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Bull Case on Peregrine Pharma Shouldn't Be Dismissed

Look closely at Peregrine's survival data, which can be found in the pre-recorded webcast on the company's website, and you will see faint "tick marks" in the Kaplan-Meier curve. Those are censored patients. The number of patients "at risk" is also listed along the bottom of the graph. In both bavituximab arms, there are lots of patients censored after ten months, which means the data on the far right hand of the survival curve are less reliable than the results on the left.

According to the company, investigators conducted a "sweep" for deaths before preparing the study for presentation to find unreported fatalities among censored patients. I don't know if this is true, but it's standard practice for a clinical trial. Since I don't have any reason to suspect a rash of deaths among censored bavituximab patients, I'm guessing the bulls are right that these data won't change much.

3. Expectations for success in other indications remain low, which skews risk to the upside. Peregrine will report data from two Phase II studies of bavituximab in first-line non-small cell lung cancer and pancreatic cancer by year-end. Initial data in front-line non-small cell lung cancer, reported earlier this year, showed essentially identical response rates and progression free survival. Based on these results, investors appropriately concluded that this study has a very low probability of success. There are no data yet available from the pancreatic cancer trial, although consensus is that bavituximab will fail to meaningfully extend survival.

Fundamental investors can't ignore market sentiment. Although I agree that Peregrine's studies in front-line non-small cell lung cancer and pancreatic cancer will most likely fail --- even the bulls could offer me no substantive rationale for success -- investors already expect it. As such, failure will not drive Peregrine shares lower and even the slightest positive signal would send bulls rushing to buy and bears scrambling to cover.

4. Peregrine will most likely partner bavituximab within the next six months. This is a good point, and I wouldn't be surprised if the company secured impressive deal terms. Many investors view partnerships as validation of a drug's potential. Although I don't share this view -- I could easily cite more than a dozen examples of surprisingly obvious pharma and large-cap biotech business development mistakes -- Peregrine shares will still trade up if the company inks a solid deal.

Management says it hopes to secure a partnership before an end-of-phase II meeting with the FDA, which will likely be scheduled in late 2012 or early 2013. I'm not sure why the company put forth a timeline, which seems like an unnecessary detail that could complicate investor expectations. Bulls argue that the specificity of company's partnership guidance suggests a deal is imminent. I'm not so sure, but I wouldn't bet against it.

After last week, the bull case seems far more compelling to me than it did at first. I'm still a bit hesitant, but risk-tolerant investors might reasonably consider modest long exposure. However, absent new clinical data, investors should treat Peregrine as a trading position rather than a long-term investment.

Sadeghi has no position in Peregrine
Nathan Sadeghi-Nejad has 15 years experience as a professional health-care investor, most recently as a sector head for Highside Capital. He has worked on the sell side (with independent research boutiques Sturza's Medical Research and Avalon Research) and the buyside (at Kilkenny Capital prior to Highside). Sadeghi-Nejad is a graduate of Columbia University and lives in New York. You can follow him on Twitter @natesadeghi.
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