Are Short-Sellers Onto Something at Peregrine?

Since everyone loves a winner, it's reasonable to assume that everyone hates a loser -- everyone but short-sellers, at least. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into profits.

Below we take a look at biotech Peregrine Pharmaceuticals (NASDAQ: PPHM  ) , which saw a 28% jump in shares sold short, though it only amounts to around 4% of its float, so its short interest ratio is only one day to cover. Don't expect a short squeeze here. So let's see if the biopharmaceutical has the power to make short work of short sellers.

Peregrine Pharmaceuticals snapshot

Market Cap

$178 million

Revenues (TTM)

$15.7 million

1-Year Stock Return

24.1%

Estimated 5-Year EPS Growth

N/A

Return on Investment

(278.8%)

Dividend and Yield

N/A

Recent Price

$1.34

Shares Short Nov 30

5 million

Shares Short Nov 15

3.9 million 

% Change

28.8%

CAPS Rating (out of 5)

*

Sources: wsj.com, FinViz.com.

Just because the shorts are piling in doesn't mean you should, too. Such stocks could have serious problems that warrant their short interest, but they might also just be stricken by short-term troubles. Only Foolish due diligence will tell you for certain.

The short story
Why the shorts are piling into Peregrine at the moment can't be because they've popped 15% since the debacle of the data mix up for its lead cancer drug bavituximab. As investors are all too painfully aware, a third party calculating results for the biopharma in non-small-cell lung cancer trials incorrectly coded which patients received the drug or placebo. Maybe you should trust the results after all that said bavituximab, when combined with docetaxel, doubled patient survival rates compared to just docetaxel by itself and, more importantly, was well tolerated. Oops.

That, of course, was followed by a consortium of lenders saying, "You know, that just might be covered under our 'material adverse change' clause in that loan we just made to you. Can we have our money back, please?" Peregrine ended up returning the $15 million it had drawn on the loan, along with accrued interest and a $975,000 "final payment fee."

While its earnings reports continue to look better, Peregrine's stock remains mired 76% below the highs it hit soon after reporting the promising, but ultimately erroneous, data. Short-sellers may be thinking it's time for a comeuppance again soon. It's still losing money, even if it's not as much as it was previously.

Failure is the common thread
Investors should tread warily when wagering on small-cap biotechs successfully surmounting the obstacles that non-small-cell lung cancer, or NSCLC, erects in front of them. Just last month Oncothyreon (NASDAQ: ONTY  ) suffered the same fate as Peregrine when it reported phase 3 data for its drug Stimuvax, an experimental vaccine that treats NSCLC, saying it failed to improve overall survival for patients in the clinical trial. Its stock dropped 50%. Geron (NASDAQ: GERN  ) canceled its program after being unable to find enough patients to enroll in trials, leading to a 27% loss of value.

Clovis Oncology (NASDAQ: CLVS  ) is tackling NSCLC next after its metastatic pancreatic cancer drug was no more effective in extending overall survival than Eli Lilly's (NYSE: LLY  ) Gemzar, which nearly cut its stock in half, while Infinity Pharmaceuticals (NASDAQ: INFI  ) will probe whether its heat shock protein 90 inhibitors are effective against the disease. I'm not counting on it.

So far, the successes have been few and far between with Celgene (NASDAQ: CELG  ) gaining FDA approval with its therapy Abraxane and Pfizer's (NYSE: PFE  ) Xalkori targeting a specific gene mutation that impacts only 5% of all non-small-cell lung cancer patients. However, at $34 billion and $189 billion, respectively, these aren't exactly baby biotechs, either. The field is simply a tough nut to crack.

I don't see much hope for Peregrine at this moment, and it will face increased costs if for no other reason than the shareholder lawsuits that are piling up around it. I have to side with the short-sellers on this one that any increase in share value is a prelude to another fall.

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Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On January 03, 2013, at 4:28 PM, BSDetector wrote:

    Feel free to short at will. Everyone who writes an article bashing a stock should put their money where their mouth is (unless of course that mouth is permanently affixed to a hedge fund).

  • Report this Comment On January 04, 2013, at 6:47 AM, BSDetector wrote:

    So you are saying short interest has jumped 28% (or 1%) to a total of 4%???? THAT is some serious shorting!!! We'd better all pile on before it shoots up another 1%. Did you stop to read what you wrote before submitting this article? Saturday Night Live would kill for this material.

  • Report this Comment On January 04, 2013, at 11:21 PM, BSDetector wrote:

    I realize that you currently captivated by the fact that PPHM's short interest recently shot up from 3% to 4%. Not to distract you, but you may want to use one eye to glance at the massive April call / put ratio imbalance.

    In the unlikely event that you actually did short PPHM that should send you running for the toilet.

  • Report this Comment On January 07, 2013, at 2:32 PM, BSDetector wrote:

    Still captivated by the whopping 4% short interest? Today's +74% PPHM gain doesn't seem to be working in the short's favor.

  • Report this Comment On January 08, 2013, at 12:54 AM, bugmenot wrote:

    Another ill timed stab a trying to foretell the future.

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