Ziopharm - The Wall Street Sting

Have you seen ''The Sting''?

Its a movie from 1973 about con-artists in the 1930s starring Robert Redford and Paul Newman, among many other notable actors including Robert Earl Jones, the father of James Earl Jones.

Here's the Cliff Notes version, or Coles Notes for Canadians like me :-)

Two small time hustlers, Hooker played by Robert Redford and Luther played by Robert Earl Jones, pull a con on a guy charged with delivering money from an illegal gambling outfit.  They play out a little scheme  and succeed in switching his envelope filled with about $10,000 for another stuffed with tissue paper.  They score big.  The only problem is that the 'bag man' they hustled was a runner for one of the biggest crime bosses in the city, Doyle Lonnegan, an Irish mobster.

Lonnegan has Luther killed and has a contract put out on Redford's character Hooker.  Wanting revenge on the big crime boss Lonnegan, Hooker seeks out legendary con-artist Henry Gondorf, played by Paul Newman, who is also a friend of the now deceased Luther.  They concoct an elaborate scam to swindle Doyle Lonnegan out of $500,000.

But here is the central point.  Newman's character Gondorf explains to Hooker that the con has to be played all the way through.  After they've taken Lonnegan's cash the old Irishman still can't know he was swindled.  Its a great movie and here's a spoiler, they succeed.  But knowing that won't ruin the movie, its all about how its done.

What does this have to do with Ziopharm you ask?

Allow me to explain.  But please note, this runs deeper than Ziopharm, this is just the way the big Wall Street type players operate a lot of the time, especially when it comes to speculative money burning companies.

The Company

Let's go back in time, all the way to 2014.  Ziopharm closes out the year with a closing price of $5.07 on December 31st 2014, which is actually a big improvement over where it was a few months earlier in October when shares could have been had for just $2 and change.

All the way back in 2011 Ziopharm entered into a channel partner agreement with Intrexon, not that it ever had much affect on the share price.  Between January 2011 when the agreement was signed and the end of 2014 ZIOP's share price never once touched even a mere $8.

As 2014 closed out the 10K filing for that year reveals Ziopharm was down to about $42 million in cash and equivalents, with cumulative net losses totaling over $370 million to that point in its history. This amount may seem large, but take note of the fact that this company has been around since 1998 when it was incorporated under the name Net Escapes Inc. which was later changed to Easy Web in 1999.  Ziopharm was born in 2005 via a ''reverse acquisition'' of Ziopharm Inc.

Shares issued up to December 31st 2014 were a little over 104.4 million, with the company authorized to issue as many as 250 million in total.  Basic and diluted net losses per share for the year ended 2014 came it at (-$0.31).  The line item for stockholders equity shows $33.8 million, or about 33 cents per share.  In terms of a clinical pipeline, at the end of 2014 it appears there was nothing undergoing any clinical trials, just plans  for 2015.

So let's sum up.  at the end of 2014 Ziopharm was a company that:

• Started out as an outfit called Net Escapes then later changed it name to Easy Web.
• Had over 100 million shares issued and outstanding
• Net losses for the year came in at over $31.7 million
• The accumulated deficit at the end of 2014 was approximately $372 million
• Had no current trials developing any drugs or therapies.
• Their only late stage (ph-III) trial had failed in 2013 for palifosfamide.

I've seen OTC penny stocks that looked better strictly from a fundamental and financial perspective. If you want to verify any of the information I've just provided you can read Ziopharms 10K filing for the year 2014, in fact I encourage it:

http://secfilings.nasdaq.com/filingFrameset.asp?FilingID=10519440&RcvdDate=2/26/2015&CoName=ZIOPHARM%20ONCOLOGY%20INC&FormType=10-K&View=html

So how did a company with this type of history go on such a wild ride, climbing from less that $3 in October of 2014 to highs of near $15 in 2015?  And how did the company raise the money needed to continue operating?

Wall Street to the rescue!!!

Enter J.P. Mogan Securities LLC as the lead underwriter for a secondary offering of 10,000,000 shares priced at $8.75 for the public in February of 2015.  In fact they over subscribed, taking an additional 1,500,000 shares under the same price conditions.  $8.75 as noted was the price to the public, the underwriters paid $8.225 per.  That filled Ziopharm's cash register to the tune of about $90 million after discounts and expenses.  

Thanks to the cash infusion Ziopharm was now well capitalized, and they projected their resources might be enough to finance the company into the fourth quarter of next year.  After that their filings say they will require further financing.

But how could the underwriters get the public excited enough to pay $8.75 or more for the 

secondary offering?

J.P. Morgan Securities LLC was the sole book running manager for the offering, and BMO Capital Markets acted as the senior lead manager.  Then there was Griffin Securities, Maxim Group and Mizuho Securities U.S.A. all of whom acted as co-managers for the offering.

That's quite a team, with analysts to provide coverage and clients numbering likely in the hundreds of thousands.  Still though it probably would have been a tough sell, a biotech/pharma company with nothing in late stage development and burning through cash with over 100,000,000 shares issued at the end of 2014 and more on the way.

But by the time those 11,500,000 shares started trading big news had already been announced.

