Spectrum Pharmaceuticals: Oversold and Undervalued

In Monday trading, Spectrum Pharmaceuticals (Nasdaq: SPPI) closed at $4.98 with a market cap of $193 million. Shares broke through and closed below their 50-day MA, $5.02. This suggests that shares of the drug maker are likely oversold.

Data Source: e-Signal.

PLENTY OF CASH ON HAND

Fundamentally, SPPI appears to be undervalued. With an estimated $110 million in cash, Spectrum is currently trading, below most of its competitors, at 1.75 X cash. Most drug makers trade around 8 X cash.

REVENUE GROWTH

It is becoming apparent that analysts and commentators are underestimating the potential of SPPI and its products.

(1) Analysts expect SPPI to generate about $48 million in revenue in 2009.

On May 11, 2009, SPPI reported revenue of $14.1 million and an EPS of $0.02 in Q1 2009. Even if sales flat line or remain the same, annual revenue will total $56.4 million in 2009. Upon approval for additional indications, sales of Zevalin and Fusilev should continue to grow throughout this year and next. Shares of SPPI will likely follow suit.

(2) In 2008, Zevalin sales totaled $11 million under a different company.

In Q1 2009, which ended on March 31, Zevalin sales were just shy of $3 million. SPPI, however, did not obtain the rights to Zevalin (via RIT Oncology, LLC) from Cell Therapeutics (Nasdaq: CTIC) until March 16, 2009. One could reasonably argue that SPPI has not been given sufficient time to implement their marketing plan. So investors should not be shocked to see an up-tick in Zevalin sales during Q2 2009.

Side Note: Regarding SPPI’s plan for Zevalin, one writer, who I would characterize as a sell-side commentator, indicated that after his review, “he walked away impressed.” On this one point, we agree.

LOOK TO LEADERSHIP

The key to success for both Zevalin and Fusilev lies with SPPI’s leadership. George Uy, who serves as vice-president of marketing and sales at SPPI, will head up the team responsible for executing Zevalin’s marketing plan.

George brings more than 20 years of hands on experience in both large and small pharmaceutical companies. His experience includes leadership roles in oncology marketing at Roche and Abraxis BioScience, in the U.S., Switzerland, China and the Philippines.

George is currently designing and implementing marketing strategies for drugs that are in regulatory review and in the late stages of development. In addition he will play an important role in identifying in-licensing and partnership opportunities with late stage drugs.

While at Abraxis, as Executive Director of Marketing, he oversaw the strategic and tactical launch of Abraxane in 2005 for the treatment of metastatic breast cancer. Abraxane attained over $130 million in sales in its 2005 launch year. Prior to Abraxis, George spent 23 years of increasing management experience at Roche, most recently serving as the U.S. Brand Director for Xeloda where he was responsible for the successful 2001 launch of Xeloda in colorectal cancer and advanced breast cancer. During his tenure at Roche, George was involved in the launch of several key Roche products not only in the U.S., but worldwide.

Source: Spectrum Pharmaceuticals

CONCLUSION

Some analysts and commentators have highlighted old numbers from the past as evidence for future sales. Some have completely ignored Fusilev and its potential. While these same folks acknowledge the company’s plans are impressive, they place little to no value on the leadership behind that plan. WHAM! BAM! They quickly conclude, SPPI is overvalued! Queue up the shorts. Cut it down!

I see it differently. From my view, SPPI is oversold and undervalued at $4.98.

For more information, see my other articles on SPPI: June 12, June 19, June 28, June 30 and July 6.

Disclosure: Long SPPI

Comments

[walker6713]

He is right, it is undervalued.

2009 Jul 15 01:23 PM

[TizMe]

Most small biotech's and small pharma's are lucky to have a year or two of cash, and they burn through it quickly. Sppi and other biotechs like it are not 'most drugmakers' and you would prob have a hard time supporting 8xcash for some larger companies, let alone any small biotech/pharma.

2009 Jul 16 12:04 AM

[Justin M. Hall]

TizMe:

Your argument does not make much sense to me. What is the point you are trying to make?

Have you done any research on Spectrum (SPPI)? If not, then you should consider taking some time to review the company's pipeline.

I think you will find that Spectrum is not only undervalued right now, but the company has tremendous growth potential with Zevalin and Fusilev as well as Eoquin.

Good luck.

