Washington Editor

The Department of Defense surprised Peregrine Pharmaceuticals Inc. Friday by abruptly halting negotiations to finalize a five-year contract, potentially worth $44.5 million, with the military's Defense Threat Reduction Agency (DTRA).

Shares of Tustin, Calif.-based Peregrine (NASDAQ:PPHM) dropped 15.2 percent Monday, or 7 cents, to close at 39 cents.

The contract, which was expected to become final in early 2008, involved a proposal to investigate Peregrine's monoclonal antibody bavituximab and other antiphosphotidylserine antibodies as potential therapies to treat hemorrhagic fever viruses, such as Ebola and Marburg, which can damage the vascular system and the body's ability to regulate itself.

Generally, there is no cure or treatment, other than supportive care, for those diseases, which can sometimes be deadly. With the exception of yellow fever and Argentine hemorrhagic fever, no vaccines exist that can protect against hemorrhagic fever viruses, according to the Centers for Disease Control and Prevention.

Although Congress in November apparently had sliced $100 million from DTRA's 2008 budget for its Transformational Medical Technologies Initiative (TMTI), which is focused on developing medical countermeasures to emerging biological warfare threat agents, DTRA auditors up until late last week had led Peregrine to believe its contract still was viable.

"Just two days ago, government auditors spent almost an entire day at our offices working diligently to complete their third audit needed before this contract award could be finalized," said Paul Lytle, Peregrine's chief financial officer. "We are very disappointed and shocked at this unexpected development."

DTRA recently had asked the firm to accelerate the timeline for the company's antiviral studies and to request additional funds under the TMTI program, Lytle said in a statement issued late Friday.

Peregrine noted that the White House Office of Management and Budget (OMB) in an October statement opposed the $100 million reduction to the TMTI program.

"TMTI represents an essential element of our efforts to develop countermeasures against new biological threats, such as those that would be engineered in a laboratory or naturally occurring agents . . . that could have a catastrophic impact on our troops," OMB stated.

The $100 million cut, the budget office argued, would impede the military's effort to combat biological threats "for which we do not currently have countermeasures."

DTRA, Peregrine said, had "worked very hard to find alternative sources of funding for this project, but were unable to do so in the required timeframe." The military encouraged the company to reapply when new funding initiatives become available, the firm added.

"We appreciate the continued interest expressed from the DTRA in our bavituximab program for viral hemorrhagic fevers, and hope to be able to pursue other government funding opportunities when they become available,""said CEO Steven King.

DTRA spokeswoman Cheri Abdelnour said her agency could not disclose what other firms may have been affected by the cuts to TMTI's budget, which was slashed from $247 million to $147 million for fiscal year 2008.

While Peregrine was disappointed by the recent turn of events of its DTRA contract, King insisted it had "no impact" on the firm's development program for bavituximab as a therapy to treat cancer and hepatitis C.

The antibody targets and binds to a basic component of the cell structure called a phospholipid that is exposed only on the surface of tumor blood vessel cells or on cells infected with certain viruses and has been shown to inhibit tumor growth and development and stimulate the body's immune defenses to destroy viruses and infected cells.

Peregrine has completed two bavituximab Phase I monotherapy trials in patients with chronic hepatitis C infection. The company currently is conducting an open-label, dose-escalation study in up to 24 patients chronically infected with hepatitis C and HIV. The antibody also is in Phase II trials in solid cancers.

The rest of the company's pipeline includes Cotara, an antibody attached to a radioactive molecule, which is in a Phase II study in glioblastoma multiforme, a deadly form of brain cancer.

Peregrine last week reported a net loss of $6.2 million for the second quarter of fiscal year 2008 compared with a net loss of $5.1 million for the same period last year. The firm said the increased net loss primarily reflected increased investments in research and development as the company advanced its clinical programs for bavituximab and Cotara.

Total revenues for the quarter increased to $1.89 million compared with $684,000 for the same quarter last year, Peregrine reported. The company said it had over $26 million in cash and cash equivalents compared with $16 million at 2007 fiscal year end April 30.