Can Spectrum Pharmaceuticals Regain Investor Trust?

On March 13, 2013, Spectrum Pharmaceuticals Inc. (NASDAQ:SPPI) plummeted as much as 38%. The market reacted to Spectrum's forecast that the company would experience a dramatic drop in annual revenue due to hospitals purchasing more of a generic colorectal cancer drug, leucovorin calcium, rather than the company's top selling drug, Fusilev (levo-leucovorin).

Fusilev sales account for about 80% of Spectrum's drug sales. Fusilev is labeled in adults for methotrexate rescue in osteogenic sarcoma, to reduce toxicity in patients with impaired methotrexate elimination, and to reduce toxicity after inadvertent folic acid antagonist overdose. It is also labeled for palliative treatment of colorectal cancer in combination with fluorouracil. In pediatric patients, Fusilev is labeled for methotrexate rescue in osteogenic sarcoma.

Leucovorin is produced by Bedford Laboratories, a division of Ben Venue Laboratories, which is a subsidiary of Boehringer Ingelheim, Sagent Pharmaceutical (NASDAQ:SGNT), Teva Pharmaceuticals (NYSE:TEVA), and APP Pharmaceuticals, a division of Fresenius Kabi (NASDAQ:APCVZ).

According to the American Society of Health-System Pharmacists (Pending:ASHP), an organization that monitors drug shortages, there are several reasons for the leucovorin shortage. A March 21, 2013, ASHP update indicates that Teva has a leucovorin shortage due to manufacturing delays, APP and Sagent are short on leucovorin due to increased demand, and that Ben Venue/Bedford has been operating under a consent decree with the U.S. Food and Drug Administration (FDA) since late January 2013. In July 2012, Bedford Laboratories issued a nationwide recall of three lots of leucovorin calcium injection, due to the discovery of visible crystalline particulate matter in a small number of vials. However, Spectrum had Fusilev readily available.

The supply of generic leucovorin has increased since Sagent began selling the drug in October 2012 after receiving FDA approval to market the drug one month earlier.

On February 21, 2013, Spectrum reported $267.7 million in revenue for the fiscal year ended December 31, 2012. Fusilev sales for the year were $204.3 million. The company noted that, "Fusilev sales volume increased significantly year-over-year, as well as in the fourth quarter compared to the previous quarter. However, 4Q Fusilev revenues saw a decrease compared to 3Q due to greater gross-to-net adjustments, mostly attributable to an increase in the customer mix that receives government mandated rebates, per 340B regulations." The company stated that continuing to gain Fusilev market share, grow revenue, and initiate additional clinical studies to expand indications were "key catalysts" for 2013.

However, on March 12, 2013, Spectrum "updated its 2013 outlook for the company." Spectrum stated that based on recent conversations with customers the company now expects that Fusilev sales would be approximately $80 to $90 million for the 2013 fiscal year. Spectrum claimed that "while hospital sales are shifting to generics, the end-user demand for Fusilev remains stable in the clinics, and the company continues to anticipate solid demand in this segment in 2013."

Spectrum believes that "the majority of the impact from the change in ordering patterns will be reflected in the first half of 2013 and expects to return to a run-rate that more closely aligns with end-user demand by the end of the year."

Spectrum anticipates total company revenues in the range of $160 to $180 million for the full-year 2013.

After the news, Spectrum shares plummeted on extremely high trading volume exceeding 22 million shares. The company's market cap decreased from 740.08M on March 12, 2013 to 463.82M the next days. A flurry of lawsuits ensued.

At least eight class action securities fraud lawsuits have been initiated against the company and several of its officers and directors for alleged violations of the Securities Exchange Act of 1934. The suits claim that Spectrum officials misrepresented or failed to disclose the negative impact that the increasing availability of generic leucovorin would have on the company's share price.

The general crux of the suits is that Spectrum made "false and misleading statements" by "dismissing" or "failing to disclose" concerns that Fusilev sales would be adversely affected by increased supplies of generic leucovorin, and that the advantages of Fusilev over leucovorin would not be sufficient for clinics and hospitals to continue to choose the more expensive Fusilev once leucovorin was available in larger quantities. The litigation alleges that Spectrum officials knew that when the availability of leucovorin increased, the company would not be able to sustain its business outlook and revenue projections.

The law firms were looking for an individual who made a sizable purchase of Spectrum stock from August 8, 2012, through March 12, 2013, who would like to serve as lead plaintiff in the lawsuit.

