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CEO Gaffe of the Week: Peregrine Pharmaceuticals

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This year, I introduced a weekly series called "CEO Gaffe of the Week." Having come across more than a handful of questionable executive decisions last year when compiling my list of the worst CEOs of 2011, I thought it could be a learning experience for all of us if I pointed out apparent gaffes as they occur. Trusting your investments begins with trusting the leadership at the top -- and with leaders like these on your side, sometimes you don't need enemies!

This week we'll take a closer look at the CEO of Peregrine Pharmaceuticals (Nasdaq: PPHM  ) , Steven King, and examine why it is this week's disaster du jour!

The dunce cap
I know what you're thinking and no, this is a different Stephen King, though with the 79% haircut the stock received this week, it could very well be a lead in to a horror story.

Peregrine's nightmarish week is just two weeks removed from announcing what appeared to be fantastic results in a mid-stage trial for its non-small-cell lung cancer treatment bavituximab. According to that press release, bavituximab, when combined with docetaxel, doubled patient survival rates versus just docetaxel by itself (12.1 months versus 5.6 months) and, more importantly, was well tolerated. The news shot the stock up by 70% over the course of the next two weeks.

Then every single wheel simultaneously fell off the bus...

Come Monday this week, we received a press release from Peregrine that, in effect, its mid-stage study results on bavituximab shouldn't be relied upon. D'oh! And let's go on the record saying that clinical-stage biotech investors don't take kindly to clinical boo-boos. Peregrine noted an unusually large number of censored patients in its trial (those that Peregrine is either unable to follow up with, or haven't been in the trial long enough to analyze), which likely skewed the results in favor of bavituximab's efficacy.

To the corner, Mr. King...
Oh, don't think this murder-mystery is done just yet, because there's even more disturbing news.

In addition to the, "oh by the way, don't rely on that bit of data we released two weeks ago," Peregrine's creditors, which include Oxford Finance, Silicon Valley Bank, and MidCap Financial SBIC, filed a notice of default on a $30 million loan underwritten just 28 days ago. I'm pretty sure this is the quickest default I've ever witnessed in my 14 years of following the market. According to the written nature of the loan, any material adverse changes in Peregrine's business are grounds for declaring default, and I'd definitely say a 79% tumble perpetuated by a "yeah, we actually didn't do that" serves as reasonable grounds to declare a default. Peregrine complied by returning the $15 million it had borrowed plus an additional $975,000 in penalties. According to Peregrine, it has enough cash to satisfy operations through April 2013.

In Peregrine's defense (if there is one), companies of all sizes have had a difficult time getting treatments past the Food and Drug Administration with regard to lung cancer of any form. Eli Lilly's (NYSE: LLY  ) Alimta failed in a combination study with Avastin to reach its target in a late-stage nonsquamous non-small-cell lung cancer study.Late last year, Sanofi's (NYSE: SNY  ) afilbercept failed in a late-stage study to meet its endpoint in combination with docetaxel as a second-line treatment to NSCLC. Even Merck (NYSE: MRK  ) has struggled for more than three years in its attempt to win approval for Erbitux in Europe to treat NSCLC.

With the deck clearly stacked against Peregrine, consider this week's snafu the final straw for investors. Good luck getting investors to believe your next set of results, Mr. King.

Do you have a CEO you'd like to nominate for this dubious honor? Shoot me an email and a one- or two-sentence description of why your choice deserves next week's nomination, and you just may see your suggestion in the spotlight.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 28, 2012, at 2:25 PM, tjeo wrote:

    Peregrine has filed a lawsuit against Clinical Supplies Management, Inc., the third-party contractor hired to code and distribute the NSCLC trial product.

  • Report this Comment On June 09, 2013, at 3:22 PM, crgibson wrote:

    Dear Fool –

    On September 28, 2012 you awarded the CEO of Peregrine Pharmaceuticals, Steven King, your CEO gaffe of the week recognition – perhaps you should reconsider. Here's the real story:

    Peregrine pharmaceuticals' lead drug candidate, Bavituximab, had finished its second phase trials. You might call this a triple blind study because doctors did not know what they were giving, patients did not know what they were receiving, and Peregrine was not informed of the data until the finish of the trial. The data turned out to be spectacular with nearly a doubling of life expectancy for patients with advanced lung cancer. At that point in time we had no reason to suspect the integrity of the data. Peregrine began analyzing the data and a week later discovered that the data was not making sense. Somehow it had become contaminated. Our CEO did the only responsible thing he could do and announced that the data could not be relied upon. This was through no fault of our own but rather that of the third-party that had overseen the encoding and distribution of the vials of medication. We were the victims, not the perpetrators. After a months long investigation it was fortunately discovered that the placebo and low-dose arms of this trial were the only ones affected by the mis-coding. The high-dose arm, 3 mg per kilogram, was unaffected. Even though it skewed the results upward from what the placebo arm alone would have been, Peregrine combined the placebo arm and low-dose arm, 1 mg per kilogram, for analysis purposes. Even still, the results were fantastic. The data analysis of the combined arms showed a median overall survival of 7.3 months whereas the high-dose arm showed an 11.7 months median overall survival. That is a great leap forward and the FDA has recognized it by approving phase 3 trials which should begin by the end of 2013. So not only was your 'award' an insult to our CEO and his judgment, but it also cast an extremely promising cancer treatment in a very negative light.

    Our CEO and top executives had the courage to do what was right at a time when we see major corporations and their executives right and left being caught doing the exact opposite. Now the question is, do you have the courage and decency to do what is right by printing a retraction and offering an apology to Mr. King and all of the dedicated staff at Peregrine Pharmaceuticals whose work you have impugned. Let's hope so.

    Carl Gibson

    Peregrine Pharmaceuticals employee and proud of it

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