3. Ethnicity imbalances may have skewed the data. Another important concern is the apparent imbalance between treatment arms, at least in terms of Asian patients enrolled. Asian ethnicity is a well-established favorable prognostic factor for OS in NSCLC. A number of studies support this claim, including a review of more than 20,000 patients published a few years ago in the Journal of Thoracic Oncology Ou SH, et al. J Thorac Oncol. 2009 Sep;4(9):1083-93 Although the company has released few specifics, investors should note that the control group included fewer Asians than either drug arm (25% versus 35% and 44% for the low and high bavituximab arms, respectively). This seems like a possible area of bias, especially given the data variability.

4. The distribution of results by geography remains unclear. One of Feuerstein's major concerns about Peregrine's data involves geographic distribution. Data for ex-U.S. centers, particularly those in India or other Third World countries, are highly suspect. (Before Xtandi's success in prostate cancer, Medivation ( MDVN) investors surely remember the misleading ex-U.S. data for Dimebon in Alzheimer's disease, which could not be duplicated in a U.S.-based trial.) Peregrine has stated that half of the patients enrolled in the Phase II trial were from ex-U.S. centers, which makes a geographic breakdown of OS data critical. Investors should demand this granularity.

There are other concerns, most of which I consider secondary to those listed above. For example, one savvy sellsider reminded me that the drug's World Health Organization-assigned International Nonproprietary Name (INN) doesn't clearly support management's purported mechanism-of-action; the "tu" in bavituximab indicates a tumor targeted monoclonal antibody, not one with an immune stimulating or vascular impact. Bavituximab is a monoclonal antibody directed against a phospholipid on the surface of tumor vasculature, called phosphatidylserine (PS), which management believes suppresses the body's immune response.

Compare this to Roche's ( RHHBY) anti-cancer drug bevacizumab, commonly known as Avastin, which targets a vascular growth factor called VEGF; the "ci" in Avastin's INN indicates a compound with a circulatory system impact. This isn't a major problem, but it does merit consideration.

Overall, I'm very skeptical of the results. Unfortunately, the data don't contain a definitive smoking gun. That could be bad news for the bears, especially given Peregrine's modest market capitalization and the absence of any clear near-term negative catalyst. The company will almost surely initiate Phase III trials, which will take years to produce any data, and I'm not convinced failure in front-line NSCLC will be enough to convince the bulls to sell. The most bullish investors may even start to believe in the potential for accelerated FDA approval of the drug in the second-line setting, although I think that would be extremely unlikely. Nonetheless, my experience suggests that even wildly misplaced hope can drive a $470 million market capitalization towards $1 billion or more over time.

The bear case for Peregrine is potentially compelling, but there are some very real risks to the short. Sometimes it pays to not play. That's what I'd recommend.

Disclosure: Sadeghi has no positions in any of the stocks mentioned in this article.

Follow Nathan Sadeghi-Nejad on Twitter.
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.

If you liked this article you might like

What Adam Feuerstein Got Right and Wrong About Biotech Stocks in 2016

Peregrine Pharmaceuticals (PPHM) Weak On High Volume Today

Peregrine Pharmaceuticals (PPHM) Stock Gains on Revenue Beat

Peregrine Pharmaceuticals (PPHM) Highlighted As Weak On High Volume