Whistleblowers with inside information were advised that if they report original information leading to a successful enforcement action by the U.S. Securities and Exchange Commission (SEC), they may be able to receive rewards totaling up to 30% of any successful recovery made by the agency.

Since the March 12 announcement, Spectrum shares have hovered in the $7 to $8 range. The stock reached a 52-Week Low of $6.92 on March 21, 2013.

There is more to Spectrum than Fusilev. In addition to Fusilev, Spectrum markets Folotyn (pralatrexate) and Zevalin (ibritumomab tiuxetan) and has several other drugs in development.

Folotyn

Spectrum acquired Folotyn with the September 2012 acquisition of Allos Therapeutics. In 2012, Folotyn sales were $20.4 million (for the four months since Spectrum acquired the drug).

In September 2009, the FDA approved Folotyn (pralatrexate), the first treatment for a form of cancer known as Peripheral T-cell Lymphoma (PTCL), an often aggressive type of non-Hodgkin's lymphoma.

Folotyn was approved under the FDA's accelerated approval process, which allows earlier approval of drugs that meet unmet medical needs. It is approved for patients who have relapsed, or have not responded well to other forms of chemotherapy.

Lymphoma is a cancer of the lymphatic system, which is part of the immune system. There are many types of lymphoma: one type is called Hodgkin's disease, and the rest are called non-Hodgkin's lymphomas. PTCL involves a type of white blood cell called T-cells. It is a relatively rare disease, occurring in less than 9,500 patients each year in the United States.

The FDA explains that when studying a new drug it can take time to learn whether a drug actually provides real improvement for patients, such as living longer or feeling better. This real improvement is known as a "clinical outcome." In 1992, the FDA instituted accelerated approvals which allow earlier approval of drugs based on a surrogate endpoint, a laboratory measurement or physical sign that can serve as an indirect or substitute measurement for clinical outcomes.

In the case of Folotyn, the FDA approved the drug based on evidence that it reduces tumor size because tumor shrinkage is considered reasonably likely to predict a clinical benefit such as extending the survival of cancer patients. Tumor shrinkage was seen on imaging scans in one study. Of 109 patients with PTCL in the trial, 27% had reduction in tumor size.

Spectrum plans to conduct research to determine if Folotyn has synergies with other drugs, including possible clinical studies for combined treatment with Fusilev.

Zevalin

On January 25, 2012, Spectrum announced that the company had entered into an agreement to pay Bayer Healthcare (OTCPK:BAYRY) $24.7 million to acquire licensing rights to market Zevalin (ibritumomab tiuxetan) outside of the United States. Zevalin is currently approved in more than 40 countries outside the United States for the treatment of follicular B-cell non-Hodgkin's lymphoma.

"The global market for Zevalin is several times larger than the US, with more than 350,000 cases of non-Hodgkin's lymphoma diagnosed every year. Since acquiring the U.S. rights to Zevalin in 2008, we have successfully reversed the declining sales trajectory and nearly tripled 2008 sales. We hope to achieve similar milestones outside the U.S. with our focused sales and marketing efforts," stated Spectrum's Chairman, CEO and President Rajesh C. Shrotriya, MD, stated.

Zevalin is a treatment of patients with previously untreated follicular non-Hodgkin's Lymphoma (NHL), who achieve a partial or complete response to first-line chemotherapy. Zevalin is also indicated for the treatment of patients with relapsed or refractory, low-grade or follicular B-cell non-Hodgkin's lymphoma.

Zevalin is a CD20-directed radiotherapeutic antibody. The Zevalin therapeutic regimen consists of two components: rituximab, and Yttrium-90 (Y-90) radiolabeled Zevalin for therapy. The Zevalin therapeutic regimen is a form of cancer therapy called radioimmunotherapy. Zevalin builds on the combined effect of a targeted biologic monoclonal antibody augmented with the therapeutic effects of a beta-emitting radioisotope.

Zevalin was initially approved in February 2002 for the treatment of follicular NHL patients who had recurred or progressed after other systemic therapies. In September 2009, Zevalin was approved as part of the first-line setting based on results from a 414-patient study that showed a 54% decreased risk of progression with Zevalin. A 130-patient multicenter, randomized, open-label clinical study comparing the efficacy of the Zevalin therapeutic regimen versus rituximab in patients with relapsed or refractory low-grade or follicular NHL showed that Zevalin therapeutic regimen produced an overall response rate of 83% compared to 55% with rituximab.

