Shares of

American Pharmaceutical Partners


are running strong ahead of an expected Jan. 8 approval decision by U.S. drug regulators on the company's breast cancer drug Abraxane.

Whether or not the Food and Drug Administration approves Abraxane has been the focal point of a

longstanding war between bulls and bears over American Pharmaceuticals. With the stock up 28% in the past week, bulls are pressing their bets, believing Abraxane's approval is near. Bears, including some diehard short-sellers, haven't given up and continue to raise questions about Abraxane. But in private conversations, some of these critics are worried.

American Pharmaceuticals rose $2.01, or 6%, to $37.20 Tuesday; the stock is now up a whopping 76% since sinking to a 52-week low of $21.28 on Oct. 20. How much of this recent activity can be explained by short-covering is not known, but as of Nov. 30, 10.5 million American Pharmaceutical shares were sold short, or about 50% of the company's freely traded shares, according to



Recall, American Pharmaceuticals describes Abraxane as an improved version of

Bristol Myers Squibb's

(BMY) - Get Report

cancer drug Taxol (also sold generically as paclitaxel); the company claims Abraxane can be administered faster, at higher doses and with less toxicity than Taxol.

There hasn't been any public word from American Pharmaceuticals about Abraxane that could account for the recent rally. But Monday afternoon, Merrill Lynch analyst Gregg Gilbert held a conference call for institutional investor clients to discuss the drug. The featured guest on the call was Dr. Steven Carter, an oncologist and former executive with Bristol Myers, and a Taxol expert. His comments offered a little something for both bulls and bears. (Gilbert has a neutral rating on American Pharmaceuticals and his firm has no banking relationship with the company.)

As I

mentioned in's

Columnist Conversation

, Carter believes the FDA will not approve Abraxane this time around, but will require the drugmaker to conduct additional clinical work. This skepticism is based on the fact that he views Abraxane as an entirely new drug-delivery technology for Taxol and, therefore, it must meet higher regulatory requirements with the FDA.

But in response to questions, Carter also acknowledged that the FDA may simply view Abraxane as a reformulation of Taxol, which would make approval more likely because the regulatory requirements would be less stringent. Furthermore, Carter conceded that the FDA would have likely rejected the Abraxane application already if the agency viewed the drug as something more complex than a simple Taxol reformulation.

One manager of a $400 million mutual fund who is long American Pharmaceuticals seized on this last point. "If the FDA had wanted a full-fledged NDA

new drug application, they would have asked for one by now," he said. The source requested anonymity because his firm doesn't allow money managers to discuss individual stocks in their portfolio.

It should be noted, too, that the FDA didn't bring Abraxane in front of an advisory panel meeting. Such a venue is often used by the agency to vet drugs with which it has issues or problems.

Abraxane bears, on the other hand, were making hay with Carter's initial negative comments to press their case on why the FDA will turn the drug away. Generally speaking, short-sellers of American Pharmaceutical shares have long believed that the Abraxane data sent to the FDA are flawed, including problems with patient enrollment in the phase III clinical trial, Abraxane's dose levels, and surprisingly poor Taxol response rates in the study.

Skeptics also point to past comments made by American Pharmaceutical executives, who at various public forums have described Abraxane as a new delivery mechanism for Taxol.

A hedge fund manager, also asking for anonymity, isn't covering his American Pharmaceuticals short, despite the stock's recent strength. "Nothing I've heard in recent days changes my mind: The FDA won't approve Abraxane," he forecast.

But not all Abraxane bears are so confident. Another hedge fund manager, who also asked for anonymity, said he covered his short position in American Pharmaceuticals in October, when the stock was trading in the mid-$20s. At that level, American Pharmaceuticals would not have sunk more than another two or three dollars if Abraxane had been rejected because of a valuation floor set by the drugmakers' base generic-drug business, he explained. But if Abraxane had been approved, the stock easily could have doubled or more.

"The upside to my short position was small, but the risk was huge," he said, adding that he had become increasingly concerned with the short thesis, especially after the FDA didn't send Abraxane to an advisory panel.

The Abraxane "event" is high-risk, but one thing is fairly certain, with American Pharmaceutical shares already rising and the short position still high, the stock is likely to surge in one direction or the other, depending on the FDA's decision.

Adam Feuerstein writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to