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ZIOP > SEC Filings for ZIOP > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Form 10-K for ZIOPHARM ONCOLOGY INC


18-Mar-2013

Annual Report


Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations

The following "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as disclosures included under the heading "Business" and elsewhere in this Form 10-K, include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a safe harbor for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact we make in this Form 10-K are forward-looking. In particular, statements preceded by, followed by or that include the words "intends", "estimates", "plans", "believes", "expects", "anticipates", "should", "could" or similar expressions, are forward-looking statements. These statements include, but are not limited to, statements regarding future sales and operating results; growth and trends of our company and our industry, generally; growth of the markets in which we participate; international events; product performance; the acquisition of or investment in other entities; the construction of new or refurbishment of existing facilities by us; our ability to successfully develop and commercialize our therapeutic products; our ability to expand our long-term business opportunities; financial projections and estimates and their underlying assumptions; and future performance. All of such statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements. These risks and uncertainties include, but are not limited to: whether Palifosfamide, Ad-RTS IL-12, DC-RTS IL-12, Darinaparsin, Indibulin, or any of our other therapeutic products will advance further in the clinical trials process and whether and when, if at all, they will receive final approval from the FDA or equivalent foreign regulatory agencies and for which indications; whether Palifosfamide, Ad-RTS IL-12, DC-RTS IL-12, Darinaparsin, Indibulin, and our other therapeutic products will be successfully marketed if approved; whether any of our synthetic biology platform discovery and development efforts will be successful; our ability to achieve the results contemplated by our collaboration agreements; the strength and enforceability of our intellectual property rights; competition from pharmaceutical and biotechnology companies; the development of and our ability to take advantage of the market for DNA-based biotherapeutics; our ability to raise additional capital to fund our operations on terms acceptable to us; general economic conditions; and the other risk factors contained in this Annual Report on Form 10-K. Forward-looking statements reflect our current expectations and are inherently uncertain. Our actual results may differ significantly from our expectations. We assume no obligation to update this forward-looking information. The section herein entitled "Risk Factors" describes some, but not all, of the factors that could cause these differences.

The following discussion and analysis should be read in conjunction with our historical financial statements and the notes to those financial statements which are included in Item 8 of Part II of this Form 10-K.

Business Overview

ZIOPHARM Oncology, Inc. is a biopharmaceutical company that seeks to develop and commercialize a diverse portfolio of cancer drugs that can address unmet medical needs through the licensing and development of proprietary small molecule drug candidates and the synthetic biology platform. Our small molecule drug candidates are related to cancer therapeutics already on the market or in development and that can be administered by intravenous, or IV, and/or oral dosing. Our small molecule clinical programs include palifosfamide (ZIO-201), indibulin (ZIO-301) and darinaparsin (ZIO-101). We are also pursuing the development of our synthetic biology platform in the field of cancer pursuant to a partnering arrangement with Intrexon Corporation, or Intrexon. Under the arrangement, we obtained rights to Intrexon's effector platform for use in the field of oncology, which includes two existing clinical stage product candidates, ZIN-CTI-001 (or DC-RTS-IL-12 + AL) and ZIN-ATI-001 (or Ad-RTS-IL-12
+ AL). We plan to leverage Intrexon's synthetic biology platform to develop products to stimulate key pathways used by the body's immune system to inhibit the growth and metastasis of cancers, adding significantly to our small molecule drug development portfolio and utilizing


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our capabilities to translate science to the patient setting. More detailed descriptions of palifosfamide, indibulin, darinaparsin, ZIN-CTI-001 and ZIN-ATI-001, and our clinical development plans for each, are set forth in this report under the caption "Business-Product Candidates."

Development Plans

We are currently pursuing several clinical programs for our small molecule and synthetic biology candidates, which include:

palifosfamide (ZIO-201)-completing our Phase 3 pivotal trial in first-line metastatic STS, entitled PICASSO 3, and continuing enrollment in our Phase 3 trial in SCLC, entitled MATISSE.

ZIN-CTI-001-completing a Phase 1b trial in patients with metastatic melanoma.

ZIN-ATI-001-completing a Phase 1b trial in patients with late-stage melanoma, continuing enrollment in our Phase 2 trial in patients with late-stage melanoma and enrolling a Phase 2 trial of ZIN-ATI-001 and palifosfamide for breast cancer.

indibulin (ZIO-301)-completing a Phase 1 trial in patients with metastatic breast cancer.

darinaparsin (ZIO-101)-working with Solasia in the licensed territory; assessing future oral/IV opportunities.

We are also evaluating additional potential preclinical candidates and continuing discovery efforts aimed at identifying other potential product candidates under our Channel Agreement with Intrexon.

