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 , 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

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 Oncothyreonsuffered 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 canceled its program after being unable to find enough patients to enroll in trials, leading to a 27% loss of value.

Clovis Oncology is tackling NSCLC next after its metastatic pancreatic cancer drug was no more effective in extending overall survival than Eli Lilly's Gemzar, which nearly cut its stock in half, while Infinity Pharmaceuticals 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 gaining FDA approval with its therapy Abraxane and Pfizer's 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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The article Are Short-Sellers Onto Something at Peregrine? originally appeared on Fool.com.

Fool contributor Rich Duprey owns shares of Pfizer. The Motley Fool has no positions in the stocks mentioned above. 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.

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