Spectrum plans to continue its Phase III ZEST clinical trial in patients with Diffuse Large B-Cell Lymphoma (DLBCL), as well as the International SPINOZA (IIS) trial in patients with relapsed DLBCL who receive autologous stem cell transplantation (ASCT), and the RoZetta study, a head-to-head evaluation of Zevalin consolidation treatment versus rituximab maintenance in previously untreated patients with follicular NHL.

In 2012, Zevalin sales were $30.3 million (for the nine months since acquisition).

Spectrum has two late stage drug candidates. Belinostat is an HDAC inhibitor in late-stage clinical development for peripheral T-cell lymphoma, and other solid tumors.

The company is also developing apaziquone, a synthetic bio-reductive agent being investigated in the treatment of non muscle-invasive bladder cancer. Both drugs are being developed under Special Protocol Assessment (SPA) by the FDA.

Belinostat

In February 2010, Copenhagen, Denmark-based Topotarget (OTC:TPTGF) outlicensed North American and Indian rights on belinostat to Spectrum. Under the terms of the agreement, Spectrum Pharmaceuticals made an upfront payment of $30 million and took over 100% funding of the Peripheral T-Cell Lymphoma (PTCL) PTCL BELIEF trial. Topotarget is eligible to receive milestone payments upon successful achievement of certain development and commercial milestones of up to $320 million as well as royalties on sales in addition to the upfront payment.

The Phase II BELIEF trial is evaluating the efficacy and safety of intravenous belinostat for the treatment of patients with relapsed/refractory PTCL.

According to the Lymphoma Research Foundation, lymphoma is the most common blood cancer. The two main forms of lymphoma are Hodgkin's lymphoma and non-Hodgkin's lymphoma (NHL). Lymphoma occurs when lymphocytes, a type of white blood cell, grow abnormally where they typically reside in the lymph glands. The body has two main types of lymphocytes that can develop into lymphomas: B-lymphocytes (B-cells) and T-lymphocytes (T-cells). Peripheral T-cell lymphoma (PTCL) comprises a group of rare and aggressive NHLs that develop from mature T-cells. PTCL accounts for approximately 10 to 15% of all NHL cases in the United States, and projections for annual cancer incidences point to 15,500 new cases of PTCL in the United States.

On December 21, 2012, Spectrum announced surpassing the primary endpoint in the BELIEF trial. Belinostat surpassed an objective response rate (ORR) of at least 20% in these patients, the study's primary efficacy endpoint as established under a Special Protocol Assessment (SPA) agreement with the FDA. The BELIEF trial safety evaluation showed belinostat had an acceptable safety profile in patients with relapsed/refractory peripheral T-cell lymphoma (R/R PTCL), including patients who have received a previous allogeneic or autologous stem cell transplant.

Spectrum expects to file its new drug application (NDA) for belinostat in mid-2013 and anticipates potential commercialization in 2014, subject to FDA approval.

Apaziquone

On January 31, 2013, Spectrum announced the company had reacquired development and commercialization rights for apaziquone in the United States, Europe and other territories pursuant to an agreed-upon restructuring of Spectrum's collaboration with Allergan, Inc. (NYSE:AGN). In exchange, Allergan will receive a royalty on future revenue.

Apaziquone is an anticancer agent being developed for the treatment of non-muscle invasive bladder cancer (NMIBC) as a single instillation following transurethral resection of bladder tumor (TURBT).

NMIBC is a form of bladder cancer localized in the surface layers of the bladder that has not spread to the deeper muscle layer. Approximately 70% of all patients newly diagnosed with bladder cancer have NMIBC. More than one million patients in the United States and Europe are estimated to be affected by the disease, which is treated predominantly by urologists. According to Spectrum, professional urology associations and the National Comprehensive Cancer Network (NCCN) Guidelines recommend instillation of a cytotoxic agent following TURBT for NMIBC. However, in the United States, there are no FDA-approved agents for this indication.

Spectrum also announced that company officials met with the FDA to discuss the results from the company's Phase III apaziquon clinical trials.

Spectrum conducted two multi-center, randomized, double-blind, placebo controlled, Phase III pivotal trials of single dose intravesical apaziquone to be instilled into the bladder in the immediate post-operative period after surgical resection of low-risk, non-muscle invasive bladder tumors. The primary endpoints were the rate of tumor recurrence at two years between apaziquone and placebo.

