By Abe Raymond
Peregrine Pharmaceuticals (NASDAQ:PPHM) has traditionally been an unknown biopharma player, until now, that is. Peregrine may have uncovered a compound that has extremely high efficacy for lung cancer tumors. If this news ends up being statistically significant, Peregrine could be sitting on a blockbuster drug.
Peregrine Pharmaceutical currently has a drug, called Bavituximab, that is undergoing Phase II FDA trials. As of now, it has been able to show a 50% improvement in tumor response rates in non-small cell lung cancer patients. Does this mean that Peregrine will see explosive growth?
While the drug offers exciting prospects, there is a direct competitor that has already passed FDA trials. Pfizer (NYSE:PFE) has announced its own non-small cell lung cancer drug, Xalkori. Peregrine may have stumbled upon a winning drug itself, but it may not be able to snatch as much market share as initially hoped. Regardless of competition, Peregrine stands to gain much more than Pfizer.
Peregrine currently makes several million per year in revenue - in 2011, it made about $13 million. It has also yet to be profitable, as massive research and development expenses drag down what profits the company has managed to accrue. If the drug manages to pass FDA trials, it could give Peregrine hundreds of millions, or even billions of dollars.
In the case with Pfizer, its reach and reputation simply gives it a leg up. It was conservatively estimate that Pfizer could garner $3.2 billion in annual sales. This, however, implies that Pfizer is the only player in this particular type of lung cancer, and does not account for Peregrine's recent success. Pfizer has already received FDA approval for its cancer drug, but its sheer size prevent it from taking risks with profits.
Peregrine may be able to get away with its small brand-name by offering its drug at a much lower price than Pfizer. Considering that it is only one of two companies with this type of drug, Peregrine might be able to profit handsomely by sacrificing margins for significant asset turnover. Pfizer, on the other hand, would not be able to make these kinds of concessions, and would have to charge its customers tens of thousands of dollars for its cancer treatment.
Peregrine would also be able to market its drugs to smaller hospitals and research institutions. While Pfizer has significant outreach to the larger biomedical firms and hospitals, Peregrine may be able to capitalize on its immediate surroundings and persuade locals to use its drug over Pfizer's drug. In reality, Peregrine does not need to make huge sales in order to appease investors. It simply needs to boost the top line by about $50 million in order to compensate for rising salaries as well as research and development costs.
By increasing revenue to this extent, Peregrine would be able to support positive cash flows, increase its balance sheet in a positive manner, and increase its EPS numbers. It would also be able to boost research, which means that it could eventually produce another blockbuster drug. While this may seem far-fetched or unlikely, Peregrine would still be able to profit from the drug.
Peregrine Pharmaceuticals may be able to produce a blockbuster lung cancer drug that is a significant competitor to Pfizer's drug. If so, it could benefit the company wildly, along with its shareholders. It could also pave the way for lower drug costs and ultimately benefit patients themselves. While there is a lot of promise, the drug is still in Phase II trials and still has to pass the rest of the trials subjected by the FDA.
Peregrine Pharmaceuticals is currently trading at about $1.16, down over 49% for the year.
Traders who believe that Peregrine will produce a blockbuster might want to consider the following trades:
- Long Peregrine as soon as possible. Do not initiate a whole position right now, but gradually build it up.
- Long the Health Care SPDR ETF (NYSEARCA:XLV), as more lung cancer therapies are positive for the health care industry as a whole.
- Short Pfizer, which is the only other company to have this particular type of drug. Traders will probably recognize the fact that Pfizer could lose a lot of market share.
Traders who believe that Peregrine's drug will fail FDA trials may consider the following positions:
- Short the company immediately, as it has gained nearly 30% in today's trading session.
- Long Pfizer, which would be the sole lung cancer drug manufacturer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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