from Baxter in November 2006. Remaining milestone payments could amount to approximately $8.0 million plus royalties on net sales of the product. Indibulin is a novel, small molecule inhibitor of tubulin polymerization. Of the 7 Indibulin patents, 3 expire in 2017 and 4 expire in 2019. ZIO-301 is a tubulin inhibitors. No neurotoxicity was seen in preclinical and Phase I data due to a differentiated pharmacology, binding to a unique site on tubulin and is active in multi-drug-resistant (MDR-1, MRP-1) and taxane-resistant tumors. Phase I testing in late stage metastatic breast cancer has demonstrated safety and tolerability.

Cancer — Melanoma

Approximately 77,000 new cases of melanoma will be diagnosed in the U.S. in 2014 and 100,000 in Europe. Early stage melanoma is often treated successfully with surgery alone. Adjuvant therapy with interferon is used if the melanoma was found in lymph nodes, as well as radiation, IL-2 and chemotherapy. Interferon and IL-2 boost the immune system to try and shrink the tumors, a strategy similar ZIOPHARM’s Ad-RTS-IL-12. However, they are often highly toxic.

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Advanced melanoma has traditionally been very hard to treat, with many potential drugs failing or showing little benefit. Recently however, there have been several new drugs that have been successful in this setting and several more in development that have high expectations. Immunotherapy has been a significant strategy for emerging treatments (Exhibit 4). These new therapies generally target the BRAF or PD-1 genes and proteins. BMS’s YERVOY was the first new melanoma drug approved in 13 years in 2011 and had worldwide sales of $960mm in 2013.

Exhibit 4. Recent and Potential Melanoma Therapies

Company Drug

BMS YERVOY (ipilimumab) Roche ZELBORAF

GSK Mekinist + Tafinlar

Merck lambrolizumab (MK-3475)

BMS nivolumab Roche MPDL3280A

Mechanism

CTLA-4 inhibitor BRAF V600E

MEK + BRAF V600E or K

anti PD-1

anti PD-1 anti PD-1

Notes

1st approved drug in 13 years

approved with BRAF V600E companiond diagnostic

FDA approved combo in January 2014 as accelerated approval

Expect FDA submission mid-2014 for 2nd line following YERVOY

Phase III Phase II

Source: FDA, company reports, Mizuho Securities USA

Cancer — Breast Cancer

Approximately 230,000 new cases of invasive breast cancer will occur in 2014. Breast cancer can be stratified broadly by the presence of hormone receptors on the tumor cell. If hormone receptors are present, then the tumor is sensitive to female hormones (estrogen and progesterone), which can drive the growth of the cancer. Estrogen receptor (ER) positive tumors are sensitive to estrogen. Progesterone receptor (PR) positive tumors are sensitive to progesterone. Treatments that block these hormones, such as the estrogen receptor antagonist tamoxifen, and aromatase inhibitors that block the production of estrogen, can stop or slow the growth of ER+ tumors. Hormone receptor (HR) negative tumors lack hormone receptors, and are not effected by hormone therapies.

Another way to characterize breast cancer is by the presence or absence of multiple copies of the ErbB2 (HER2) gene or overexpression of its protein. ErbB2 is a cell surface receptor in the epidermal growth factor receptor (EGFR) family of tyrosine kinases. HER2 is involved in numerous signaling pathways, especially cell growth and cell proliferation—hence the role in cancer. ErbB2 is the target of Roche’s highly successful trastuzumab (Herceptin) breast cancer drug, which had sales of approximately $7bn in 2013.

Recent Breast Cancer Data

From the San Antonio 2013 conference, ZIOPHARM presented data in metastatic breast cancer showing 1) the RTS technology allows controlled expression of IL-12, allowing for controlled dosing and scheduling (Exhibit 5), 2) the IL-12 construct in humans is biologically active as judged by on mechanism and toxicity profile, and 3) side effects are reversible, by turning gene expression off.

Exhibit 5. Ad-RTS-IL12 Dose Response Curve

Source: ZIOPHARM Oncology – SABCS 2013 poster

These results were similar to findings in melanoma, in that 1) Il-12 expression was tightly controlled, demonstrating an on/off cycle as judged by tumor mRNA (Exhibit 6), and 2) toxicity appeared limited and controllable; Grade 3 in 10-20% of patients (AST elevation, hypotension, leukopenia Pyrexia) and importantly reversed on discontinuation of veledimex.

Exhibit 6: IL-12 On/Off switching

Source: ZIOPHARM Oncology – Melanoma Bridge 2013 Meeting

At the Trimolecular Conference in October 2013, ZIOPHARM, in conjunction with Intrexon, showed a series of interesting preclinical results that provides insight into the future direction of the pipeline; 1) three different immune effector molecules- IL- 12, IFNalpha, and CTLA-4- could be expressed in-vivo (in skeletal muscle cells) using a preclinical mouse model, 2) single chain variable Fc fusion proteins, such as trastuzumab (Herceptin) could be generated in-vivo with high affinity and specificity in-vitro, as well as dual expression of trastuzumab and cetuximab, and 3) the same three immunomodulators (IFN-alpha, IL-12, CTLA4) could be expressed in human mesenchymal stem cells, to be used as an expression system for localized tumor- targeted delivery of single or multiple effectors for cancer immunotherapy.

