Assessing Peregrine And Seeking Upside In The Space

Last week was rough for investors of Peregrine Pharmaceuticals (NASDAQ:PPHM), a week they might try to forget. After announcing poor trial conduct that led to a 70% loss, the company has encountered another hit, but this time on its balance sheet with a default accounting for nearly $16 million. It has been a rocky road, and could very well get worse before getting better, with potential lawsuits and a skeptical FDA committee ahead if it considers pushing ahead with its bavituximab trials. At this point, it's unknown if the company can gain enough support to finish clinical studies. It's a perfect example of how quickly the biotech dream can come crashing down. The good news is that Peregrine's failures are not a reflection of the industry. There are other strong-performing, attractive stocks in the space with encouraging clinical studies that may replace some of the loss seen in shares of Peregrine.

Prior to September 21, Peregrine had traded with a gain of nearly 500% in 2012, and a three-month gain of over 1,000%! PPHM had been one of the best-performing stocks in the market. It had gone from being a $45 million company to a $550 million company in only one year, thanks to incredible data from its lead candidate, bavituximab, for second-line non-small cell lung cancer (NSCLC). However, it is now back to square one and is perhaps in a worse situation than it was last year. The company's first major blow came after it announced that it had "discovered major discrepancies in treatment group coding by an independent third party vendor responsible for distribution of blinded investigational product used in the bavituximab Phase II second-line non-small cell lung cancer trial." The company added that investors should not rely on any data disclosed on or before September 7, 2012, which just so happens to be the data that led to its incredible rally.

In the first week of September (prior to its recent announcement), Peregrine announced "results" for bavituximab that stunned all of Wall Street and retail investors alike. The drug reportedly was being tested on second-line NSCLC patients, which means patients who have failed first-line therapy. The company had reported a median overall survival of 12.1 months compared to just 5.6 months for patients treated with docetaxel and a placebo. Keep in mind, the 50% reduction in the risk of death far exceeds the benefits of other approved drugs for this disease, such as Avastin, which extends survival by only two months. Therefore, it was assumed that PPHM had found the next great product, and a technology that could potentially be used effectively in treating other diseases besides AML. However, despite the positives, there were also whispers surrounding the data conducted in Europe, Russia, and India, as some voiced the concern that patients may not have actually qualified for the treatment due to not failing first-line therapy. Nonetheless, it was still considered to be incredible data for the treatment of a very deadly disease.

Overall, looking at the big picture, it is still possible that bavituximab is effective at treating second-line NSCLC. It most likely won't see a 50% reduction in the risk of death, but its results may still be deserving of an FDA approval. The problem moving forward is the lack of support, its recent $16 million default, and the fact that the company can only continue operations for another six months due to a lack of cash.

Now that the stock has fallen to such a large degree, there are some investors who believe PPHM is a buy, and they could very well be correct. However, investors must consider that its entire rally was based on the speculation and data of this one candidate. So although $1.00 might appear cheap, be aware that earlier this year it was priced at $0.45, and could very well return back to these levels depending on upcoming events. One upcoming catalyst that we can predict is an offering of some sort due to the company's need for cash. And in light of everything that has occurred, I doubt investors are going to be rushing to give the company money with an offering. Consequently, it has real problems and could sink significantly lower short-term.

The good news is that there is opportunity elsewhere in the market. There are stocks that have traded with the same level of optimism-- companies with novel cancer therapies, with strong results, and attractive valuations. Peregrine may still have a great product, and may earn an FDA approval; but in my opinion, there are much better, and safer, opportunities elsewhere in the market with the same level of upside.

One company you might want to consider is Sunesis Pharmaceuticals (NASDAQ:SNSS), a company that has increased in value by nearly 400% in 2012 with strong data and significant market potential. In some ways, this is a company that reminds me of what Peregrine could have become, with many similarities between the two stocks. However, unlike PPHM, this is a company that is executing its trial to perfection, recently increasing the size of its Phase III trial by 225 patients for its cancer drug, Vosaroxin, following a recommendation by an independent Data and Safety Monitoring Board (DSMB).

