50% Upside on this Biotechnology Stock
Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Editor's Note: The original article references one of Peregrine's drugs as Contara, the correct spelling is Cotara. This version has been corrected and Motley Fool apologizes for the error.
The patent cliff has positively impacted the valuations of small biopharmaceutical companies due to their acquisition potential. Peregrine Pharmaceutical (NASDAQ: PPHM) is currently trading at a 50% discount to my estimated target price of $4. I believe the stock will bounce back as the market has still not adjusted for the recent positive news in company disclosures. It is also a major acquisition candidate and I believe it will be a nice fit for Pfizer (NYSE: PFE) and Teva Pharmaceuticals (NYSE: TEVA).
Peregrine Pharmaceuticals is a biopharmaceutical company focused on the discovery, development, and commercialization of biopharmaceutical products. The company is focused on the development of monoclonal antibodies for the cure of cancer and viral infections.
The company has an interesting pipeline with 3 primary candidates under various phases of clinical trials.
This candidate is currently in Phase II clinical trials. The drug is being tested in 3 different randomized Phase II clinical trials for the treatment of NSCLC (Non-small Lung Cancer) and pancreatic cancer. Bavituximab is a monoclonal antibody that targets phosphatidylserine and has demonstrated the ability to treat various oncology indications.
It is the lead candidate of Peregrine for their Tumor Necrosis Therapy (TNT) and is in Phase II clinical trials. The interim results have been good as the percentage of patients alive at 6 months, 12 months and 24 months were 73%, 38% and 19%, respectively. Moreover, two patients under treatment with Cotara were still alive after 3 years.
The company is also in preclinical trial stage for its tumor imaging candidate PNG650. According to company disclosures it has initiated an open label, single center trial at Washington University. The trials will involve 12 healthy subjects which will be given a single dose of the imaging agent.
The stock is currently trading at a 55% discount to its mean sell side target price of $4.50 and at a 30% discount to its lowest sell side target price. The stock has traded as high as $5.50 in the last 52 weeks, a 65% upside to current levels. Peregrine lost almost 50% of its value when the company announced in September that there were major discrepancies in the study for its star drug Bavituximab. I have a $4 target price on the stock based on the sell side estimates and past valuations.
Since then the stock has gained some of its value due to the positive announcement by the company that most of the problems indicated with Phase II trial have been resolved, and the drug is all set to enter phase III. According to the company’s announcement the review has found discrepancies with the 1 mg/kg trial and no problems with the 3mg/kg trial. I believe it is only a matter of time before the stock will move back to its value before the negative announcement on Bavituximab ruined its valuations.
Buy or Sell
At these levels the two questions on any investors mind is whether to buy the stock or take advantage of this recovery and get out. I believe at these levels Peregrine is one of the most attractive biotech stocks on the market. The market reacted pretty quickly to the bad news on the discrepancies in Phase II trial of Bavituximab but has still not accounted for the recent positive announcement. The stock is giving more than a 100 percent return on its lowest sell side price target and its pre-September valuations. Keeping in view the large potential in lung cancer drug market and positive Phase II data, I believe Peregrine is a strong buy.
A number of major drug candidates have faced patent expirations in the last couple of years. This has left Big Pharmaceutical players looking for potential acquisition targets to replenish their patent portfolio. I believe Teva and Pfizer are the most likely candidates for acquiring small cap pharmaceutical stocks.
Teva recently announced at its investors meeting that it plans to focus on expanding its drug portfolio rather than returning shareholder wealth. The company has one of the lowest dividend yields in the market and the new management is justifying this dividend yield with a shot at expansion. Teva already has a rich oncology product line with Treanda, Trisenox, Tevagrastim, and Eporatio. Peregrine’s Bavituximab is its leading candidate and would fit in nicely with Teva’s oncology product line.
Pfizer is another major drug company actively looking to replenish its diminishing drug portfolio. The company has almost $22 billion in cash and equivalents and can easily afford Peregrine, valued at $280 million. Pfizer already has a very strong oncology portfolio which will make Peregrine an ideal investment. There will also be a lot of synergy because Pfizer already has one of the best sales and distribution channels for Oncology products.
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