Ziopharm's Sarcoma Study and the Feuerstein-Ratain Rule

NEW YORK ( TheStreet) -- Ziopharm ( ZIOP) is the next challenger to the Feuerstein-Ratain Rule.

Results from the palifosfamide phase III study in sarcoma are expected at the end of the current quarter. This is a make-or-break clinical catalyst for Ziopharm, so let's take a look at what the Feuerstein-Ratain Rule says about predicting the study outcome.

(I know you're impatient so I'll say Ziopharm's chances are somewhat better than Celsion ( CLSN) but bear with me and read on.)

First, a reminder about the Feuerstein-Ratain (F-R) Rule: University of Chicago oncologist and professor Dr. Mark Ratain and I examined 59 phase III clinical trials of cancer drugs going back 10 years. We found companies with micro-cap market valuations (i.e. market caps less than $300 million) had no chance -- 0% -- of producing positive phase III results.

By contrast, almost 80% of companies with market values greater than $1 billion conducted positive phase III studies. For companies with market values between $300 million and $1 billion, the success rate was 17%.

Importantly, Ratain and I used market values of cancer drug companies four months prior to the release of phase III results. Our findings were published in the Journal of the National Cancer Institute.

The F-R Rule was constructed retrospectively, meaning we used old data to form our hypothesis. But since last year, two prospective challenges -- the unsuccessful phase III trials of Keryx Pharmaceuticals' ( KERX) perifosine and Celsion's Thermodox -- confirmed the hypothesis behind the F-R Rule.

Which brings us to Ziopharm. Last November, Ziopharm announced the expectation of top-line results from the palifosfamide study in sarcoma "at the end of the first quarter 2013."

For purposes of this analysis, I'm going to assume palifosfamide results could come at any time during March, the last month of the first quarter. Per the F-R Rule, we need to examine Ziopharm's market value in November 2012 -- four months prior to the expected palifosfamide results.

Ziopharm's average share price during November 2012 was $4.45. An outstanding share count of 78.7 million (taken from the company's Sept. 30 10-Q) yields a market value of $350 million.

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) 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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