Ziopharm - What happens when the money runs out?

Warning, this post is going to be relying heavily on Ziopharm's SEC filings.  If you are the type of investor who prefers Press Releases to audited corporate filings, then you you might just want to stop reading right now.

Those who've done their Due Diligence already know that Ziopharm is well into its second decade of existence and has achieved only minimal revenues.  You also know that the accumulated deficit up to March 31st 2016 is over half a billion dollars. With existing capital resources only foretasted to be sufficient to get the company into the 4th quarter next year, and maybe not even that long, the question is what happens then.  Here is what the most recent 10Q filing says:

• The Company has operated at a loss since its inception in 2003 and has minimal revenues. The Company anticipates that its losses will continue for the foreseeable future. At March 31, 2016, the Company’s accumulated deficit was approximately $504.7 million. Given its current development plans, *the Company anticipates cash resources will be sufficient to fund operations into the fourth quarter of 2017. The Company’s ability to continue operations after its current cash resources are exhausted depends on its ability to obtain additional financing or to achieve profitable operations, as to which no assurances can be given. Cash requirements may vary materially from those now planned because of changes in the Company’s focus and direction of its research and development programs, competitive and technical advances, patent developments, regulatory changes or other developments. *Additional financing will be required to continue operations after the Company exhausts its current cash resources and to continue its long-term plans for clinical trials and new product development. There can be no assurance that any such financing can be obtained by the Company, or if obtained, what the terms thereof may be, or that any amount that the Company is able to raise will be adequate to support the Company’s working capital requirements until it achieves profitable operations. (* emphasis is mine)

Next we'll look at the current cash situation

As of March 31, 2016 the same 10Q filing linked above lists cash and cash equivalents at $140,717,000 which is anticipated to be sufficient to fund operations to the end of next year.  From April 2016 to December 2017 equals a total of 19 months, which means the company is anticipating burning through about $7.3 million per month on average.  Of course the filings only say "into" the 4th quarter of 2017, which means it may not be enough to last right up until the end of the year.  The 4th quarter ends December 31st, but if they only have enough to last to the end of November 2017 then the burn rate would be $7.8 million per month on average.  

Using a middle figure of $7.5 million per month means that Ziopharm would be burning through about $90 million a year.  And given that they're only at the early stages it can be reasonably expected that their costs are going to escalate if they are able to progress into latter phase II and phase III trials.

The last capital raise via an underwriting agreement with JP Morgan Securities LLC provided Ziopharm with approximately $94.3 million dollars.  That was in February 2015 and involved the issuance of 11,500,000 shares at a price of $8.225 per pursuant to the underwriting agreement.  

Going forward it would appear that $90 million or so, that it would only provide enough capital to operate the company for about one year, and with costs escalating probably not even that long.  

If Ziopharm is looking to have enough capital to get them through another 2 years past the 4th quarter of 2017, then they're likely going to need close to $200 million in my view.

Bottom line

Sometime next year, barring a buyout, Ziopahrm is going to be running seriously low on capital to operate their business and to fund clinical trials.  Without a substantial revenue stream it is hard to envision them obtaining traditional financing through a lending institution.  A bond issue seems unrealistic for the same reason.  How can a company pay interest on a bank loan or on bonds when it doesn't have a steady, reliable source of revenue and an accumulated deficit of over half of a billion dollars?

The only possibility I see is more dilution.  How much will depend on the price shares are trading at when its done.  To raise $200 million, if they could get an underwriting agreement at $10 then that would mean 20,000,000 more shares.  Right now the PPS is trading around $6, at that price point its about 33.3 million more shares on top of the 131.8 million that were outstanding as of March 31st 2016.  

Thankfully, according to Ziopharm's filings, the company is authorized to issue up to 250,000,000 common shares and up to 30,000,000 preferred shares. So even if the PPS continues to erode they should still be able to issue enough shares to keep operating for a few more years before having to consider the possibility of a share consolidation in my opinion.

FULL DISCLOSURE
I sometimes like to have some skin in the game with the stocks I write about, and in the case of Ziopharm I do own some put contracts so my views are not without bias.