Investors are scrutinizing Peregrine Pharmaceuticals ( PPHM ) after the company finally addressed the issues with the phase II data for the lung cancer treatment bavituximab publicly.

The concerns were initially brought up in September 2012, and if you remember, they sent the stock into a death spiral from $5.37/share to $1.16/share (almost an 80% drop) in a single trading session. Investors were in the dark about the situation, which kept PPHM well below $2/share until the company reported the results of an internal investigation on January 7th.

Apparently, the data problems were limited to the 1 mg bavituximab arm, which implies that the 3 mg bavituximab related data is still good. This relieved Peregrine investors enough to move the stock about 80% higher, although a few dip buyers have already decided to sell on the news. This is also why the stock dropped 4.12% the day after (January 8th, 2012) on abnormally high volume.

This suggests that confidence in the company and bavituximab is still quite low - especially since the company is still worth about half as much as it was right before the bad news hit. What can resolve the situation?

As pessimistic as the market is (still), Peregrine believes that the existing, untainted bavituximab phase II data is sufficient to progress the drug into phase III trials after some discussion with the FDA. While I'm skeptical that this will actually happen due to the study's design, there's little doubt that such a victory (if it happened) would send PPHM soaring towards it's old 52-week high of $5.50/share again.

Other than the poor execution of the phase II trial, I don't see anything wrong with bavituximab itself. The drug seems to result in substantial improvements in overall survival for non-small cell lung cancer (NSCLC) patients. NSCLC represents about 85% of all lung cancer cases, and gets diagnosed in about 226,000 patients every year. The disease results in roughly 160,000 deaths every year.

There are a good number of NSCLC treatments in clinical development today, but bavituximab was one of the more promising ones. The drug and its parent company are certainly salvageable, although the recent phase II trial may not be. Only time will tell.

I think that investors who are willing to hold PPHM on a multi-year timeframe should seriously consider the stock if we find out that the drug cannot progress to phase III trials this year. While the initial disappointment could lead to intense selling in the short run, the damage to bavituximab's future prospects would probably be overstated.