Market Overview

Peregrine Pharmaceuticals Finds Its Stride Again: Exclusive Interview With MLV & Co's George Zavoico

Peregrine Pharmaceuticals, Inc. (Nasdaq: PPHM), a therapeutic and diagnostic antibody development and manufacturing company based in Tustin, CA, has had a tumultuous ride in the past 12 months.

The news coming out of Peregrine has alternated between very bad to excellent several times. Now, with the dust beginning to settle, Peregrine is poised to breakout with promising confirmatory Phase II results of a randomized, double-blind trial of its leading antibody candidate, bavituximab. This comes after what could have been a catastrophic error alleged to have been made by a CRO responsible for distributing investigational product for the trial.

Benzinga had the opportunity to speak with MLV & Co. analyst George Zavoico about Peregrine. George has more than seven years of experience as a life sciences analyst writing research on publicly traded equities. Prior to joining MLV & Co., he worked at Westport Capital Markets LLC and Cantor Fitzgerald in their research departments.

Zavoico has received the Financial Times/Starmine Award two years in a row for being among the top-ranked earnings estimators in the biotechnology sector. He holds a bachelor's degree in biology from St. Lawrence University and a doctorate in physiology from the University of Virginia.

Could you provide some background regarding the science behind bavituximab, PPHM's lead product candidate? My understanding is that the compound targets the phospholipid phosphatidylserine (PS), which flips over to the outside of the cell surface in tumor cells. Essentially, the antibody is able to target and flag for the immune system these specific diseased cells where PS is on the outside of the membrane without effecting other cells?

Bavituximab is an unusual therapeutic antibody in that it does not target a protein or peptide, but a structural cell membrane phospholipid called phosphatidylserine, or PS. For decades, PS was thought to have only a structural role; helping to maintain the integrity of the cell membrane. However, it is now understood that PS is a marker of stressed, injured or dying cells undergoing apoptosis.

Included in this category are tumor cells and vascular endothelial cells lining blood vessels of tumors stressed by hypoxia or acidity. Healthy cells expend a considerable amount of energy sequestering PS to the inner leaflet of their cell membrane bilayer, keeping it largely invisible to the extra-cellular environment.

When PS flips over to the outer leaflet in injured or dying cells, it is now exposed and serves to mark the cell for disposal without initiating an inflammatory or immune response.

The anti-inflammatory and immunosuppressive effects of PS flipping and exposure enables efficient removal of injured and dying cells by phagocytes without affecting healthy bystander cells. Notably, tumors hijacked this immunosuppressive function to avoid detection and their own removal.

By binding to PS exposed on tumors and tumor vasculature, bavituximab serves to identify cells for disposal by antibody-dependent cell-mediated cytoxicity (ADCC) by effector cells of the immune system and by reversing the tumor's immunosuppressive effects. Thus, PS is a selective, non-protein therapeutic target, which differentiates bavituximab from other antibody therapeutics.

Could you talk a little bit about the volatility in Peregrine's stock price? On May 21, PPHM released positive top-line data from its Phase II trial of bavituximab in second-line non-small cell lung cancer, but the stock did not react. It wasn't until September 7 that the impressive survival data was released from the trial and by then the stock had already jumped quite a bit. Was the move over the summer due to investors speculating that the survival data would be good?

The action in Peregrine's stock valuation in the last 12 months have centered on the results of two Phase IIb clinical trials. With promising Phase I and IIa results in hand in certain solid tumor types, Peregrine commenced two randomized Phase IIb trials in NSCLC in mid-2010.

One trial presented as front-line therapy in combination with carboplatin and paclitaxel in a randomized, open-label trial and the second as second-line therapy in a more rigorously designed randomized, double-blind trial in combination with docetaxel (Taxotere®).

The first stumble occurred in early March 2012, when Peregrine announced top line median progression-free survival (PFS) and overall response rates (ORR) in the front-line trial.

While investigator assessment of patients showed a 1.2 month improvement in median PFS with bavituximab (5.8 vs. 4.6 months), the difference largely vanished to a 0.3 month improvement when the same data were centrally reviewed (6.7 vs. 6.4 months).

Moreover, median PFS did not translate into notable differences in ORR between the two arms of the trial, either by investigator or central review. Not surprisingly, with these disappointing results Peregrine's stock in April was worth half of what it was before the announcement and investor sentiment toward bavituximab turned largely negative.

Then, in late May, Peregrine announced positive top-line results from its Phase II trial of bavituximab as second-line therapy in NSCLC. The median PFS improved by 1.5 months, from 3.0 to 4.5 months, with the addition of bavituximab to docetaxel, and the ORR improved from 7.9 percent to 17.9 percent.

Median overall survival (OS) was less than six months in the placebo arm, but was not yet reached in the low (1 mg/kg) and high (3 mg/kg) dose bavituximab arms. No significant safety issues were raised.

Over the course of the summer, negative sentiment toward bavituximab from the top-line results of the front-line trial gradually reversed as investors began to grasp the potential impact that the difference in median PFS might have on prolonging median overall survival (OS), the key primary endpoint of the trial.

