Bull Case on Peregrine Pharma Shouldn't Be Dismissed

NEW YORK ( TheStreet) -- School has started again on Wall Street. Last week, I chatted with scores of investors and executives about healthcare at a major industry conference. Not surprisingly, Peregrine Pharmaceuticals ( PPHM) and its experimental lung cancer drug bavituximab was a frequent topic of conversation given the stock's meteoric rise over the past few months.

I wrote about Peregrine last week, recommending investors stay away from the stock. I didn't like the short call due to pre-existing negative sentiment and the lack of a near-term catalyst. The long side was similarly unattractive because of the numerous red flags in the bavituximab data.

Nearly all of the institutional investors I spoke with last week shared my view of Peregrine or were extremely bearish. I did manage to find a few bulls. Here's why they want to own Peregrine now -- with my comments added:

1. The control group data in Peregrine's Phase II study were within expectations. Bulls highlighted a few additional trials of docetaxel in second-line non-small cell lung cancer that showed a median overall survival in the 6-month range. One investor cited 13 studies of docetaxel-treated patients in the second-line setting, with an average overall survival of slightly more than 7 months, as support for this thesis.

I don't find this a compelling counterpoint to my concerns, since even the largest sample yields a similar average as the 7.3-month median overall survival from the four studies I cited. Bulls shouldn't expect a repeat of the 5.6-month control arm overall survival observed in Phase II trial.

One additional point: management should assume a seven-month control group survival when designing the Phase III statistical plan for bavituximab. If the company assumes six months for docetaxel-treated patients, look out.

2. The Phase II data won't change much over time. One bull noted that his extensive scenario analyses of Peregrine's Phase II study suggested the data would improve with longer follow-up. Without actually seeing these calculations, it's hard for me to evaluate this claim. Nonetheless, I went back to take a closer look at the study, which many bears consider an illusion caused by small patient numbers and the inclusion of ex-U.S. clinical centers. My conclusion: I don't think the data will change much as the Phase II study matures.

On a recent conference call, Peregrine noted that the bavituximab survival results were "comparable" across geographic regions. Although I wish the company had provided greater detail, this suggests there isn't a vast difference between U.S. and ex-U.S. patients. (It's possible management is lying, although I have no specific reason to suspect it in this case.)

The company also clarified that greater than 70% of events (deaths) have occurred in the control group. Clinical data from trials using a survival endpoint are generally considered mature -- a fancy term for "final" -- after 80-85% of deaths. Therefore, survival results in the docetaxel arm won't change much going forward.

Meanwhile, fewer than 50% of deaths have occurred in the bavituximab arms of the study. This raises the possibility that the bavituximab results will worsen with additional follow-up.

This is where things get tricky. For those unfamiliar, "censoring" refers to the practice of removing patients from the survival curve at the end of follow-up. Censoring patients is perfectly acceptable in clinical statistics, although by shrinking the sample size the practice reduces data reliability.

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