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Source: National Cancer Institute.

Following the close of the U.S. markets on Tuesday, small-cap cancer immunotherapy developer Peregrine Pharmaceuticals (NASDAQ:PPHM) reported its first-quarter earnings results. As a whole, the results either met or bested analyst expectations.

Peregrine Pharmaceuticals, by the numbers
For the quarter, revenue totaled $9.67 million, an increase of 76% from the year-ago quarter, driven by growth in the company's contract manufacturing subsidiary Avid Bioservices. Specifcally, Avid's revenue grew to $9.38 million in Q1 2016 from $5.5 million in Q1 2015.

As expected with a growing manufacturing subsidiary and an expanding pipeline, Peregrine Pharmaceuticals' total expenses also rose on a year-over-year basis to $23.4 million from $18.7 million. Peregrine's press release listed its phase 3 SUNRISE study of lead cancer immunotherapy bavituximab as a second-line non-small cell lung cancer (NSCLC) treatment as the primary cause of its higher expenses during the quarter.

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Source: National Cancer Institute.

Peregrine's increasing revenue wasn't enough to completely negate its rise in expenses, but its net loss of $15.1 million, or $0.08 per share, wasn't much worse than the $14.2 million loss (also $0.08 per share) it recorded in the year-ago period. By comparison, Wall Street had been looking for Peregrine to lose $0.08 per share (which it did), but report closer to $7 million in revenue (which it handily surpassed).

Looking ahead, Peregrine still sees somewhere between $30 million and $35 million in full-year revenue in fiscal 2016, and it ended the quarter with a $42 million backlog at Avid Bioservices. Cash and cash equivalents fell to $59 million from $68 million on a sequential quarterly basis.

Peregrine is gaining some serious traction
This might seem like a pretty typical quarter for a biopharmaceutical company that's trying its best to get its first product approved by the Food and Drug Administration, but Peregrine is actually gaining some serious momentum if you dig a bit deeper than the headline numbers.

For starters, its contract manufacturing subsidiary is looking as if it could play a major role in the coming years in reducing cash burn. In just the past two quarters, Avid's contract backlog has jumped from $29 million to $40 million, and then in Q1 2016 to $42 million. This backlog, which encompasses phase 3 and commercial production services for fiscal 2016 and fiscal 2017, is a key figure to watch since Avid will have a new manufacturing facility that'll be fully operational very soon (most likely a couple of weeks away). Avid's new facility should give it more than double its prior capacity, in turn giving it room to expand its backlog substantially. It's also worth noting that Avid's expansion comes at the perfect time for Peregrine, with bavituxuimab hitting its pivotal SUNRISE trial. Avid will provide the production of bavituximab if it's eventually approved.

That leads to the next point: SUNRISE remains on track to be fully enrolled by year's end. SUNRISE is a multinational, double-blind study comprised of 582 patients randomized between the combo of a placebo and docetaxel, and bavituximab and docetaxel as a treatment for advanced-stage or locally advanced NSCLC. The primary endpoint of the study is overall survival. The intrigue lies in cancer immunotherapy bavituximab, which is designed to remove the immunosuppressant quality of cancer cells to make it easier for the immune system to locate and fight these foreign cells.

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Source: Peregrine Pharmaceuticals.

The data backing SUNRISE is also encouraging, though the midstage study itself came with its own set of controversy. On the bright side, in its midstage study the bavituximab cohort demonstrated a median overall survival of 11.7 months compared to just 7.3 months for the placebo. However, the third-party contractor handling the study botched the initial top-line readout, requiring Peregrine to restate the data. Long story short, SUNRISE will go a long way to validating bavituximab as a viable cancer immunotherapy.

Thirdly, we're learning that bavituximab isn't just for NSCLC. Peregrine has had no issues lining up big-name pharmaceutical partners to explore different combinations and indications with bavituximab. Recently, Peregrine and AstraZeneca announced an immuno-oncology hook-up of Peregrine's bavituximab and MedImmune's durvalumab (MedImmune is an AstraZeneca subsidiary). The two are slated to combine Astra's checkpoint inhibitor with Peregrine's immunosuppressant therapy in a phase 1/1b study in multiple solid tumor indications.

Likewise, Peregrine and Bristol-Myers Squibb are exploring the combination of bavituximab with FDA-approved checkpoint inhibitor Opdivo in metastatic NSCLC. The proposed phase 2 study should begin enrollment before the end of the calendar year.

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Source: Peregrine Pharmaceuticals.

But it still has concerns
Of course, not everything is working perfectly for Peregrine -- otherwise its stock price would be shooting to the stratosphere instead of trading very near its 52-week lows.

The biggest issue for Peregrine is its ongoing cash burn. Growth in Avid Bioservices should help to somewhat offset the higher costs associated with running a pivotal phase 3 study, but Peregrine is still likely years away from having an FDA-approved product on pharmacy shelves. Even with SUNRISE on track, a top-line, event-driven readout isn't expected until Q4 2016 or Q1 2017. Assuming Peregrine succeeds in SUNRISE and files a new drug application immediately, the quickest turnaround we're likely to see is a second-half of 2017 or first-half of 2018 decision from the FDA. In the meantime, Peregrine keeps losing money.

But it's not just the company's accumulated deficit of $467.3 million since inception that's concerning -- it's the ongoing at-the-market share issuances. In order to raise cash Peregrine, can, from time-to-time, sell common stock on the open market. As its share count increases, it dilutes the value of existing shareholders. After ending fiscal 2010 with just 51.9 million outstanding shares, Peregrine ends Q1 2016 with 197.3 million shares outstanding. This is up about 8.6 million shares from the sequential fourth quarter. As long as this continues, it could seriously curb any momentum in Peregrine's share price.

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Source: Social Security Administration.

What should you do?
So, who should be buying Peregrine here? My suggestion is only investors with the highest tolerance for risk who understand that they could lose a significant portion of their investment if SUNRISE doesn't hit the mark. Since bavituximab represents the lion's share of Peregrine's pipeline, a failure in SUNRISE could wipe out a large portion of the company's market valuation.

Additionally, investors in Peregrine need to understand that this is a volatile company that they should be prepared to hold long-term. Trying to move in and out of Peregrine in the short-term is simply not a smart move, and is akin to flipping a coin and hoping to get lucky. Personally, I'd suggest sticking to the sidelines until after pivotal SUNRISE data is released. If the primary endpoint isn't hit, you'll be thrilled you didn't own Peregrine. And even if it does hit and you miss the initial pop, there will still be plenty of time to take advantage of label expansion opportunities, possible partnerships and licensing deals, and sales of the drug down the road.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on 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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