In April 2012, Spectrum announced that these two trials were analyzed individually and did not meet their primary endpoint of a statistically significant difference in the rate of tumor recurrence at two years between the two arms. However, Spectrum contends that an analysis of the pooled data from both studies showed a statistically significant treatment effect in favor of apaziquone in the primary endpoint of the rate of tumor recurrence at two years and in a key secondary endpoint, time to recurrence.

Based on its discussions with the FDA, Spectrum has agreed to conduct one additional Phase III clinical trial after consulting with the FDA on its design. The company anticipates that it will file a new drug application (NDA) for apaziquone in 2014.

Spectrum has three drugs in the Phase II stage of development: Ozarelix, for the treatment of prostate cancer, SPI-2012 for chemotherapy induced neutropenia and lucanthone, a chemotherapy sensitizer in the treatment of recurrent, malignant brain tumors.

The company also has three drugs in the Phase I stage of development: SPI-014, used in the treatment of hyperphosphotemia in end stage renal disease (ESRD), SPI-1620, an adjunct to chemotherapy, which has just completed Phase I, and MTRN-2696 for the treatment of solid tumors.

Other drugs in development include Ortataxel, for the treatment of taxane-refractory tumors, and SPI-205 used in the treatment of neuropathy.

On March 14, 2013, Spectrum announced it had gained global development and commercialization rights to Ligand Pharmaceuticals' (NASDAQ:LGND) Captisol-enabled, propylene glycol-free (PG-free) melphalan.

Captisol-enabled melphalan is currently in a pivotal trial for use as a conditioning treatment prior to autologous stem cell transplant for patients with multiple myeloma.

Spectrum is assuming the responsibility for the ongoing pivotal clinical trial and will be responsible for filing a new drug application with the FDA, which is anticipated in the first half of 2014.

"Captisol-enabled melphalan is designed to meet the need for a formulation of melphalan that is free of propylene glycol, which has been associated with renal and cardiac side effects. The Captisol technology may allow longer duration of administration and slower infusion rates, potentially enabling a higher dose intensity of pre-transplant chemotherapy to optimize efficacy. We look forward to rapid progress of the program," Shrotriya stated.

The use of the Captisol technology to reformulate melphalan is anticipated to allow for longer administration durations and slower infusion rates, potentially enabling clinicians to safely achieve a higher dose intensity of pre-transplant chemotherapy.

In December 2012 Ligand announced the initiation of a pivotal trial of Captisol-enabled melphalan. This multi-center trial is evaluating safety and efficacy in 60 patients, and is intended to confirm the results from an earlier Phase II study demonstrating that the Captisol-enabled melphalan formulation showed acceptable safety findings, and met the requirements for establishment of bioequivalence to the current commercial intravenous formulation of melphalan, which is marketed (sold by GlaxoSmithKline (NYSE:GSK) as Alkeran for Injection.

Multiple myeloma is a cancer of plasma cells, a type of white blood cell present in the bone marrow. In multiple myeloma a group of plasma cells (myeloma cells) becomes cancerous and multiplies, raising the number of plasma cells to a higher-than-normal level. There are an estimated 20,000 new cases of multiple myeloma in the United States each year, with an incidence of new cases increasing by approximately 1.7% per year.

According to Spectrum, the current intravenous melphalan market is approximately $130 million annually, with predominant use in stem cell transplants. The rate of autologous stem cell transplants for patients with multiple myeloma is growing by approximately 3.3% annually.

Spectrum's Future

Is now a good time to invest in Spectrum? After all, the stock is down approximately 40%. The company has three FDA approved products, two late stage drugs, and eight other drugs in development. As of December 31, 2012, the company had approximately $140 million in cash. The company has been profitable for the past two years and even pays a 2% dividend.

Fusilev represents 80% of the company's drug sales. Last year, Fusilev unit volume grew 56% and 33% in dollar sales, but that amazing growth was largely due to the leucovorin shortage, and shortages do not last forever.

In February, the company forecast that 2013 Fusilev sales would exceed the $268 million the drug generated in 2012. In March, the company "updated" those figures stating that 2013 Fusilev sales would be in the $160 million to $180 million range. How could the company make such a significant error when Spectrum's future is largely dependent on Fusilev's future? Others are asking why have Spectrum insiders, including CEO Rajesh Shrotriya, sold so many of their Spectrum shares over the past six months?

Spectrum executives will probably have to answer those questions and many others during lawsuit depositions and a probable SEC investigation.

The most important question the company must address is, "How can Spectrum Pharmaceuticals regain investor trust?"

As the old saying goes, "It takes years to build trust, but only seconds to destroy it."

Disclosure: I am long SPPI, AMGN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.