Peregrine Pharmaceuticals (NASDAQ:PPHM) just put out first-quarter fiscal year financials and, based on the headline figures, the company has taken a bit of a hit on the news. Peregrine shares go for around $3.10 a piece right now, down more than 44% on July highs in and around $5.58 a share.
Regular readers will know that this is one that we have covered on a few times over the last 12 months and, against a backdrop of negative market sentiment, it’s one that we have repeatedly suggested might be undervalued and that – long-term – could be a very rewarding exposure.
The latest action fails to validate this thesis, but for us, that’s not important right now. Instead, we are looking at it from this perspective: the farther this one falls, as weighed on by negative sentiment and market misinterpretation of the company from an operational point of view, the larger the divergence between market value and inherent value and – by proxy – the larger the potential upside when the company finally rebalances.
Why we so sure about this one?
For those not familiar with Peregrine, the company is a biotechnology stock that is basically split into two parts. The first is a research and development arm that is currently trying to bring an oncology drug called bavituximab to market, but that hasn’t had much luck in doing so over the last 12 months on the back of a failed phase 3 trial in non–small cell lung cancer (NSCLC). The second is a contract manufacturing organization (CMO) arm that manufactures and supplies a whole host of different drug types to third-party pharmaceutical companies.
This time last year, the research and development arm was the primary focus. As the company itself put it in the most recent conference call, previously, Peregrine was a research and development biotechnology company that also operated an additional manufacturing arm. Fast forward 12 months, however, and the impetus has shifted considerably. Right now, the company is a contract manufacturing entity that has a research and development arm running concurrently to its primary manufacturing operations.
To offer some perspective on the size of the manufacturing arm, the company generated $27 million in revenues from its manufacturing operations during the fiscal first quarter. Revenue guidance for the full fiscal year is expected to be between $50 million and $55 million.
This is a company that currently has a market capitalization of just $130 million, meaning it’s valued at just two times revenues.
Going forward, and near term, we also have a potential major catalyst set to hit press with regards to the research and development arm. The company outlined in its most recent conference call that it intends to find a partner that confirmed the analysis of a subset of data from the above-mentioned failed phase 3 trial and – in turn – can help Peregrine advance bavituximab elongates development pathway and towards commercialization.
We don’t yet know who this partner might be and from the tone of the conference call it seems that management isn’t sure yet either, but, if Peregrine can secure an injection of upfront capital and a commitment from a larger company to help it carry bavituximab forward, it will no doubt help ease sentiment surrounding the stock and should also serve to help realign market focus towards the manufacturing operation that is playing such a crucial role in the company’s growth right now.
Cash on hand as of the end of July this year came in at a little over $37 million, which, when combined with the revenues derived from the manufacturing operation, pretty much completely negates any essential for near-term dilution.
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Disclosure: We have no position in PPHM and have not been compensated for this article.