The MD Anderson feeding frenzy

Thanks to an agreement with the MD Anderson Cancer Center,  Ziopharm made a big splash in the hot CAR-T space. Companies like Juno and Kite had already seen explosive growth in their share prices thanks in major part to their CAR-T initiatives, and now Ziopharm was set to join the  party.

Of course the partnership with Anderson didn't come cheap, Ziopharm and Intrexon ponied up $100 million large for the deal, split evenly between the two.  Thankfully MD Anderson took payment from both in shares, because let's face it, the way Ziopharm burns through cash they didn't have a lot left over.

Even better, JP Morgan was hosting their 33rd annual Health Care Conference in January of 2015. What better place to announce the MD Anderson news?  Apparently MD Anderson was a willing partner, and was okay with accelerating the agreement to accommodate Ziopharm and Intrexon, but not for free.  It required an additional payment of $15 million split equally between the two companies, all in shares again of course.

What was the effect of announcing the Anderson deal at the JP Morgan Healthcare conference?  You be the judge, on the day Ziopharm's CEO made his presentation over 38.7 million shares of ZIOP traded hands with the price closing at $8.87 after closing at just $5.74 the previous day for a one day gain of 55%.

And that was just the start, Wall Street was just getting warmed up.  After all, the secondary offering which JP Morgan was leading was slated for February.  But now they had a compelling story. Ziopharm had just been "chosen" by the most prestigious cancer centers in the United States, and maybe even in the world.  This was a story that needed an audience, and with some major players in the financial markets on board you know the story was going to be told.

Enter the analysts

Remember the firms involved in the public offering of an eventual 11,500,000 shares?

JP Morgan's Cory Kasimov rated the stock as neutral following his firm's Healthcare Conference and did not provide a price target.  Other companies working the secondary offering however were far more bullish.

• BMO came out with an outperform rating and a price target of $15 after the conference saying that the Rheo Switch technology "could" be a game changer.  
• Griffin rated ZIOP a buy and put a price target of $12 on the stock, which was later raised to $21 in March.

Bring on the promoters

It wasn't long before ZIOP became the darling of social media.  Interest exploded with the Ziopharm thread on InvestorVillage becoming the most active forum led by some guy with the user name RobCos assuming the role of chief cheer leader.  On Stocktwits thousands of user IDs put Ziopharm on their watch lists.  

Anonymous emailing shops like stockreversals started hyping Ziopharm to their book. Some outfit called "Medical Technology Stock Letter" through its website Bioinvest included Ziopharm in its reccomended portfolio and alerted its email subscribers.  

The games had begun and ZIOP's share price did what would be expected, it soared, taking three or four runs at the $15 mark in 2015 but never able to break through that barrier.

And now?  As of this past Friday May 13th 2016 the PPS closed at just $7.25, even less than where it was following all the excitement of early 2015.

So what happens now?

Many of those investors who bought into the hype and excitement are likely hunkering down, convinced in the long term potential for Ziopharm to develop a cancer treatment or cure.  According to the projected timelines included in Ziopharms own SEC filings clinical trials take between 1 and 2 years for phase I, between 2 and 3 years for phase II and between 2 and 4 years for phase III.

Given the early stage that Ziopharm is at shareholders are looking at between 5 and 9 years from start to finish before the company projects that a drug approval "could" be obtained.  I use the word could because Ziopharm could fail again like they did 2013 with palifosfamide.  And the company anticipates having only enough cash to get them into late 2017, next year.

After the secondary share offering in 2015 the investment machine went to work, analyst targets of up to $21 per share, email blasts, social media types all over twitter, stocktwits, yahoo and other sites. All that activity brought in a lot of buyers obviously.  But is there any incentive now to bring in a huge level of buying interest?

I'm sure there are individuals posting in social media who believe they can spur interest in the company, but realistically nothing can compare to the hurricane winds that come from a stock that has the big boys of Wall Street working their magic.

Maybe sometime next year though, when Ziopharm is again running low on cash, maybe then another tsunami of promotion will come to bear and push the PPS higher.  Until that time I see the PPS drifting.  Ziopharm has a huge following and I have no doubt that there are Hedge Fund types pushing it around, pumping it up and dumping then shorting and distorting, that's their game.

Perhaps they could make their existing cash last a bit longer with some austerity measures.  It certainly had to by eye popping when American Business Journals came out with the story that Ziopharms CEO earned more money in 2015 than the CEOs of major pharma companies like Novartis and Roche.  (STORY HERE)

In the meantime retail buy and hold longs will be told..."Ahh well, that's the market, you can't win them all".  Retailers are the marks, and nobody is gonna yell GOTCHA when the bag closes.  After all, this is nothing new....and  the machine that is "The Street" will want them coming back for the next big show and investing more money.  

If its shares of Ziopharm that are being sold again the story will have to be even better than it was at the start of 2015 in my opinion.  Now its a company with an accumulated deficit of over half a billion dollars, billion with a B.  And instead of a 104 million odd shares there are now over 130 million.

The comment field, as always, is open.  But no profanity or attacks will be tolerated, keep it mature.

Full disclosure, I own ZIOP put contracts so my opinions and views are not without bias.