A ravenous bull and bear community has developed around Peregrine Pharmaceuticals (NASDAQ:PPHM), and thus far, the bulls have scored big. The company answered most of the skeptic’s questions with last Friday’s release of interim Phase IIb results for bavituximab in second-line non small-cell lung cancer (NSCLC). The data was, by all accounts, impressive, with pooled data demonstrating more than a doubling of survival between patients receiving the drug + docetaxel vs. those receiving docetaxel alone (12.1 months vs. 5.6 months, respectively — P value =0.0154, hazard ratio 0.524). Statistical significance (a P value of <0.05) supports the drug’s benefit, particularly in this case, where only 121 patients were included in the study and allocated into three relatively small groups. The company is hosting a conference call Monday morning for investors and analysts at 11am EST, and this call (both earnings and an update on recent events) is likely to further momentum in the stock. PPHM now has a market cap approaching $500 million, which is quite amazing, given that the stock has nearly quintupled since June. So the key question now is: What should one do with PPHM shares?
Our current view is that shares could continue to float higher, as the bear arguments have taken a big blow. The naysayers are still digging for reasons to cast doubt on the results, including that no data on geographic distribution was released and that patients in India or Eastern Europe in the study may not have strictly met the trial protocol. While this argument has some weight, the bears are unlikely to get satisfaction on this negative argument in the near-term, and there remains “upside risk” to short investors that the company offers data to remove all doubt. In other words, PPHM has full control over whether it wants to challenge this argument or not.
While the shares should continue to trade with underlying strength, investors should proceed cautiously, as a capital raise seems likely on the good news. Management notes in its press release this morning that it has only taken down half of its $30 million credit line, which it was recently awarded. The credit line took pressure off of the shares last month, serving as a sign to investors that there was no imminent need for a capital raise. The mention of the credit line in today’s press release, however, was somewhat muted, suggesting that a capital raise could be coming soon off of the positive Phase IIb trial results. This makes sense, in that robust negotiations with potential drug company partners is usually best accomplished with a strong balance sheet. See PropThink’s previous coverage of Peregrine here, including discussion of a possible capital raise.
We note that padding the balance sheet with quality investors could be viewed as a positive event, hence our view that buying some PPHM now could make sense, but that investors should round out the position after a raise. Another key question is: Will the new data on bavituximab attract smart money? A quality deal would be very bullish in our eyes, and a sloppy deal would be detrimental indicating that the company has not yet convinced the market that these bavituximab data will stand the test of time. Alternatively, delivering a quality big pharma partnership could also validate the results, and management is indicating that discussions are ongoing. Hence, holding a partial position on PPHM makes sense here, in the event quality finds its way into the stock. There are numerous examples of companies that generated compelling Phase II data taking valuations up to and over the billion-dollar level, with some getting acquired (Pharmacyclics, Ardea, Micromet, Inhibitex). Is PPHM one of those companies? Time will tell.
