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Ziopharm's Sarcoma Study and the Feuerstein-Ratain Rule

The good news, first: With a market value above $300 million, Ziopharm is outside the F-R Rule's "100% failure rate" zone for the palifosfamide clinical trial. Whew.

The not-so good news: Ziopharm, at a $350 million market cap, sits in the middle valuation bucket demonstrating a 17% clinical trial success rate, according to the data used to formulate the F-R Rule.

A 17% chance of success is better than 0% but it's a far cry from 80%.

If 17% makes you feel insecure about the looming outcome of the palifosfamide study, take heart in knowing that only 12 of the 59 clinical trials examined by Ratain and I were conducted by companies with market values between $300 million and $1 billion. That's a rather small sample size. The real success rate of cancer drug trials for companies of this size might be significantly higher, we just didn't have the retrospective data to show it.

The sub-$300 million bucket included 20 clinical trials; the $1 billion-plus group 27 trials -- larger sample sizes.

The logic behind the F-R Rule borrows a bit from Occam's Razor. Good cancer drugs are scarce and valuable commodities, and potential Big Pharma partners and institutional investors are forever scouting for opportunities to buy, license or invest in companies with drugs that have a high probability of success. Said another way, there are very few, if any, cancer drugs that come out of nowhere to be big sellers.

Therefore, market value can be a reasonably accurate proxy for the future success of a cancer drug in a phase III clinical trial. Consider Pharmacyclics (PCYC - Get Report) and its blood cancer drug ibrutinib. The company's nearly $5 billion market value and a partnership with Johnson & Johnson (JNJ) screams investor confidence in the outcome of ongoing phase III studies.

Ziopharm? Not so much. Investors haven't written off palifosfamide completely, but a $350 million market value suggests investors aren't sure how to call the outcome of the pending phase III sarcoma trial. Confidence in the palifosfamide is mixed at best, so trade accordingly into the study results.

At least that's how the F-R Rule sees it.

-- Reported by Adam Feuerstein in Boston.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.
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