Ziopharm Oncology (ZIOP) - Get Report has always been the weaker, co-dependent partner in the relationship with Intrexon (XON) - Get Report . So when the two companies announced changes to financial terms of their drug-development collaboration on Thursday, it was no surprise to see Ziopharm on the losing side.
Under the old arrangement, Ziopharm had to pay Intrexon half of the operating profits derived from cancer or graft-versus-host disease drugs developed under their partnership. (No products have been developed successfully yet, so the 50-50 profit split was only aspirational at this point.)
Under the new terms, Intrexon cuts its profit split to 20%. In exchange, Ziopharm issues $120 million in new preferred shares to Intrexon. The preferred shares carry a dividend of 1% per month payable in additional preferred shares.
The new deal is a loser for Ziopharm because Intrexon choosing to take $120 million in preferred shares for 30% of its profit split implies the net present value of all products coming from the partnership is only $400 million. [Factor in the interest payable on the preferred shares and the net present value is actually lower than $400 million]
Ziopharm and Intrexon have long boasted about the billion-dollar sales potential of the cancer drugs under development through the existing collaboration. But now, it looks like Intrexon believes the value of these products is far, far less.
The amended agreement bolsters the bear argument against Ziopharm that its entire cancer drug pipeline is mediocre and overvalued.
Ziopharm may retain a larger slice of the profits from drugs in clinical trials, but the likelihood that any of these drugs are approved -- and therefore generate revenue and profits -- remains very small. A larger slice of zero profits is still zero profits, so Ziopharm doesn't really win anything.
And in exchange for getting nothing, Ziopharm dilutes shareholders with the payout of $120 million in preferred shares. The dilution grows each month since the 1% interest is paid out in more preferred shares.
Remember the restaurant in Goodfellas?
Ziopharm is the restaurant owner.
Intrexon is Tommy.
These "partnerships" are never equal. Thursday's amendment proves it once again.
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.