Spectrum Pharmaceuticals: Undervalued Growth Company with Strong Late-Stage Pipeline 19 comments
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With two potential approvals coming up in the next 120 days, Spectrum Pharmaceuticals (Nasdaq: SPPI) appears to be a hidden gem.
APPLES TO APPLES
Investor’s Business Daily bases its rankings on the relationship that one company has with other companies within the same industry. In my June 12 article, I indicated the company could likely generate $280 million in annual revenue within the next 12-18 months upon approval of both the company’s cancer drugs Zevalin and Fusilev. The table below is a list of other drug makers who are generating annual revenue between $230 and $300 million – comparable to SPPI’s projected $280 million. Please note each company’s current market cap as it relates to annual revenue.
Company | Last | Market Cap | P/E | Annual Revenue | Annual Income |
BioMarin Pharmaceutical (Nasdaq: BMRN) | 14.79 | 1.48B | 142.25 | 296.49 | 30.83 |
PDL BioPharma (Nasdaq: PDLI) | 7.79 | 930.66M | 5.77 | 294.27 | 238.39 |
United Therapeutics (Nasdaq: UTHR) | 83.92 | 2.22B | - | 281.50 | -42.79 |
Alexion Pharmaceuticals (Nasdaq: ALXN) | 38.71 | 3.18B | 64.49 | 259.10 | 33.15 |
Techne (Nasdaq: TECH) | 62.93 | 2.34B | 22.48 | 257.42 | 103.56 |
Regeneron Pharmaceuticals (Nasdaq: REGN) | 16.58 | 1.33B | - | 238.46 | -82.71 |
Data Source: Google Finance
PIPELINE
Variations in market cap are most likely due to the strength of the underlying drug maker’s pipeline. SPPI prides itself on having a risk-reduced pipeline, which primarily consists of cancer drugs. In this article, I would like to highlight the company’s other two late-stage products, Fusilev and Eoquin. Please note that all information and data below was presented by SPPI at the 8th Annual JMP Securities Research Conference on May 21, 2009, which should still be available at the company’s website.
Fusilev®
Fusilev was launched in late 2008 and approved in the US for the treatment of osteosarcoma, a form of bone cancer, in February 2008. Post US launch, sales ramped up well. In the first quarter of 2009, Fusilev sales were about $9.4 million. With approval of the colorectal cancer indication, the company believes they will be able to market the drug more effectively.
Fusilev has been approved and used to treat colorectal cancer for over a decade in Europe and Japan. Outside the US, Fusilev is marketed by Wyeth (NYSE: WYE) and Takeda and brings in approximately $200 million in annual revenue.
Colorectal Cancer: A generic version of leucovorin is widely used in the US and typically prescribed in doses of 500 mg. Leucovorin or is most often used in conjunction with 5-FU a common treatment for colorectal cancer.
While the generic version currently prescribed to patients in the US is an inactive isomer, Fusilev is a pure active isomer of leucovorin.
Pure Isomer (Fusilev) v. Inactive Isomer (generic leucovorin): The inactive isomer tends to compete with the active isomer and leads to more variability of biological outcome. This means, patients tend to react to the inactive isomer version (generic leucovorin) with more variability. Such variability is not as noticeable in the pure isomer version (Fusilev).
Head to Head Study: A study comparing equivalent doses of Fusilev and generic leucovorin indicated there was a statistically significant reduction in toxicity with Fusilev. The results showed there was nearly a complete reduction in severe grade 3 and 4 toxicities in patients treated with Fusilev. It is worth pointing out that Fusilev is prescribed in 250 mg doses, half that of generic leucovorin.
Due to the benefits of less variability and reduced toxicity, Fusilev should be preferred over the existing generic version with more variability and increased toxicity.
Over the next 12-18 months, I projected that sales of Fusilev under both indications will very likely hit $100 million.
Eoquin®
Eoquin is a phase 3 drug indicated for bladder cancer.
Bladder cancer is a recurring cancer that is currently treated surgically via trans-urethral surgery. Approximately 235,000 trans-urethral surgeries are performed each year. Nearly 80% of bladder cancer patients recur to higher risk disease or with high frequency.
Eoquin attacks the primary reasons for early recurrence of bladder cancer:
-- It tends to kill remaining free-floating cells post surgery as well as portions of the lesions which treating physicians may miss during surgery.
-- It also addresses any undiagnosed or undetected [small] lesions not removed during surgery.
