Biotech company Peregrine Pharmaceuticals (NASDAQ:PPHM) was up as much as 33% today after announcing that it's starting a phase 3 trial for bavituximab in non-small-cell lung cancer.
You read that right. Not up 33% because its phase 3 trial was a success. Up 33% because it's starting a phase 3 trial.
Now granted, Peregrine is a small biotech company. The bump in share price only represents about a $70 million increase in Peregrine's value. But I'm not sure the news is worth even that much.
My best guess is that investors take the start of the trial as some sort of endorsement by the Food and Drug Administration. Peregrine even mentions the agency in the headline of the press release, highlighting that the company "has reached agreement with the FDA." If the agency agreed to allow Peregrine to run the trial, it must think the trial will work right?
Sorry, it doesn't really work that way.
The FDA is pretty open to biotech companies running clinical trials to test their experimental drugs, as long as there isn't a reason to think the drug will harm patients. If a biotech company can find patients willing to enter a clinical trial, the FDA is usually fine with a company running the trial. After all, that's the only way to definitively determine whether a drug works.
Examples abound where running another phase 2 trial would have made things a lot clearer, but the FDA "agreed" to allow biotech companies to run a phase 3 trial. Aeterna Zentaris (NASDAQ:AEZS) and Keryx Biopharmaceuticals (NASDAQ:KERX) took their colorectal cancer drug, perifosine, into a phase 3 trial based on a subset of the phase 2 data, which didn't turn out so well. Outside of cancer, Elan's (UNKNOWN:ELN.DL) Alzheimer's drug bapineuzumab is a good example of the FDA's indifference to biotech companies running phase 3 trials; Elan and its partner Wyeth started phase 3 trials for bapineuzumab before the phase 2 data was even complete.
Peregrine's investors are desperate for some validation because the bavituximab phase 2 data in lung cancer are a mess; the company doesn't know which patients got the low dose of the drug and which got the placebo.
Peregrine combined the two arms of the study and compared them to the higher dose of bavituximab, which showed an increase in overall survival of 4.4 months. Assuming the low dose was doing something, the high dose might even extend survival by more than that, but the current results aren't statistically significant.
The only way to know for sure is to run another trial. Peregrine could have run another cheaper phase 2 trial to confirm the tantalizing-but-very-dirty data from the first phase 2 trial, or it could roll the dice and jump into an expensive phase 3 trial. Don't for a second think that was the FDA's decision to make. It's Peregrine's money to spend.
Speaking of money, that seems to be the main motivator here. At the end of January, Peregrine had about $26 million in cash and equivalents. Pausing to run a second phase 2 trial would have eaten up much of that. Pressing into phase 3 trials has investors excited, which will allow the company to raise more cash at a higher valuation.
I'm not saying that bavituximab is guaranteed to fail its phase 3 trial in lung cancer. But without any definitive data, it's a crap shoot, like most phase 2 trials run by biotech companies.
Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.