Overall, these results suggest 1) the use of MSC as a delivery “bioreactor” for some settings, 2) mono and combo expression of oncology therapeutics, and 3) the expression of Fc fusion proteins as a therapeutic to replace injectable drugs.

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Management & Board

According to information from the company:

CEO — Jonathan Lewis, M.D., Ph.D is the Chief Executive Officer and a Director. Dr. Lewis was previously Professor of Surgery and Medicine at Memorial Sloan- Kettering Cancer Center, and has helped develop several oncology drugs.

CMO — Francois Lebel, M.D., Clinical Development and Medical Operations, has extensive drug and device development experience, holding senior leadership roles as Vice President, Research & Development at Baxter International and Global Head of Medical and Scientific Affairs at MedImmune. He has lead the development of 8 NDA/BLA’s in various therapeutic areas and also has held roles at Chiron (Novartis), Warner- Lambert (Pfizer) and Burroughs Wellcome (GSK).

Notable Board Members

Murray Brennan, M.D. (Lead Director), is the emeritus chairman of Memorial Sloan- Kettering Cancer Center’s Department of Surgery and previously served as chairman since 1985. One of the most famous surgeons, has lectured and acted as a visiting professor throughout the world and authored over 800 scientific papers. He is the recipient of numerous honors and medals for his leadership of surgery and oncology worldwide.

Randal J. Kirk, currently serves as the chief executive officer and chairman of the board of Intrexon, CEO of Third Security, an investment management firm, prior experience; founded and chairman of New River Pharmaceuticals (acquired by Shire Plc), and on the board of Halozyme Therapeutics, Inc. and Clinical Data, prior boards Scios, Inc (acquired by Johnson & Johnson

Timothy McInerney, Partner, Riverbank Capital Securities Inc, specializing in financing for the biotech and specialty pharmaceutical industry. Prior to that, McInerney was a managing director of Paramount BioCapital, and as a research analyst focusing on the biotechnology industry at Ladenburg, Thalman & Co.

Michael Weiser, M.D., Ph.D, Partner, Actin Biomed, a healthcare investment firm advancing the discovery and development of novel treatments for unmet medical needs. Prior to Actin, Dr. Weiser was the director of research at Paramount BioCapital where he was responsible for the scientific, medical and financial evaluation of biomedical technologies and pharmaceutical products Dr. Weiser currently serves on the board of directors of Chelsea Therapeutics International, Emisphere Technologies, Inc., and several privately held companies.

P&L, and Market Model

ZIOPHARM Oncology is currently “pre-revenue‖. The focus for earnings releases is on clinical trial updates, updated timelines, and cash burn. Earnings performance is largely irrelevant. Following the failure to meet clinical end points in the PICASSO 3 pivotal trial in March 2013, ZIOPHARM cut costs including a workforce reduction plan, but has subsequently added headcount in part to support the collaboration with Intrexon.

As of end of year 2013, ZIOPHARM had approximately $68.2 million of cash and cash equivalents, which management believes is sufficient to fund operations into 2Q15.

Revenue – ZIOPHARM’s current revenue consists of collaboration revenue with Solasia Pharma K.K. (started March 7, 2011)- $5.0 million in R&D funding recognized over 75 months (the estimated period of performance).

R&D – For the year ended December 31, 2013, ZIOPHARMA’s clinical projects included two Phase III projects for palifosfamide which will fall off going forward.

Exhibit 7: Market Model — U.S. Melanoma

Melanoma

US Melanoma Patients

Growth

Progress to 2nd line or later

Progress to 2nd line or later

% Progress to 2nd line or later

IL-12

Patients on IL-12

% penetration, IL-12

Cos t drug/month

%increase

Length of Therapy, months Revenue/Patient

IL-12 Revenue, Progress to 2nd line or later

Source: Mizuho Securities USA,

2012 2013 2014

2015

72,121 1%

43,273 60%

0%

10,201 $

2016 2017 2018 2019

72,842 73,571 74,306 75,049 1% 1% 1% 1%

43,705 44,142 44,584 45,030 60% 60% 60% 60%

– – 2,229 9,006

0%0%5 %

10,303 $ 10,406 $ 10,510 $ 10,615

2020 2021

75,800 76,558 1% 1%

45,480 45,935 60% 60%

15,918 22,967

35% 50%

10,721 $ 10,829

2022 2023

77,324 78,097 1% 1%

46,394 46,858 60% 60%

30,156 37,486

65% 80%

10,937 $ 11,046

70,000

42,000 60%

$

70,700 71,407 1% 1%

42,420 42,844 60% 60%

– –

0% 0%

10,000 $ 10,100

$

$

$

1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%

6

6 6

6 6 6 6 6 6 6 6 $ 62,436 $ 63,061 $ 63,691 $ 64,328 $ 64,971 $ 65,621 $ 66,277

$ – $ 140,574 $ 573,599 $1,023,975 $1,492,224 $1,978,882 $2,484,502

US Net revenues, IL-12 $ – $ 119,488 $ 487,559 $ 870,378 $1,268,390 $1,682,050 $2,111,827