Our current plans involve using our principal internal financial resources to develop palifosfamide and to extend the synthetic biology program, with the intention of ultimately partnering or otherwise raising additional resources to support further development activities for all of our product candidates. Based on these plans, we expect to incur the following expenses during the next twelve months: approximately $123.2 million on research and development expenses and approximately $29.1 million on general corporate and administrative expenses. As of December 31, 2012, we had approximately $73.3 million of cash and cash equivalents. This forecast of expenses is forward-looking information that involves risks and uncertainties, and the actual amount of our expenses over the next twelve months could vary materially and adversely as a result of a number of factors, including the factors discussed in the ''Risk Factors'' section of this report and the uncertainties applicable to our forecast for the overall sufficiency of our capital resources, which are discussed under "-Liquidity and Capital Resources" below. We have based our estimates on assumptions that may prove to be wrong, and our expenses could prove to be significantly higher than we currently anticipate.

Furthermore, the successful development of our product candidates is highly uncertain. Product development costs and timelines can vary significantly for each product candidate, are difficult to accurately predict, and will require us to obtain additional funding, either alone or in connection with partnering arrangements. Various statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of each product. The lengthy process of seeking approval and the subsequent compliance with applicable statutes and regulations require the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals could materially, adversely affect our business. To date, we have not received approval for the sale of any product candidates in any market and, therefore, have not generated any revenues from our product candidates.

Financial Overview

Overview of Results of Operations

Revenue.

We recognize research and development funding revenue over the estimated period of performance. We have not generated product revenues since our inception. Unless and until we receive approval from the FDA and/or other regulatory authorities for our product candidates, we cannot sell our products and will not have product revenues.


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Research and Development Expenses.

Our research and development expense consists primarily of salaries and related expenses for personnel, costs of contract manufacturing services, costs of facilities and equipment, fees paid to professional service providers in conjunction with our clinical trials, fees paid to research organizations in conjunction with pre-clinical animal studies, costs of materials used in research and development, consulting, license and milestone payments and sponsored research fees paid to third parties.

We have not accumulated and tracked our internal historical research and development costs or our personnel and personnel-related costs on a program-by-program basis. Our employee and infrastructure resources are allocated across several projects, and many of our costs are directed to broadly applicable research endeavors. As a result, we cannot state the costs incurred for each of our oncology programs on a program-by-program basis.

In 2012, our clinical projects consisted primarily of two Phase 3 projects for our lead product candidate, palifosfamide. The expenses for our Phase 3 palifosfamide study in STS incurred by us to third parties were $14.4 million for the year ended December 31, 2012, and $34.7 million from the project inception in July 2010 through December 31, 2012. The expenses for our Phase 3 palifosfamide study in SCLC incurred by us to third parties were $10.8 million for the year ended December 31, 2012, and $10.8 million from the project inception in December 2011 through December 31, 2012.

Our future research and development expenses in support of our current and future programs will be subject to numerous uncertainties in timing and cost to completion. We test potential products in numerous pre-clinical studies for safety, toxicology and efficacy. We may conduct multiple clinical trials for each product. As we obtain results from trials, we may elect to discontinue or delay clinical trials for certain products in order to focus our resources on more promising products or indications. Completion of clinical trials may take several years or more, and the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product. It is not unusual for pre-clinical and clinical development of each of these types of products to require the expenditure of substantial resources.

We estimate that clinical trials of the type generally needed to secure new drug approval are typically completed over the following timelines:

                                            Estimated
                                            Completion
                          Clinical Phase      Period
                          Phase I            1 - 2years
                          Phase II           2 - 3years
                          Phase III          2 - 4years

The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others, the following:

the number of clinical sites included in the trials;

the length of time required to enroll suitable patents;

the number of patients that ultimately participate in the trials;

the duration of patient follow-up to ensure the absence of long-term product-related adverse events; and

the efficacy and safety profile of the product.

As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our programs or when and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our programs in a timely manner or our failure to enter into appropriate


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collaborative agreements could significantly increase our capital requirements and could inversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time-to-time in order to continue with our product development strategy. Our ability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.

General and Administrative Expenses.

General and administrative expenses consist primarily of salaries, benefits and stock-based compensation, consulting and professional fees, including patent related costs, general corporate costs and facility costs not otherwise included in research and development expenses or cost of product revenue.

Other Income (Expense).

Other income (expense) consists primarily of changes in the fair value of warrants.

Results of Operations for the fiscal year ended December 31, 2012 versus December 31, 2011

Revenues. Revenues for the years ended December 31, 2012 and 2011 were as follows:

Year ended December 31, 2012 2011 Change

($ in thousands)

Collaboration revenue $ 800 $ 667 $ 133 20 %

Revenue for the year ended December 31, 2012 increased by $0.1 million from the year ended December 31, 2011. The increase was due to our receipt of funds under our collaboration agreement with Solasia to further the research and development of darinaparsin. We recognize the research and development funding revenue relating to this collaboration agreement in equal monthly amounts over the estimated period of performance of 75 months commencing March 2011.

