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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.

While SPPI is already up 250%+ YTD, I believe the show is just getting started.
July 2 – The first of two big dates SPPI has with regulators is scheduled for July 2. SPPI is seeking approval for its non-Hodgkin’s lymphoma (NHL) radio-immunotherapeutic, Zevalin. With approval, SPPI will market Zevalin as first-line consolidation therapy for NHL. In doing so, SPPI will finally make this effective treatment available to a greater number of patients, estimated near 28,000. Over the next 12 to 18 months, sales of Zevalin are highly likely to surge, which should translate into a big win for SPPI shareholders. I estimate Zevalin sales could reach $180 million during this time.

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 Facts

  • 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
(1) 87% of patients, who only received a partial response (PR) to induction therapy, obtained a complete response (NYSE:CR) or remission following treatment with Zevalin in the consolidation setting. Importan... hematologists and oncologists often use CR or remission after induction therapy as a surrogate for overall survival (OS). To those unfamiliar with NHL, this PR to CR benefit is significant.
(2) Zevalin patients also received a two-year progression free survival (NYSE:PFS) benefit, a benefit not enjoyed by those only treated with the standard of care. Importantly, Zevalin patients received the PFS benefit whether they initially received either a PR or CR following induction therapy.
(3) Zevalin was well accepted. This means, there were no clear safety concerns with Zevalin. For this reason, SPPI was not cited to visit with the ODAC panel or the FDA Oncology Drug Advisory Committee. This tells me, the FDA is comfortable with the data provided from the trial and that they (the FDA) believe Zevalin is safe.
Projections
Approximately 20,000 NHL patients receive first-line induction therapy each year and would qualify for consolidation treatment with Zevalin. Approxim... 8,000 NHL patients are treated under the salvage or last resort setting. The total patient pool estimated for both settings is 28,000. Zevalin, a one-time treatment, costs between $24,000 and $30,000.
Over the next 12 to 18 months, I estimate that at least 7,500 patients total from both settings, out of the 28,000 who are projected to be eligible, will opt to receive the Zevalin treatment. Under the salvage setting which Zevalin is currently approved, roughly 800 patients received the treatment last year (only 6,700 to go).
Annual Sales Projections for Zevalin
# Patients
Sales ($24K)
Sales ($30K)
5,000
$120 M
$150 M
7,500
$180 M
$225 M
10,000
$240 M
$300 M
15,000
$360 M
$450 M
SPPI Price Targets
Before July 2 – SPPI should retest at or near the July 2007 high of $7.88.
July 2 – Upon Zevalin approval on July 2, SPPI could trade as high as $20 with a market cap of $720 million based on 4x projected sales of $180 million (7,500 patients at $24,000).
  • Current Zevalin sales under the approved indication are approximately $20 million annually.
October 8 – Upon Fusilev approval on October 8, SPPI could trade as high as $31 with a market cap of $1.12 billion, based 4x projected sales of $100 million for Fusilev and $180 million for Zevalin.
  • Sales of Fusilev in Europe and abroad are $200 million.
  • Current Fusilev sales under the approved osteosarcoma indication are approximately $38 million annually.
Post October 8 – With both approvals, a premium price may be warranted for SPPI as it could be targeted for acquisition.
CONCLUSION
SPPI is thinly traded with roughly 36 million shares. The company has approximately $80 million in cash. Shares are currently trading 3x their cash value. Without either approval this year, annual revenue is already expected to be near $58 million.
At $5.35, SPPI is terribly undervalued.
Disclosure: Long SPPI.
Source: Two Possible Upcoming Approvals for Spectrum Pharmaceuticals