Our US melanoma market model (Exhibit 7) assumes US peak revenues of approximately $2.1bn for Ad-RTS-IL-12 by 2023 in the second line setting for melanoma. ZIOPHARM’s split of the profit share is expected to be approximately $600mm in 2023. Other assumptions include 6 years to ramp to 80% penetration, at a cost of approximately $10,000 per month for 6 months of treatment. We could see upside from faster ramp, and upside to pricing versus recently approved targeted drugs. For Asia and Europe, we make similar assumptions with the key differences being a slower ramp in Europe and only a subset of European and Asian (ex-Japan) patients will represent an addressable market due to pricing concerns.

Valuation

We use a combination of metrics to value ZIOPHARM, the most appropriate are DCF and discounted P/E analysis.

We view ZIOPHARM as a pure-play on synthetic biology, with multiple catalysts. ZIOPHARM’s peers are small cap biotech companies that are 1) focused on oncology, 2) with a targeted molecular therapeutic pipeline, and 3) focused upon biomarkers to de-risk drug development. This group of peer includes OncoMed, Verastem, Merrimack Pharmaceuticals, TESARO Inc and Clovis Oncology (Exhibit 8).

Exhibit 8: Comp Table of Cancer Biotech Companies

Molecular Oncology – Small Cap 2013 2014 2013 2014

Revenue Estimates EPS Estimates Valuation, 2017E Consensus Drugs by Phase and Diagnostics Company Ticker Rating Price Mrkt Cap 2015 2016 2017 2015 2016 2017 P/S P/E PT Upside Cash Debt PIII PII PI CDX

Chemocentryx, Inc.
OncoGenex Pharmaceuticals, Inc.
Clovis Oncology, Inc.
Puma Biotechnology, Inc.
Endocyte, Inc.
TESARO,Inc. MerrimackPharmaceuticals,Inc. MACK Newlink Genetics Corporation NLNK Synta Pharmaceuticals Corp. SNTA OncoMedPharmaceuticals,Inc. OMED Verastem,Inc. VSTM ZIOPHARMOncology,Inc. ZIOP

Average

NC NC BUY NC NC BUY BUY NC NC BUY BUY BUY

$8.09 $12.64 $85.60

$120.63 $14.33 $37.04

$5.57

$29.41 $4.76 $36.19 $12.60 $4.76

349

186

2,902

3,633 518 1,332 573 819 407 1,010 325 479

5 88 16 160 61 158 275 42 138

2 90 172 337 115 355 398 273 244 263 104 175

(1.17) 0.65 (4.62) (2.16) (1.33) (3.63) (0.90) (2.05) (1.23) (0.19) (1.77) (0.32)

(1.43) (1.20) 174.5x – 3.69 3.18 2.1x 4.0x

(4.86) (2.95) – –

$9 $24 $ 101 $ 139 $ 21 $ 51 $ 10 $ 40 $ 14 $ 47 $ 22 $ 3

7% 150 0 90% 40 0 18% 323 – 16% 84 – 44% 0 0 37% 130 – 81% 155 0 35% 62 7

191% 91 0

1 1 0
1 1 0
0 0 2 2 1 1 0 0 1 0 1 2 2 0 1 1 1 2 3 2 1 2 2 0 1 1 0 0 0 3 2 0 1 1 2 1

CCXI OGXI CLVS PBYI ECYT TSRO

3 54

122

13

114 –

1

(1.36) (0.65) (2.31) 0.07 0.05 (1.11) 0.11 (1.53) (0.07)

1.48 10.8x 81.3x

25 37 27

0.42

1.32 0.53 2.29 0.24 1.80 0.08 0.86

4.5x 34.3x

3.8x 28.1x 1.4x 10.5x 3.0x 12.8x 1.7x NA 3.8x 20.1x 3.1x – 2.7x 5.5x

20

80 23 1

28% 129 – 76% 100 – -47% 68

0 1 2 1 0

3.7x – 1111

Source: FactSet and Mizuho Securities USA, Estimates and price targets represent consensus numbers.

We believe ZIOPHARM shares appear attractively valued by a combination of DCF and discounted P/E analysis, including NOL’s of $197 million that could build to over $600 million by 2018. Based upon a blended average of our DCF and discounted P/E valuation, which include risk-adjusted revenues, we derive a price target of $11 per share (see below), or approximately 100% upside potential from the current stock price.