Pharmaceutical research and development is a risky venture—big financial returns on the drugs that make it to market, which will be outnumbered by the majority of drugs that don’t. And then there are the drugs that come close.
Peregrine Pharmaceuticals Inc.’s immunotherapy drug candidate, bavituximab, was in a nearly 600-person phase-three trial of patients with nonsquamous, nonsmall cell lung cancer when it stopped the trial because of disappointing results in February 2016.
Now shareholders Ronin Trading LLC and SW Investment Management LLC want Peregrine out of the drug-development business. Collectively the second largest stockholders of Peregrine, with aggregate beneficial ownership of approximately 8.8%, Ronin and SW Investment issued a statement calling for the company to “immediately cease all clinical development activities … [and] begin a process to monetize its intellectual property, either through an outright sale or a contingent value right to a larger pharmaceutical firm that has the financial ability to underwrite further studies.” Furthermore, the statement said the company should focus on profitably growing its cash-generating biologics manufacturing operation Avid Bioservices Inc.
The shareholder group and Peregrine’s current chief executive and board now seem set to square off in a battle for control of the company in the fall.
Avid about Avid
Both sides agree the manufacturing business is promising. Avid generated revenue of $57.6 million for the fiscal year ended April 30, representing 30% revenue growth year-over-year, according to its 10-K filing with the Securities and Exchange Commission.
The audited 2017 revenue of $57.6 million was still short of guidance—between $60 million to $65 million—and the company guided lower for fiscal 2018—$50 million to $55 million—due in part to “decreases in demand from our largest customer,” it said in the SEC filing.
Peregrine Chief Executive Steven King said the company plans to split research and development from manufacturing and “actually have Avid be the company” by the end of the calendar year. The company had $0 revenue from its drug-development business in fiscal 2017.
“Avid is about 90% of our business, and that business can thrive with the appropriate staffing and a dedicated president and CEO as Avid grows organically and through acquisitions,” he said. Peregrine has announced that it plans to appoint a new president with contract development and manufacturing experience to lead Avid. It also said it intends to increase the size of its board of directors from four to seven members with that expertise.
Peregrine remains a public company following a 1-for-7 reverse stock split in July.
“My message is not everything is going down the tube,” King said, referring to Peregrine’s recent 20%, or 60 employee, workforce reduction from 319 full-time employees as of April 30. “That’s why we are doing this strategic analysis on how to get the best value out of two very distinct businesses [including] how do we maximize the value of that R&D portfolio.”
The job cuts—research and development staff cut by half to 11 employees, a 20% cut to 184 employees in its Avid division, and an 8% reduction to sales and administration, leaving 49 employees—are projected to generate between $3.7 million and $4.3 million in cost savings in fiscal 2018 and more than $7 million in annualized savings beginning in the 2019 fiscal year.
R&D
Peregrine management believes there’s still a strong research and development pipeline for bavituximab, a monoclonal antibody that inhibits tumor growth.
“The study nearly stopped [last February]. We followed up with patients, and what we found is a number of interesting bio markers that we could follow,” said King. He said results from a small subset of the 597 patients appear to benefit from bavituximab, with the median overall survival extended from six months to a year.
Peregrine is enrolling for three clinical trials: a phase one study for hepatitis C-associated hepatocellular carcinoma; a phase two and three study for glioblastoma, a type of brain cancer; and a phase two study for metastatic and recurrent head and neck cancer. National Comprehensive Cancer Network in Fort Washington, Pa., an alliance of 27 cancer centers in the U.S., provided a $2 million grant in support of the trials.
But the dissident shareholder group isn’t sold.
Peregrine’s spending in research and development is estimated to be over $300 million, according to Ronin and SW Investment in its letter to Peregrine stockholders. It says the company loses $30 million a year because of R&D spending. The letter also said that bavituximab produced disappointing results with other types of cancer, including breast cancer, hepatitis C-associated hepatocellular carcinoma and pancreatic cancer.
Skepticism
Peregrine began clinical development of bavituximab for the treatment of cancer in 2008. It has conducted over a dozen phase one or two studies on the drug’s efficacy to treat various cancers.