Justin M. Hall

2009 Jul 17 05:27 PM

[TizMe]

I am invested in SPPI, Im just saying that if a microcap biotech/pharma like Spectrum 'should be trading at 8 x cash', why can't I find the other 20 or so companies of this size that I also keep track of trading at a similar cap to cash ratio, or some of the midcaps on my list? I do not think that it is a useful way to value these companies, especially since they tend to only have a years worth of cash and the stocks trade down with the cash burn.

2009 Jul 20 09:43 AM

[TizMe]

I'm not saying that cash isn't important, on the contrary its probably more important than the drugs, but if I take any of the small similar stocks that I track or even much larger ones and multiply their cash x 8, I come up with a meaningless number that does not track anywhere near actual market caps for any stock that I cover.

2009 Jul 20 09:48 AM

[Justin M. Hall]

TizMe:

I did NOT say that SPPI deserved or should trade at 8 X cash.

Regarding why you cannot find the companies, I cannot help you.

If you don't like it, then you should sell SPPI. Investing in drug development is not for everyone and it appears it may not be for you. You might consider contacting a financial advisor, who might really be able to help you.

Best of luck.

Justin M. Hall


On Jul 20 09:43 AM TizMe wrote:

Spectrum 'should be trading at 8 x cash', why can't I find the
other 20 or so companies of this size that I also keep track of trading at a similar cap to cash ratio, or some of the midcaps on my list?

I do not think that it is a useful way to value these companies, especially since they tend to only have a years worth of cash and the stocks trade down with the cash burn.

2009 Jul 20 03:49 PM

[Justin M. Hall]

TizMe:

I track 258 optionable drug, device and diagnostic makers.

Below are the average metrics for all 258 companies. My list is dated June 11, 2009. So, I suspect not much has changed since last month.

Average Price/Cash 15.62
Average Price/Sales 18.66

This means, the metric I used 8 X cash was about half of the average. My estimate was very conservative.

I hope this helps.


Justin M. Hall

On Jul 20 09:48 AM TizMe wrote:

I'm not saying that cash isn't important, on the contrary its probably more important than the drugs, but if I take any of the small similar stocks that I track or even much larger ones and multiply their cash x 8, I come up with a meaningless number that does not track anywhere near actual market caps for any stock that I cover.

2009 Jul 20 04:00 PM

[Justin M. Hall]

TizMe:

Compare the averages in the above comment to Spectrum (SPPI).

SPPI is currently trading a little over 2 X Cash, factoring the recent stock offerings and 4.27 X Sales.

Data source: www.finviz.com/quote.a...

I hope this is helps. Good luck.


Justin M. Hall

2009 Jul 20 04:10 PM

[TizMe]

My prefference is to estimate forward revenue of Zevalin and Fusilev, multiplied by a revenue multiplier appropriate to the drug's competitive landscape, (I like 4-5x for Zevalin, and 1.5-2x for Fusilev) add in the portion of the cash (at 1x, also add in credit lines if you like) that will still be on the books past the future point we are estimating for (1 year out?) and not bothering with the portion of cash that will be burned through that point. I'm only looking forward about 3 years, but if you want to look forward 4-5 years, you can add in a milestone payment (at 1x) for Apaziquone.

I know this is an art, and I know this isn't as exquisitively artful as the 10-12 year estimate discounted to the present day that the accountants like to do, but you have to start somewhere.

But cash alone, doesn't tell you if a company has phase III drugs that will produce revenue or upfront licensing money soon, or phase I drugs that will never see the light of day. It also doesn't tell you if you have 300,000 in revenue or 200,000,000 or 0. Also, these companies should not be holding any more cash than absolutely neccessary, because it usually means that they could be progressing some of their additional drugs through trials or aquiring/licensing more drugs into their pipeline. Since the credit market and the ability to raise cash isn't as nice as it once was, stockpiling cash isn't taken as negatively as it has been in the past. Yet to a certain degree in this business, sitting money is wasted money.

2009 Jul 22 01:52 PM

[Justin M. Hall]

TizMe:

I purposely delayed my response in order to allow for some time to pass.

(1) There are legal reasons why cash value is important.

(2) You are misrepresenting the facts. SPPI's two drugs that are under review have already been approved for use in the US.

(3) SPPI has had NO problem raising cash as evidenced by three recent stock offerings.

Your arguments lack sufficient depth to merit serious consideration. I just can't get my arms around where you're trying to go here.

Again, I do wish you the best.


Justin

2009 Aug 09 03:43 AM