Research and Development Expenses. Research and development expenses during the years ended December 31, 2012 and 2011 were as follows:

Year ended December 31, 2012 2011 Change

($ in thousands)

Research and development $ 83,446 $ 57,083 $ 26,363 46 %

Research and development expenses for the year ended December 31, 2012 increased by $26.4 million from the year ended December 31, 2011. The increase was due to the following changes since 2011: higher trial costs of $10.8 million related to the Phase 3 palifosfamide study in SCLC, which started in 2012; increased preclinical trial costs of $1.8 million due to additional studies needed to assist in NDA filing preparation; other clinical costs of $0.8 million; manufacturing activity costs of $5.6 million needed to support existing trials and further development of drugs; a $1.3 million increase in non-cash expense related to our Channel Agreement over 2011; salary and employee-related costs of $5.6 million due to increased headcount to support increases in Research and Development activities discussed above; and $0.9 million related to a new safety database, offset by other cost reductions of ($0.4) million.

We expect our research and development expenses to increase, as compared to prior periods, as we continue our pivotal Phase 3 study of palifosfamide and other studies for palifosfamide, DNA therapeutics, indibulin and darinaparsin.


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General and Administrative Expenses. General and administrative expenses during the years ended December 31, 2012 and 2011 were as follows:

Year ended December 31, 2012 2011 Change

($ in thousands)

General and administrative $ 19,523 $ 14,984 $ 4,539 30 %

General and administrative expenses for the year ended December 31, 2012 increased by $4.5 million from the year ended December 31, 2011. The increase was primarily due to higher salary and higher employee-related costs of $2.0 million to support increased activity in clinical studies, non-employee contracted costs of $1.2 million, costs of $1.0 million related to our restructuring and other costs of $0.3 million.

We expect our general and administrative expenses to increase moderately to support increased activity in clinical studies.

Other Income (Expense). Other income (expense) during the years ended December 31, 2012 and 2011 were as follows:

                                              Year ended
                                             December 31,
                                          2012         2011              Change
      ($ in thousands)
      Other income, net                  $   (13 )    $    39     $    (52 )      -133 %
      Change in fair value of warrants     6,050        7,583     $ (1,533 )       -20 %

      Total                              $ 6,037      $ 7,622     $ (1,585 )

The decrease in other income (expense) from the year ended December 31, 2012 compared to the year ended December 31, 2011 was due primarily to the change in the fair value of liability-classified warrants, which yielded a gain of $6,050 thousand in 2012 as compared to a gain of $7,583 thousand in 2011. The change in liability-classified warrants is attributable to the decrease in our stock price, decrease in remaining term and a decrease in volatility. Additional changes are attributable to increased state tax refunds and decreased interest rates on invested funds.

Results of Operations for the fiscal year ended December 31, 2011 versus December 31, 2010

Revenues. Revenues for the years ended December 31, 2011 and 2010 were as follows:

Year ended December 31, 2011 2010 Change

($ in thousands)

Collaboration revenue $ 667 $ - $ 667 100 %

Revenue for the year ended December 31, 2011 increased by $0.7 million from the year ended December 31, 2010. The increase was due to our receipt of funds under our collaboration agreement with Solasia to further the research and development of darinaparsin. We recognize the research and development funding revenue relating to this collaboration agreement in equal monthly amounts over the estimated period of performance of 75 months commencing March 2011.


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Research and Development Expenses. Research and development expenses during the years ended December 31, 2011 and 2010 were as follows:

Year ended December 31, 2011 2010 Change

($ in thousands)

Research and development $ 57,083 $ 12,910 $ 44,173 342 %

Research and development expenses for the year ended December 31, 2011 increased by $44.2 million from the year ended December 31, 2010. The increase was primarily due to a one-time $17.5 million non-cash expense related to our channel partnership arrangement with Intrexon, including our associated license of Intrexon technology, along with increased clinical costs of $14.4 million, of which $10.5 million related to the Phase 3 palifosfamide study, $3.4 million related to DNA based therapeutics projects and $0.5 million related to other clinical trials, increased preclinical costs of $2.8 million, increased manufacturing activity of $3.9 million to replenish drug supplies and further develop palifosfamide, increased salary and employee-related costs of $5.3 million resulting from additional headcount and other costs of $0.3 million.

Exclusive of the one-time $17.5 million non-cash expense related to our channel partnership arrangement with Intrexon, we expect our research and development expenses to increase, as compared to prior periods, as we continue our pivotal Phase 3 study of palifosfamide and other studies for palifosfamide, DNA therapeutics, indibulin and darinaparsin.

