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TheStreet Open House

Why This Fund Manager Is Short Ziopharm

NEW YORK ( TheStreet) -- Remember my fund manager source who nailed short calls on Elan (ELN) (bapineuzumab), Clovis Oncology (CLVS) (CO-101) and Celsion (CLSN) (Thermodox), among other drug blow ups? Well, at the risk of instilling panic in many of you, he's short Ziopharm Oncology (ZIOP) and expects to notch another victory when the palifosfamide sarcoma study comes up lame next week.

Before I explain the Ziopharm short thesis of my investor source, let's get a few things straight. I'm not telling you to sell your Ziopharm shares (if you're long today) nor am I advising you to short the stock. I'm not urging you to believe the short thesis. I'm not even endorsing the short thesis. In fact, I'm already on record predicting a positive result from the palifosfamide study and I'm sticking with that call. Although I'm suffering from a bout of the doubts.

What I am doing is giving you a head's up. A smart hedge fund investor (he's an MD, too) looms out there with a proven track record of correctly calling the failure of phase III clinical trials. He is prohibited by his fund's rule from being quoted by name. Now he has Ziopharm in his crosshairs. No one gets 100% of the biotech stock calls right, but it's always a good idea to know what the other side of the trade is thinking.

With that said, let's discuss his Ziopharm short thesis.

First, the obvious: He thinks the palifosfamide study will fail, meaning the combination of palifosfamide plus doxorubicin will not prolong progression-free survival compared to doxorubicin alone in first-line sarcoma patients.

Why will the study fall short on the primary endpoint? The answer lies in the nitty-gritty details of a previously conducted phase II study, which also pitted palifosfamide/doxorubicin against doxorubicin but in a mix of first- and second-line sarcoma patients. Results from this study were presented in 2010 and looked positive, with a 57% reduction in the risk of tumor progression (PFS) and a median PFS of 7.8 months for the palifosfamide combination versus 4.4 months for doxorubicin alone. The response rate for the treatment arm was 23% versus 9% for the control.

Those data are a mirage, my fund manager source believes. In reality, the palifosfamide/doxorubicin arm performed more like doxorubicin usually does on its own in previous sarcoma studies, while the doxorubicin arm under-performed historically. The phase III study, with more patients and more stringent measurements of response and tumor progression, is likely to come back with data showing the palifosfamide combination only marginally better than doxorubicin alone, if at all.

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