Phase 3 full enrollment or 1400 to 1600 patients is expected by year-end 2009. Currently, there are over 1000 patients in the study. Complete data from the first phase 3 trial is expected by early 2012.
Another study in BCG Failure patients is also ongoing. These patients will receive multiple treatments over a two-year period.
Some analysts have estimated sales of Eoquin could peak at or near $1 billion annually. SPPI has a collaboration with Allergan (NYSE: AGN) to market Eoquin. Under the agreement, SPPI could receive up to $300 million in milestone payments from AGN. To date, SPPI has already received around $41 million from AGN for the completion of the ongoing phase 3 trial. The sentiment I have received from several shareholders is that Eoquin has blockbuster potential as there is no comparable drug to treat bladder cancer patients. With 235,000 patients annually, I have to agree.
CONCLUSION
I reaffirm my price target of $31 for SPPI over the next 12-18 months. At $31, SPPI will retain a market cap of $1.12 B. Go back to the top and review the table of comparable companies. As it relates to market cap, I found my price target to be fair and reasonable when compared to the market caps of other companies similarly situated.
July 2, I expect SPPI will be successful in obtaining approval for Zevalin as first-line consolidation therapy for non-Hodgkin’s lymphoma.
October 8, I also expect SPPI will receive approval for Fusilev to treat colorectal cancer.
As of yesterday’s close of $5.87, SPPI remains undervalued.
Disclosure: Long SPPI
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This article has 19 comments:
www.thestreet.com/stor...
It is important to do your own due diligence before you invest..
On Jun 19 09:15 AM thedivot wrote:
> You might want to read this blog article from The Street. SPPI is
> the 4th company to try and make money on Zevalin so make sure you're
> comfortable with the risk if you invest.
>
> www.thestreet.com/stor...
It is important to do your own due diligence before you invest..
On Jun 19 09:15 AM thedivot wrote:
> You might want to read this blog article from The Street. SPPI is
> the 4th company to try and make money on Zevalin so make sure you're
> comfortable with the risk if you invest.
>
> www.thestreet.com/stor...
In the past, the FDA allowed companies to market isomeric mixtures fairly readily which is why it is common to find older generic drugs are in fact mixtures like this. More recently, the FDA has required a much more rigorous testing of each isomer, particularly in the light of what happened with thalidomide, where only one isomer was responsible for the toxic effects. From a chemical standpoint, it is often easier to synthesize and isolate the mixture, so that is how it was usually done in the past. Modern synthetic techniques have made it much easier to target the single isomers, which is what SPPI have done.
Also, it may be true that the total dose of leucovorin is reduced by half in the SPPI formulation, but all they have really done is remove the dextroleucovorin from the mixture. The amount of the active levoleucovorin remains the same.
The author writes:
"While the generic version currently prescribed to patients in the US is an inactive isomer, Fusilev is a pure active isomer of leucovorin.
Pure Isomer (Fusilev) v. Inactive Isomer (generic leucovorin): The inactive isomer tends to compete with the active isomer and leads to more variability of biological outcome. This means, patients tend to react to the inactive isomer version (generic leucovorin) with more variability. Such variability is not as noticeable in the pure isomer version (Fusilev).
Head to Head Study: A study comparing equivalent doses of Fusilev and generic leucovorin indicated there was a statistically significant reduction in toxicity with Fusilev. The results showed there was nearly a complete reduction in severe grade 3 and 4 toxicities in patients treated with Fusilev. It is worth pointing out that Fusilev is prescribed in 250 mg doses, half that of generic leucovorin."
On Jun 19 09:15 AM thedivot wrote:
> You might want to read this blog article from The Street. SPPI is
> the 4th company to try and make money on Zevalin so make sure you're
> comfortable with the risk if you invest.
>
> www.thestreet.com/stor...
On Jun 19 08:50 AM stumpzy wrote:
> i can't believe people are copy/pasting message board posts, especially
> from yahoo. clean it up and get rid of my comment too.
Thanks for the feedback. Regarding the inactive isomer, please consider checking out the information at the following links pasted below.
It might also help if you go to SPPI's website and listen to the webcast, which I cited as the primary source for the information provided.
annonc.oxfordjournals....
books.google.com/books...
