Spectrum Pharmaceuticals: Outlook Remains Very Promising 20 comments
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So far, the Lucky 13 Buys have been winners this month. Investors, who followed the market’s cues and placed their bets on small cap drug makers, have likely fared very well over the past two to three weeks.
All of the companies on the Lucky 13 Buys list ended the third week of July in the green. While five companies captured gains of more than 20%, eight of the 13 have advanced more than 10% in the past two weeks.
| SUPG | 45.81% |
| FSYS | 28.63% |
| SWC | 27.61% |
| ONTY | 23.36% |
| GTXI | 21.58% |
| SPPI | 15.45% |
| ARIA | 14.57% |
| PRXL | 13.46% |
| UNG | 9.44% |
| ONB | 4.48% |
| TOMO | 4.17% |
| OSIR | 1.84% |
| CLNE | 1.39% |
Gains are based on the closing prices from Tuesday, July 7 to Friday, July 24, 2009.
SUPERGEN (SUPG)
The one that obviously stands out is SUPG. Since it made the Lucky 13 Buys list, shares of SUPG have jumped 45%.
In addition to collaborations with Johnson & Johnson (JNJ) and Eisai; an early-stage pipeline consisting of (1) a first-in-class drug, SGI-1776, (2) PIM kinase inhibitors, and (3) a new class of Etk kinase inhibitors; a modest royalty stream from Dacogen; and several upcoming milestones in 2009-10, SUPG has also maintained a strong financial position throughout the economic challenges of 2008-09.
With $91.8 million in cash, $0 debt, and a relatively low cash-burn rate of $2 to $3.5 million, SUPG was added to the Lucky 13 Buys list when shares were trading close to cash value or $2.03 on July 7.
Regarding smaller drug makers, short-term traders have been playing the catalysts as of late. While that strategy may work a few times, eventually luck runs out and losses follow. When playing the small cap drug makers, fundamentals matter. Cash is critical. A manageable debt load, sometimes a rare thing in this high-risk environment, does make a difference. SuperGen’s recent advance only reinforces the importance of fundamentals.
SPECTRUM PHAMACEUTICALS (SPPI)
On July 14, 2009, I indicated that SPPI was oversold and undervalued at $4.98. Since that time, shares of SPPI have advanced 30.52%. On Friday, July 24, SPPI closed at $6.50.
Going forward, I am still comfortable with my price target of $31 for SPPI over the long-term. So, it should be obvious, to most anyway, that I also believe SPPI will continue to advance from here and despite less optimistic views held by some analysts and commentators.
Price: $31.00
Duration: 12 to 18 months
IN DETAIL
For those, who have not read or followed my past articles, here's how I derived at the $31 price target for shares of SPPI.
Zevalin®
Approval for first-line consolidation treatment in non-Hodgkin’s lymphoma (NHL) is important for Zevalin. On or before September 7, 2009, Zevalin is likely to be approved for first-line use. For purposes of the analysis below, I assume Zevalin will be approved for first-line use.
Under the first-line setting, approximately 20,000 additional early-stage NHL patients could qualify for the Zevalin treatment. Currently, there are about 8,000 patients that already qualify under the existing, approved refractory or salvage setting (last resort).
Over the past six to seven years, Zevalin has only been able to penetrate about 10.5% of the existing, approved market or 8,000 late-stage patients. Approximately 800 late-stage NHL patients actually receive Zevalin in a given year.
So, if Zevalin only penetrates 10.5% of the new first-line market, an additional 2,100 patients will receive the treatment. Do the math. Under both indications – first-line and late-stage - approximately 2,900 patients would receive the treatment with a penetration of 10.5%.
In the US, Zevalin costs between $24,000 and $30,000 per patient. While such an expense may seem expensive to some folks, Betsy de Parry, the subject of a new documentary, would strongly and rightfully argue otherwise.
With a penetration of 10.5% or 2,900 patients, sales of Zevalin would total $69.6 million.
