Small cap drug makers are at a unique time in industry history. Over the next three years, many of big pharma's patents are set to expire. As result, some investors perceive that big pharma's pipeline collectively is drying up. The industry is projected to lose tens of billions in market capitalization. Whether fair or not, I believe this may, in part, explain the recent decline in big pharma companies, such as Eli Lilly (NYSE:LLY), Pfizer (NYSE:PFE) and Merck (NYSE:MRK).
Due to these challenges, the big pharma companies have recently bought up some of their biggest competitors. For example, PFE acquired Wyeth (WYE), and MRK bought Schering Plough (SGP). Larger capitalized pharma and biotech companies have also bought up some of the smaller competitors. Some recent examples include: LLY acquired Imclone at or near the end of 2008, and Endo Pharmaceuticals acquired Indevus on January 6, 2009.
Industry consolidation is in full effect.
As result, the pool of both small and mid cap drug makers has shrunk dramatically. Here, the law of supply and demand applies. With a limited pool of small and mid cap drug makers and demand for new drugs to refill big pharma’s drying pipeline, select companies are seeing their share prices rising.
In my view, the best opportunities are found in small cap drug makers with products coming to market in the next 12 to 18 months or late-stage drug makers. Since late March, late stage drug makers have seen their stocks surge.
Spectrum Pharmaceuticals (NASDAQ:SPPI) has not one but two late-stage drugs up for approval in the next four months.
October 8 – The second big date is October 8. Here, SPPI is seeking approval for yet another cancer drug, Fusilev. Fusilev is also approved by the FDA for osteosarcoma or bone cancer, which SPPI obtained in early 2008. In 2009, Fusilev is indicated for colorectal cancer, which affects many more Americans than osteorsarcoma. Fusilev is already approved in Europe and abroad. Outside the US, sales of Fusilev, attributed to colorectal cancer, are approximately $200 million.
- Zevalin: Zevalin is a radio-immunotherapeutic that specifically targets and kills cancer cells, while leaving healthy cells intact. It was first approved in 2001 as a last resort or salvage treatment for refractory NHL.
- Non-Hodgkin’s lymphoma (NHL): NHL is a recurring cancer that affects over 60,000 Americans each year.
- April 28, 2008: Zevalin was approved for first-line consolidation use in Europe, the same setting Spectrum is seeking to get approved here in the US. Bayer Schering Pharma AG has the rights to and markets Zevalin in Europe and all countries outside the US.
- Consolidation Therapy: Consolidation therapy is administered to a patient following a response to first-line induction therapy, generally consisting of chemotherapy such as doxorubicin and in combination with rituximab. The aim of consolidation therapy is to rapidly improve a patient’s response, thereby extend the duration of the patient’s response, according to the press release issued by Bayer Schering Pharma AG on April 28, 2008. If approved, Zevalin will not compete with any treatments administered in induction therapy. It is also worth noting that Zevalin cannot be used as a maintenance treatment or second-line therapy.
- Variable: SPPI is hopeful that the FDA in approving the drug will discontinue the requirement of a bio-scan prior to, during and after treatment with Zevalin. The scan is no longer required in Europe. Some argue that the scan is waste of time and money for patients and an inconvenience for treating physicians. I anticipate the FDA will no longer require this scan.
- Benefits for Patients treated with Zevalin from Recent Phase 3 Trial
- Current Zevalin sales under the approved indication are approximately $20 million annually.
- Sales of Fusilev in Europe and abroad are $200 million.
- Current Fusilev sales under the approved osteosarcoma indication are approximately $38 million annually.