2012 turned out to be a rollercoaster ride for the company and shareholders. It announced positive phase two data for patients with nonsmall cell lung cancer in March. Patients treated with bavituximab plus carboplatin and parclitaxel demonstrated improved overall response rates, 25%, versus 23% in the control group, as well as delayed tumor progression or death by 6.7 months—a 0.3 month gain in comparison to the control group. Subsequent phase two data in May showed response rates and survival rates more than doubled.
The news shot the company stock up 70%. It reached a high of $5.39 per share on Sept. 21, to give Peregrine a market value of nearly $1 billion.
Three days later, Peregrine issued a press release warning of “major discrepancies in treatment group coding by an independent third-party vendor” that could have overstated the drug’s efficacy.
Shares plummeted to close at $1.16 per share on Sept. 24, a one-day decline of 78%.
On Sept. 26, Peregrine disclosed that the company received a written notice of default from lender Oxford Finance LLC, according to SEC filings. Oxford accelerated full repayment of the loan in light of Peregrine’s disclosure concerning the major discrepancies in the result from its cancer trial.
Peregrine’s stock declined further to $1.11 per share on Sept. 27.
The company’s shares recently traded at $3.08 per share following the reverse 1-for-7 split, for a $139 million market cap.
To criticism of bavituximab’s clinical prospects, King said its analysis of the data has shown that the drug is effective in extending patient lives. “The goal now is to run smaller research. I would envision licensing or [forming] partnering relationships where we would have a partner to pay for all those expenses,” he said.
He said Peregrine has many options when it comes to restructuring the research and development business, including a separate public or private company, a merger, or partnering with other companies.
New Directors
Shareholders Ronin and SW Investment said that before starting another clinical trial they would like new “director candidates … to undertake this review and run a monetization process [to provide] an independent and objective review of Peregrine’s clinical development activities.”
Ronin nominated three candidates for election to Peregrine’s board of directors at the company’s upcoming 2017 annual meeting of stockholders: Gregory Sargen, former chief financial officer and current executive vice president of corporate development of Cambrex Corp. in Rutherford, N.J., a company that provides products and services used in generic therapeutic development; Brian Scanlan, founder and managing director of the pharmaceutical bioservice advisory firm Freedom Bioscience Partners LLC; and Salid Zarrabian, an adviser to Redline Capital Partners SA, a Luxembourg-based biotechnology and pharmaceuticals-focused investment firm.
The vote and annual meeting should take place before the end of the year. Stephen White, who heads SW Investment, said prior meetings took place in October.
Ronin and SW Investment said the current board showed misalignment with stockholders. The three independent directors, Eric Swartz, Carlton Johnson and David Pohl, demonstrated “little-to-no interest with stockholders, no experience with contract manufacturing, track records of enormous stockholder losses and questionable public company dealings outside Peregrine,” the letter said. King is also a member of the board.
Swartz and Johnson have served as directors since 1999, and Pohl was added in 2004. They collectively own less than 0.22% of outstanding shares but earned a higher-than-average compensation.
Swartz, Johnson and Pohl each received average compensation of over $520,000 for each of the last five years per SEC filings. Ronin and SW Investment say directors at large pharmaceutical firms like Pfizer Inc., Merck & Co., Johnson & Johnson, Eli Lily & Co. and AbbVie Inc. average approximately $301,000.
White said he and John Stafford at Ronin are not activist investors trying to sell the company, nor are they nominating themselves to the board.
He added that the only way for the company to create value is to focus on Avid.
Growing Avid
White said Avid is an extremely attractive business in a growing market for biologic and biosimilar drugs—and that should be the company’s focus.
Peregrine’s footprint is currently comprised of 196,000 square feet of leased space in six adjacent buildings, including Franklin and Myford manufacturing facilities totaling 54,000 square feet. Its new Myford facility was commissioned last year to support greater volume and the latest single-use technologies, including two new 2,000-liter single-use bioreactors.
King said the upgrade allows Avid to continue to meet increasing demand in the future—the new bioreactors will bring total capacity within the Myford facility to over 9,000 liters. He added that business will expand its service offerings to provide antibody discovery and characterization services to attract to customers.
Avid offers full product lifecycle supports, including cell line development, assay development and testing, cell line and process optimization, and packaging. Its clients range from small to large drug companies, including Roche Holding AG in Basel, Switzerland and Shire PLC in Dublin, Ireland—via a relationship with Halozyme Inc. in San Diego.