Vosaroxin treats a rare form of leukemia (AML) with a large unmet medical need. At this time, there are no competing drugs to fight the disease, thus giving SNSS control of the space. The company's Phase 3 cancer product has been granted U.S. and European Orphan Drug designations along with having FDA fast-track status for the treatment of AML. The company's rally has kicked into high gear since increasing the size of its trial from 450 to 675, as investors believe that survival will increase with added patients and longer follow-ups. Given the support from the FDA and early data, most are anticipating a successful trial and quick entrance into the market.

What makes vosaroxin such a unique drug is its attention from the FDA along with the potential for total control of the AML space. According to the company's CEO, Daniel Swisher, there hasn't been a new drug to treat this disease in 30 years. Hence, with no approved drugs, the company estimates the potential for vosaroxin in terms of sales to be $400-$600 million annually. This means annual sales could be double its current market capitalization, presenting significant upside potential in shares of SNSS.

In terms of safety to upside potential, SNSS is one of the better investments in the biotechnology arena. However, if we're looking at potential revenue to market capitalization, then SNSS is attractive; but it is not the best in the market. One of the reasons, aside from strong initial data, that PPHM traded higher is because it was a $100 million company with a product that had sales potential of $1 billion per year. This brings me to my second stock that presents good upside potential from its current price, and is a good alternative to PPHM: Galena Biopharma (NASDAQ:GALE). Galena is a $120 million company that has increased in value by nearly 300% in 2012, with a lead product that treats a large unmet medical need, an indication that could return billions in annual sales for the company.

NeuVax, Galena's Phase III product immunotherapy candidate, is being tested to prevent the recurrence of breast cancer in patients who have low to intermediate levels of HER2. Breast cancer is the most commonly diagnosed malignancy in women, with approximately 230,000 new cases every year. Thus, a successful vaccine in this market allows for large upside potential. Of these 230,000 diagnosed per year, between 70-80% test positive for HER2, but at different levels of expression. Roche's (OTCQX:RHHBY) Herceptin treats women who have high levels of HER2, so its addressable market is only 20-30% of breast cancer patients. However, with this small market share, the company still returned more than $5.5 billion in 2011. NeuVax will target a larger population (around 50%) that has low to intermediate levels of HER2. The company estimates that targeting low to intermediate levels of HER2 could result in NeuVax treating between 35,000 and 40,000 patients annually. Although revenue potential is difficult to ascertain, if NeuVax is successful in Phase III trials, it could return several billions in annual revenue, based on its market share and the success of Herceptin.

Unfortunately, there are a lot of companies with promising products that have big revenue potential that may never see an FDA approval. When assessing the upside of a company, it is imperative that the data supports the market potential, which brings me back to Galena. Galena's NeuVax is being tested in a Phase III trial that will enroll between 700-1,000 total patients, with the goal being to avoid the recurrence of breast cancer after the front-line treatment regimen. In the company's Phase II studies, it tested 187 patients and reported a 50% reduction in the recurrence of breast cancer. In a subgroup of 53 patients receiving booster doses of the therapy to offset waning immune response, 96.2% of patients were disease-free after 60 months, compared to 80.5% for the control group. As a result of the data from this sub-group, the phase III trial design is based on the same premise with the targeted patient set having low to medium HER2 expressions and receiving a booster dose of the therapy every six months to keep the immune response strong. You can see an advantage to NeuVax, and the potential of billions in revenue; yet Galena continues to trade with a $120 million market cap. However, with final data analysis for its Phase II study expected in the next few months, it is very possible that GALE could experience a significant rally in anticipation of data, and then could continue its rally after the data is announced.

The recent news concerning PPHM was no doubt very disappointing for investors of the company as well as the healthcare sector in bad need of a NSCLC treatment. Biotechnology investors are typically very loyal once they invest in a particular company. However, the risks and problems surrounding PPHM are not only visible, but also company-changing. It makes no sense to remain loyal to a company with such an uncertain future when there are so many promising companies in the space. My personal favorites in this industry are Sunesis and Galena. I don't see another pair of companies with the same balance of promise, data, potential, and valuation in the biotech arena. PPHM may have once been viewed as promising, but now it's simply problematic. Until these problems are solved and we have a clear picture of its upcoming hurdles, investors might elect to consider opportunities elsewhere. Have no doubt, there is plenty of opportunity in this space.

Disclosure: I am long GALE, SNSS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.