However, I argue that more patients will be made aware of Zevalin after it is approved for first-line use. In an era of defensive medicine, the FDA’s seal of approval is very important to treating physicians. It is also very important to patients. In past years, doctors have NOT told patients about the Zevalin option. While there are a number of very poor and disappointing reasons, SPPI appears to have a sound plan to address the problems that led to Zevalin’s past disuse. Rather than reexamining the problems of the past, I am more interested in Zevalin’s future after it is approved for first-line use.
Doctors should finally find a place for Zevalin after the treatment is approved for first-line use. In effect, the first-line approval is likely to limit the liability for doctors, who administer Zevalin or refer patients to doctor who can administer the treatment. Under this same reasoning, first-line approval is also likely to increase the liability for those doctors, who do NOT administer Zevalin or refer patients to a doctor who can.
Regarding the latter, let’s examine a hypothetical scenario. Doctor does not inform the patient about or dissuades the patient from the Zevalin option. Like most Americans with early and late-stage NHL, this patient does not receive Zevalin because he or she was never informed about the option or was dissuaded from it. After some time passes, this patient dies from complications attributed to NHL. How might that doctor explain to a jury of his peers that he elected to NOT offer his patient Zevalin? How might that doctor explain why he dissuaded the patient from the Zevalin treatment, even though Zevalin has been proven in several trials to be a very safe and effective treatment for NHL and that the treatment has also been approved by the FDA for first-line and late-stage patients? How might that doctor explain to the jury why he missed both opportunities? These might be tough hurdles to get over. While the scenario is hypothetical, it is certainly foreseeable.
Under this reasoning, it seems far more likely than not doctors will begin informing NHL patients about the Zevalin option after it is approved for first-line use. If more patients are aware of Zevalin (including the benefits of (1) 87% complete response or remission rates after induction therapy and (2) a two-years of progression free survival), then it is likely that most early-stage NHL patients might opt for the treatment. If so, then one could reasonably argue that Zevalin will likely penetrate more than 10.5% of the total market.
I estimate that 7,500 patients, less than 30% of the total patient pool, would elect to have the Zevalin treatment, presuming they are, in fact, made aware of the option. From my view, 30% penetration, for a safe and extraordinarily effective first-line NHL treatment, which some doctors have called a cure, is a conservative estimate.
With a penetration of 7,500 patients, sales of Zevalin would total $180 million.
Fusilev®
Fusilev is scheduled for standard review by the FDA on October 8, 2009 to be used in combination with 5-FU for the treatment of colorectal cancer. Like Zevalin, Fusilev is also likely to be approved.
In early 2008, Fusilev was approved by the FDA as a combination treatment for osteosarcoma, a form of bone cancer. In August 2008, SPPI launched Fusilev in the US.
Under the colorectal cancer indication, Fusilev sales are approximately $200 million annually in Europe and Japan where the drug is marketed by Wyeth (WYE) and Takeda.
Q1 2009, Fusilev sales totaled $9.4 million. If sales flat line or remain the same, then Fusilev sales will total nearly $40 million in 2009.
Since the drug was just launched in August 2008, sales are likely to continue growing in 2009. With the additional colorectal cancer indication, which features a much larger patient pool, sales of Fusilev could grow substantially over the next 12 to 18 months.
In that time, I conservatively estimate Fusilev sales will reach $100 million, or half that which is already generated abroad.
SPPI at $31
Over the next 12 to 18 months, I estimate sales of Zevalin and Fusilev could likely total around $280 million. SPPI’s price target of $31 was factored by using a relatively conservative multiple of four times revenue or sales ($280 million X 4 = $1.12 billion). Most drug makers trade above this multiple.
At $31, SPPI would retain a market cap of approximately $1.12 billion.
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This article has 20 comments:
I bought 100 shares of sppi on may 7 for a total of 296.95 and sold on july 23 for 634.03. It was a double ...granted on a small position.