General and Administrative Expenses. General and administrative expenses during the years ended December 31, 2011 and 2010 were as follows:

Year ended December 31, 2011 2010 Change

($ in thousands)

General and administrative $ 14,984 $ 11,636 $ 3,348 29 %

General and administrative expenses for the year ended December 31, 2011 increased by $3.3 million from the year ended December 31, 2010. The increase was primarily due to increased consulting fees of $2.1 million and increased salary and employee-related costs of $1.6 million, offset by certain cost reductions of ($0.4) million. The increased general and administrative activity was related to increased support for clinical studies.

We expect our general and administrative expenses to increase moderately to support increased activity in clinical studies.

Other Income (Expense). Other income (expense) during the years ended December 31, 2011 and 2010 were as follows:

                                              Year ended
                                             December 31,
                                          2011         2010               Change
      ($ in thousands)
      Other income, net                  $    39     $    765      $   (726 )       -95 %
      Change in fair value of warrants     7,583       (8,889 )    $ 16,472        -185 %

      Total                              $ 7,622     $ (8,124 )    $ 15,746

The increase in other income (expense) from the year ended December 31, 2011 compared to the year ended December 31, 2010 was due primarily to the change in the fair value of liability-classified warrants, which


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yielded a gain of $7,583 thousand in 2011 as compared to a loss of $8,889 thousand in 2010. The change in liability-classified warrants is attributable to the decrease in our stock price, decrease in remaining term and a decrease in volatility. Additional changes are attributable to increased state tax refunds and decreased interest rates on invested funds.

Liquidity and Capital Resources

As of December 31, 2012, we had approximately $73.3 million in cash and cash equivalents, compared to $104.7 million in cash and cash equivalents as of December 31, 2011. We anticipate that our cash resources will be sufficient to fund our operations into the second half of 2013. As a result, our independent registered public accounting firm has expressed a substantial doubt about our ability to continue as a going concern in their report on our financial statements. The results from the Company's PICASSO 3 pivotal trial in first-line STS are expected in the last week of March 2013. The Company has various dilutive and non-dilutive funding alternatives if the results are positive. If the results are negative, alternative cost-cutting efficiencies are planned in an attempt to extend our cash resources as long as possible, though there are no assurances that such efforts, if necessary, would be realized. In addition, changes may occur that would consume our existing capital prior to the second half of 2013, including expansion of the scope of, and/or slower than expected progress of, our research and development efforts and changes in governmental regulation. Actual costs may ultimately vary from our current expectations, which could materially impact our use of capital and our forecast of the period of time through which our financial resources will be adequate to support our operations. We have estimated the sufficiency of our cash resources based in part on the trial design for our PICASSO 3 pivotal trial in first-line STS and our adaptive Phase 3 trial in first-line SCLC for IV palifosfamide and our current timing expectations for the results of the PICASSO 3 pivotal trial and enrollment in our adaptive Phase 3 trial in first-line SCLC for IV palifosfamide, which may change based on the progression of enrollment. We also assumed responsibility for the advancement of two product candidates in the clinic under our Channel Agreement with Intrexon, and we expect that the costs associated with these and additional product candidates will increase the level of our overall research and development expenses significantly going forward. Although our forecasts for expenses and the sufficiency of our capital resources takes into account our plans to develop the Intrexon products, we assumed development responsibility for these products on January 6, 2011, and the actual costs associated therewith may be significantly in excess of forecasted amounts.

Although all human clinical trials are expensive and difficult to design and implement, we believe that due to complexity, costs associated with clinical trials for synthetic biology products are greater than the corresponding costs associated with clinical trials for small molecule candidates. In addition to increased research and development costs, we have added, and will continue to add, headcount to support our exclusive channel partnership endeavors, which will add to our general and administrative expenses going forward.

In addition to these factors, our actual cash requirements may vary materially from our current expectations for a number of other factors that may include, but are not limited to, changes in the focus and direction of our development programs, competitive and technical advances, costs associated with the development of our product candidates, our ability to secure partnering arrangements, and costs of filing, prosecuting, defending and enforcing our intellectual property rights. If we exhaust our capital reserves more quickly than anticipated, regardless of the reason, and we are unable to obtain additional financing on terms acceptable to us or at all, we will be unable to proceed with development of some or all of our product candidates on expected timelines and will be forced to prioritize among them.

We expect that we will need additional financing to support our long-term plans for clinical trials and new product development. We expect to finance our cash needs through the sale of equity securities, strategic collaborations and/or debt financings, or through other sources that may be dilutive to existing stockholders. There can be no assurance that we will be able to obtain funding from any of these sources or, if obtained, what the terms of such funding(s) may be, or that any amount that we are able to obtain will be adequate to support our working capital requirements until we achieve profitable operations. We have no current committed sources of additional capital. Recently, capital markets have experienced a period of instability that may severely hinder our ability to raise capital within the time periods needed or on terms we consider acceptable, if at all. If we are


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unable to raise additional funds when needed, we may not be able to continue . . .

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