On Jun 20 09:25 AM Greg Parker wrote:
> Thank you for your article. I have no comment to make regarding your
> motivations for putting SPPI into the spotlight, but clearly you
> are not really familiar with the drug compounds involved. The currently
> prescribed generic leucovorin is not an inactive isomer as you say,
> if it were inactive, why would they sell it?! It is simply a 1:1
> mixture of levoleucovorin (active) and dextroleucovorin, which are
> both isomers of leucovorin (5-formyltetrahydrofol... Levo- and dextro-
> are simply descriptors as to how the molecule is arranged in space,
> a similar analogy is saying left or right handed. Generic, refers
> to the fact that the compound is off-patent, allowing other companies
> to compete with the brand name drug, it makes no reference to the
> isomeric form of the compound.
>
> In the past, the FDA allowed companies to market isomeric mixtures
> fairly readily which is why it is common to find older generic drugs
> are in fact mixtures like this. More recently, the FDA has required
> a much more rigorous testing of each isomer, particularly in the
> light of what happened with thalidomide, where only one isomer was
> responsible for the toxic effects. From a chemical standpoint, it
> is often easier to synthesize and isolate the mixture, so that is
> how it was usually done in the past. Modern synthetic techniques
> have made it much easier to target the single isomers, which is what
> SPPI have done.
>
> Also, it may be true that the total dose of leucovorin is reduced
> by half in the SPPI formulation, but all they have really done is
> remove the dextroleucovorin from the mixture. The amount of the active
> levoleucovorin remains the same.
>
> The author writes:
> "While the generic version currently prescribed to patients in the
> US is an inactive isomer, Fusilev is a pure active isomer of leucovorin.
>
> Pure Isomer (Fusilev) v. Inactive Isomer (generic leucovorin): The
> inactive isomer tends to compete with the active isomer and leads
> to more variability of biological outcome. This means, patients tend
> to react to the inactive isomer version (generic leucovorin) with
> more variability. Such variability is not as noticeable in the pure
> isomer version (Fusilev).
> Head to Head Study: A study comparing equivalent doses of Fusilev
> and generic leucovorin indicated there was a statistically significant
> reduction in toxicity with Fusilev. The results showed there was
> nearly a complete reduction in severe grade 3 and 4 toxicities in
> patients treated with Fusilev. It is worth pointing out that Fusilev
> is prescribed in 250 mg doses, half that of generic leucovorin."
I am pleased to see articles related to smaller biotech and pharma companies, however your lack of chemical training exposes you. You have sent me source links that agree with exactly what I wrote in my previous comment! You refer to the racemic d,l-mixture of leucovorin as "the inactive isomer", this quite simply is not correct. The mixture, by its very nature contains both inactive (dextro, d-) and active (levo, l-) isomers in equal parts. Aside from the mixture, the inactive d-isomer (dextroleucovorin) is not commercially available in the US.
SPPI are simply working on the active (levo, l-) isomer and comparing it to the currently marketed racemic mixture (leucovorin) which contains BOTH isomers (active, l- and inactive, d-). It is a common pharmaceutical strategy when the mixture is off patent for a company to try to market whichever isomer contained within the mixture is the active one, as this offers the potential to patent the single isomer, even after the mixture is off patent.
On Jun 20 11:42 PM Justin M. Hall wrote:
> Greg Parker:
>
> Thanks for the feedback. Regarding the inactive isomer, please consider
> checking out the information at the following links pasted below.
>
>
> It might also help if you go to SPPI's website and listen to the
> webcast, which I cited as the primary source for the information
> provided.
>
> annonc.oxfordjournals....
>
>
> books.google.com/books...;pg=PA992&lpg=...
>
>
Yep. Wonderful idea.
Sorry for the misunderstanding. I was not trying to be defensive with you. I certainly did appreciate your feedback.
I agree with you.
With that said, it is not likely to have any affect on the approvability or marketability of Fusilev. I have been and will continue to work closely with Mike Harvilla as well as a friend who conducted cancer research at IU School of Medicine to ensure accuracy.
Thanks again!
On Jun 21 11:03 AM Greg Parker wrote:
Sorry Justin, I was just trying to point out a simple error to help
make your future postings more technically accurate. It seems however, that my comment was not received in the constructive manner in which I intended it.
On Jun 21 10:05 PM buyforeclosures wrote:
> 10 million purchase sent this flying..but that was in 5's and this
> is at 52 week high..seems risky here? Not alot of shorts so a squueze
> is not likely..I think you got that already...im watching it but
> why not write thsi when it was at $2? Crameresque
I would not be so pessimistic.
I can appreciate your Clara Peller comment questioning the beef in my comments. Hey, one good turn deserves another. My comments on your approach as being non conservative was not my main point, but since I raised it, I'll tell you how I arrived at my numbers. There's no need to address "deep throat" issue since it has been resolved with today’s press release.
