Peregrine crashes to earth after loan default

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Just when Peregrine Pharmaceuticals thought things could not get much worse they did, with the disclosure that the recent phase II data snafu with its lead project, bavituximab, had led to a breach of a recently signed loan agreement.

This default resulted in the entire $15m loan tranche, plus interest and a $1m termination fee, having to be repaid, and has left the beleaguered company with barely six month’s cash in the bank. Investors might also question why no mention had been made of the notice of default, received on September 24, until an after-hours regulatory filing two days later, during which time the company’s stock had performed a 43% dead-cat bounce. Today they were 26% lower at $1.23.

Risky money

The issue highlights the dangers of resorting to debt to finance loss-making biotech companies, which by their very nature have unstable and highly risky business models. Despite this, several banks have sprung up in recent years providing just this service to the sector – naturally with deal terms to match the risk.

Peregrine’s loan for up to $30m from Oxford Finance, MidCap Financial and Silicon Valley Bank had been effected on August 30, at which point the $15m tranche was paid out. The remainder was payable if, by the end of March 2013, the company reported positive overall survival data in the second-line NSCLC study of bavituximab as well as completing a positive end-of-phase-II meeting with the US FDA.

The trial did indeed report a stunningly positive overall survival benefit, and so strong were the data that questions started to be asked as to whether they were real. Sure enough, two weeks later it emerged that major discrepancies had been discovered at a third-party contractor, rendering the study null and void (Peregrine’s bavi dream turns into a nightmare, September 25, 2012).

Lenders take umbrage

On this news Peregrine’s lenders took umbrage and served the company with a notice of default. Although the precise nature of the breach is not known, according to the loan’s terms possible default events included breaches of representations, warranties or covenants.

Nevertheless this hardly seems to matter now given that the company immediately accepted that it was in default, and repaid the loan in full on September 25. More relevant is Peregrine’s current cash position, which stood at $19m at the end of July, but given the last quarter’s costs, and the loan set-up and termination fees, must now be significantly lower.

The company said cash would now last only to the end of its fiscal year in April 2013. After the markets closed yesterday Peregrine’s stock fell 25% to $1.25 a share. Barely six months ago the shares had languished below $1, and the company had been threatened with delisting from Nasdaq.

The shares had crashed from $5.37 to $1.16 on news of the data discrepancies on September 24, but then staged a remarkable comeback to close at $1.66 yesterday; no doubt to some investors’ chagrin, the company at that point was already in possession of the notice of default and had terminated the loan a day earlier, but did not file the announcement until after yesterday’s market close.

What now?

It is hard to see which way Peregrine can now turn. Although only one study of bavituximab has been tainted, in terms of sentiment the entire project will almost certainly be regarded as a toxic asset, and finding a licensee for it is highly unlikely. Peregrine does have in place two shelf registrations to raise up to $176m in equity, but actually doing such a deal would depend on market appetite.

Indeed, if the company could not get an equity raise away when its stock rose 90% in five days after the first data release, it is hard to see it doing so now. The third, least favourable, option is a fire sale of what remains of the company’s assets.

Unless management can somehow pull off a miracle, a fresh delisting notice from Nasdaq might now be the least of Peregrine’s problems.

To contact the writer of this story email Jacob Plieth in London at jacobp@epvantage.com

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