Moreover, investors interpreted the delay in announcing top line median OS results as promising, since it could mean an even longer than expected prolongation of survival. As sentiment shifted, the value of Peregrine's stock increased about 6-fold, from about $0.50 to $3.00 per share. In late August, Peregrine also secured a $30 million loan facility to strengthen its balance sheet and fund continuing development of bavituximab.

On September 7, it appeared as though Peregrine hit the jackpot with the OS results and the stock reacted accordingly. Median OS in this trial was prolonged from 5.6 months in the placebo arm to 11.1 and 13.1 months in the low and high dose bavituximab arms.

A more than doubling of median OS in the high dose arm was considered particularly promising for this hard to treat patient population. Within a month, Peregrine's stock appreciated another $2.00 or more, to greater than $5.00, a 10-fold increase in value in three months.

When the discrepancies in the Phase II trial were revealed, why was the market reaction so extreme in your opinion? Investors seemingly took the discrepancies to mean that the data was completely invalidated, sending the shares down more than 80%. We now know, however, that the data was not completely invalidated. Could you provide some color on the trial errors and the subsequent plunge in the stock?

Sure. About two weeks later, the bottom fell out when Peregrine announced that it discovered major treatment group coding discrepancies in the trial by an independent third-party vendor, a CRO, who was responsible for distribution of blinded investigational products to clinical sites. The entire data set was deemed unreliable at that time, pending a detailed review of the potential impact of this error.

As Peregrine initiated its investigation, including testing of used and still stored vials of investigational products, patient samples, and reviewing vendor operations, the value of its stock lost practically all its value, dropping below $1.00 again. We think investors lost confidence in bavituximab and most likely in the company being able to extract any value from the messed up trial.

In the interest of transparency, Peregrine gave no indication at the time that they would be able to sort out what happened or why, leading many investors to almost fully discount the likelihood of bavituximab ever reaching the market. Based on the earlier mixed and equivocal results of the Phase II trial of bavituximab in front-line therapy of NSCLC, this may have also led investors to question the credibility of Peregrine's management team.

As Peregrine worked to recover whatever results it could from the trial, it appeared to quickly isolate the source of the error, alleging that its CRO for this trial, Clinical Supplies Management, Inc. (CSM) of Fargo, ND, was responsible. On September 24, 2012, Peregrine filed a complaint for breach contract and negligence in the U.S. District Court of the Central District of California demanding a trial by jury and seeking monetary damages.

The complaint states that Peregrine incurred “substantial time and expense analyzing and evaluating the ramifications of the breach(es) and has incurred substantial damages, in a presently unknown amount” and that the breach(es) “may cause a delay in bringing bavituximab to market and impact the value of the platform before commercialization, causing [additional] damages,” the combined amount “to be proven at trial.”

We note that during the course of the proceedings, both Peregrine and CSM must respect confidentiality and remain silent during the early, non-public, discovery phase of litigation. We do not expect any comments or projections from either Peregrine or CSM on the status of the litigation, including the timing of a jury trial or the possibility of a settlement before a trial begins.

As Peregrine's investigation continued, the company did not make any comments for more than two months. In anticipation of possible positive news ahead of its second quarter 2013 call (Peregrine's FY ends April 30), the value of Peregrine's stock increased by about 70%. Peregrine did not disappoint.

During its second quarter 2013 fiscal year conference call on December 10, 2012, Steve King, Peregrine's CEO, said that the goal of the investigation “is to be able to generate a final data set that we believe could be used in discussions with the FDA to support advancing the program into a pivotal trial.”

In our view, this was a subtle but important change in expectations from Peregrine. In September the company's goal was to determine the impact of the coding discrepancy, now the objective was to salvage enough data to go to the FDA and argue that the recovered data is sufficient to support moving bavituximab into Phase III trials. This signaled to us that the company was making important progress in its investigation.

In an unrelated development, Peregrine also announced on December 5 that it had come to an agreement with the FDA regarding a pivotal Phase III trial for its other drug candidate, Cotara, for the treatment of recurrent glioblastoma multiforme (GBM). Peregrine said that with a Phase III plan in place, it could now concentrate on securing a partnership to move Cotara's clinical development forward.

Could you talk about the developments at the company that caused the stock to soar once again in early January. Essentially, in a lucky break, Peregrine was able to determine that the discrepancies were limited to the placebo and low dose bavituximab arms and not the high dose arm. This indicated that the high dose arm trial results were valid and that the data supported moving bavituximab into Phase III trials. In light of this positive development, why is the market valuing the stock at such a discount to where it was after the release of the survival data on September 7?

On January 7, 2013, ahead of the JP Morgan Healthcare conference in San Francisco, Peregrine announced that its preliminary analysis supported moving bavituximab into a pivotal Phase III trial as second-line treatment with docetaxel in the treatment of NSCLC. As you pointed out, the key finding of the investigation was that the coding discrepancies were limited to the placebo and low dose bavituximab arms, and not at all to the high dose arm.