Here is how I arrive at an $11-$12 price for SPPI:
Zevalin had yearly sales of $16.4M in 2006 when Biogen owned the rights. That implies a paltry 656 patients paying $25K for the drug. In 2008 Zevalin sales were $11.4M representing 456 patients, and in the first quarter of 2009 Zevalin sales were $2.6M (RTT news June 25, 2009). The latest reports show Zevalin selling at a rate of $10.4M for 2009. Sales are dropping. We all know why. It’s the inertial resistance to Zevalin because Oncologist do not get paid for administering Radio immunotherapy .
According to Spectrum Pharmaceutical’s estimates, the addressable population for Zevalin will increase by 18,000 patients with the approval. The current addressable population is 20,790 which is the number of people that die from the disease each year. (www.leukemia-lymphoma....). Assuming the same rate of prescription based on the increased population, sales of Zevalin has can be conservatively increased to approximately $20M in the next 12 months.
Fuseliv is a different story. It is already being used off label. Sales have risen from $7.7M in 2008 to $9.4M in the first quarter of 2009 (RTT news June 25, 2009). Since Fuseliv is already used off label, we should expect the same rate of prescription for the next 12 months. That represents earnings of $37M. All totaled, Spectrum should have revenues of $57M from drug sales in the next 12 months. I assume that all other income and 20% of revenues to go towards research and development, purchasing new rights to drugs, and marketing. Assuming that the remaining income from Fuseliv and Zevalin add directly to the bottom line, SPPI should have $47M in profits. With 39M shares outstanding, I expect an EPS of $1.16 in 12 months. Conservatively, I attach a 10 to 1 ratio on the EPS to arrive at $11.69 because SPPI has, let's say, a checkered past.
Your analysis is much different. It's base upon comparables of companies with an average market cap of $1.9B. You explain it with incomplete rationale about Spectrum's pipeline and earnings. Do you really think Spectrum's market cap is going to increase by a factor of 5 in twelve months. Think about it. Thats $8 in July, $10.50 in August, $12.50 in Sept, $15.00 in Oct, $17.50 in Nov.....
And yes, Dick Bove did have it right.
You really should consider reading all my articles first.
You have made many assumptions here, which cannot be supported. I spoke with some folks at the company, Fusilev off-label use is hardly a factor. Your Zevalin analysis, like Mike Becker's, relies on old numbers from the past. You do not appear to appreciate the value of Zevalin for the treatment of NHL, the leadership now behind Zevalin, or the importance of the first-line approval.
SPPI will require some time. In the end, I think you will find that you have underappreciated both the value of the company and the potential of its products. Please do check out all of my articles. I have provided a great deal of evidence to support my position.
Good luck.
Justin M. Hall
cbryant1990 wrote:
"Your analysis is much different. It's base upon comparables of companies with an average market cap of $1.9B. You explain it with incomplete rationale about Spectrum's pipeline and earnings. Do you really think Spectrum's market cap is going to increase by a factor of 5 in twelve months. Think about it. Thats $8 in July, $10.50 in August, $12.50 in Sept, $15.00 in Oct, $17.50 in Nov . . ."
1) Cancer is the THE hottest sector at Big Pharma, with companies such as Pfizer staking their future on cancer. Pfizer has 1000 cancer specialists chasing cancer cures.
2) obesity is a big contributor to cancer. America's population is not becoming less obese and in fact, as we export our fast food diet around the world, there is fast rising obesity around the world, particularly in China and the UK.
3) Seeking Alpha notes in "Prices, Profits and the Economics of Big Pharma" published September 9th that a good yardstick is that slightly over 50% of pharma profits derive from US sales and slightly under 50% of drug profits derive from international sales. It also notes that the profit margins of the top 10 pharma companies are roughly 20%.
What I see in SPPI is a very clever management who keep their capital costs down and quickly acquire successful drugs financed by other drug companies. They have a fast growing pipeline of cancer drugs. Cancer is the holy grail. And if China's population continues to have rising obesity, you're going to have a market that is 4 times the population of the United States needing cancer drugs.
SPPI has a strong cash position and Zevelin revenues grew 25% from Q1 to Q2.
What is this company going to become? This company is going to become a pharma giant, with a family of cancer drugs seeing fast rising revenues all around the world as cancer increases. I don't see the fundamentals being in place for cancer to abate any time soon. I would have to say to me this seems to be a very promising company with an astute management.