This means that patients randomized into the high dose arm were administered bavituximab correctly, whereas some of the patients in the placebo arm were administered low dose bavituximab and some in the low dose bavituximab arm were administered placebo. More importantly, the findings suggested that the median OS of 13.1 months in the high dose arm was likely to be valid.

Even by historical measures, this is a remarkable result, since docetaxel's product insert lists the median OS of NSCLC patients receiving this widely used drug as second line therapy in two trials as 5.7 and 7.5 months. In effect, adding bavituximab doubled the median OS. In our view, this was an extraordinary stroke of luck. If the high dose arm had been affected by the coding discrepancy, Peregrine would have been in a completely different and unfortunate position.

In response to this positive news, Peregrine's stock increased in value by about 60%, jumping from about $1.35 to trade at about $2.15. We note that the final results of the investigation have not been announced, and their validation in a public forum such as at a clinical conference remains to be achieved, perhaps lending an element of uncertainty and preventing the value of the stock from reaching its pre-September 24 level.

Moreover, Peregrine must determine how best to present its case to the FDA. Will the historical controls be sufficient to justify moving bavituximab into a Phase III pivotal trial, or will Peregrine have to pool the results of the placebo and low dose arms and use that as a comparator to argue for moving ahead?

A simple average of the placebo and low dose arms results in a new control median OS of about 8.4 months, still several months less than that of the high dose arm. This quick analysis results in about a five-month survival advantage, a substantial prolongation for patients with second-line NSCLC and likely to justify moving bavituximab into a pivotal Phase III trial in 2013, in our view.

What catalysts have the potential to move the stock going forward and what is the timetable for them?

With the coding error investigation now largely behind them, Peregrine is now moving forward with renewed confidence. Several key catalysts are expected in the short term: • Final, adjusted results of the Phase II trial of bavituximab as second-line treatment in combination with docetaxel and details of the coding error investigation are expected to be presented and a major medical conference, most likely in the first half of 2013 (perhaps at the annual meeting of the American Society of Clinical Oncology (ASCO) in early June). • Results of an end-of-Phase II meeting with the FDA providing guidance for the design and timing of a pivotal Phase III trial of bavituximab for the second-line NSCLC indication should also occur in the first half of 2013, most likely in the second calendar quarter. • Median OS results from a Phase II trial of bavituximab as front-line treatment for NSCLC in combination with carboplatin and paclitaxel are expected in the first calendar quarter of 2013. These results should remove any equivocation regarding the median PFS and ORR results of this trial presented in early 2013 and help determine if bavituximab may also have a role as front-line therapy in NSCLC.

• Top line results, including median OS, of a randomized Phase II trial of bavituximab in combination with gemcitabine (vs. gemcitabine alone) in the treatment of newly diagnosed Stage IV pancreatic cancer is also expected in the first calendar quarter of 2013.

• A number of investigator-sponsored trials of bavituximab are currently underway. Since these trials are not under the control of Peregrine, it is difficult to predict when data may be forthcoming. Within the next 9-18 months, we expect results from several Phase I and II trials of bavituximab in advanced hepatocellular carcinoma (in combination with sorafenib (Nexavar®)), as second-line therapy in castration-resistant prostate cancer (with cabazitaxel (Jevtana®)), in previously untreated Stage IV NSCLC (with carboplatin and pemetrexed (Alimta®), in HER2-negative metastatic breast cancer (with paclitaxel), and in Stage II or III rectal adenocarcinoma (with capecitabine (Xeloda®) and radiation therapy).

• With respect to Cotara, we expect announcement of a partnership agreement in 6-9 months, with commencement of a pivotal Phase III trial shortly thereafter.

• We expect further development of Peregrine's experimental PS-targeting imaging agent, designated 124I-PGN650, in cancer, including results of an exploratory trial of the imaging agent in patients with multiple tumor types. Positive results would provide the rationale to expand Peregrine's PS-targeting platform into another business sector, with the potential of generating an additional revenue stream from partnering or sales in several years (assuming successful results in this and future clinical trials).

• On its second quarter 2013 fiscal year conference call on December 10, Peregrine raised its revenue guidance for its wholly-owned contract manufacturing subsidiary, Avid Bioservices, Inc., for FY2013 from $15 to $18 million. In subsequent quarters, we expect Peregrine to meet or surpass its guidance based on what the company describes as a “continuing solid backlog of future work” valued in excess of $30 million for services to be delivered through FY2013 and 2014.

What is your price target for PPHM?

In our view, Peregrine is catching its stride once again, with the coding error investigation largely behind them and a long list of possible catalysts to its stock valuation in calendar 2013. Our current one-year price target is $3.00 and we have a BUY recommendation on the stock.

Disclosures: MLV or any affiliates in the past 12 months managed or co-managed a public offering of securities for Peregrine Pharmaceuticals, Inc. and received compensation for investment banking services and for products or services other than investment banking services from Peregrine Pharmaceuticals, Inc. MLV or any affiliate expects to receive or intends to seek compensation for investment banking services from Peregrine Pharmaceuticals, Inc. in the next 3 months.

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