On Jul 27 11:31 AM PYRAMIDHUNT wrote:
> I am long sppi but your too frequent opinions about sppi get pretty
> boring and annoying. Give your opinion about another biotech. Give
> us your buy price, sell target, when you bought it, etc.
> I bought 100 shares of sppi on may 7 for a total of 296.95 and sold
> on july 23 for 634.03. It was a double ...granted on a small position.
Thanks for the feedback. I am sorry if I bore you or if you don't like what I write. With said, what I have to say about SPPI should not bother you as you are no longer holding shares of SPPI.
Life is too short. Stop wasting your time on boring people who don't write what you like to read. Read only the articles of those you do like and avoid wasting your time on me.
I wish you the best.
Justin M. Hall
You sure seem like a well-reasoned chap!
For the record, I did not mention Genentech. I do agree with you that VP of Marketing and Sales did spend 23 years at Roche. I would not characterize him as a "simpleton."
Thank you for taking the time to make you first and only comment under my article.
I need all the luck I can get. So, thanks!
I'm afraid I missed out on the "Lucky 13 Buys" List - today is the first time I have seen it. Quite impressive! Are any of these possible buyouts a la Medarex? If you allow me to digress, do you have any thoughts on SQNM as well as a possible VNDA buyout in the near future?
Thanks
Shailesh
Thank you for your feedback and thoughts!
While I am familiar with both companies, I really do not have a qualified opinion on either. At this point, I am focused on cancer drug makers, late-stage drugs, collaborations and reasonable fundamentals.
I continue to like the companies in the Lucky 13 Buys List. Out of the list of 13, I currently own positions in both ARIA and SPPI. I am also fond of GTXI. Longer-term, I am interested in ONTY. TOMO has decent fundamentals and is still a good buy right here.
Sorry I could not help you with the companies you asked, but I hope the info I did provide is helpful to you. I encourage you to check my instablog periodically, as I will continue to post similar lists, inter alia. It is unlikely that I will submit such lists to be published. I will however, try to publish the results in articles.
Thank you again for the feedback! Stay in touch.
Justin M. Hall
Thanks for your insite. Continure to keep us up on SPPI. Your thoughts have been a great help. I am long SPPI and in a little deeper than bored. Lucky 13 list was great, wish I had more resources.
DuckThis
my mother had a bought with non h. limphoma and spent 60 days at the clevland clinic for a bone marrow transplant. the standard treatment,chemo,etc.did not work but the transplant did the trick.
$30,000.00 is nothing when moms total bill was ten times that figure.
she is well today after a year and a half of treatments.
i hope this drug can help people that have n.h.l.
thank you for the fine article.
CLNE is a typo as its Pickens Natural Gas Company. What is it supposed to be?
I found your analysis on SPPI very interesting. You were very thorough on the potential revenue expecations for both Zevalin and Fusilev. I bought 400 shares at $6.60. Looking forward to the stock increasing in value when they receive FDA approval in September and October.
I think everyone here would like to hear that
I think your move at $6.60 was a very good one. You purchased at the 61.8% Fibonacci retracement which is a great place to buy on the way up. If SPPI rises steadily in the next few weeks, the next stop should be $7.65 with a few battles in between. I am long and looking for the same. If it drops, see my posts on the $6.33 level retracement.
As for Justin's post, I have to give him props for the 13 picks. They are out there for everyone to see and they are simply a great set of picks. But his valuations of SPPI are suspect. First of all, who ever heard of valuing a company base upon sales or revenue? It's net earnings that matter. If we applied the same logic to Eli Lilly with $5.2B in sales, Justin would predict a stock price of $136.
Obviously, this is incorrect. I have estimated my own projections for SPPI based upon earnings after expenses which suggest a price of $16.50 with Zevalin and Fuseliv approvals. I predict this price by the first quarter of 2010. Even at $16.50, SPPI looks like a great investment, and on that, I and Mr. Hall can agree.
I'm not trying to bust your balls Justin, I just have a more conservative view than you. I will gladly eat crow in the first quarter next year if I am wrong.
.
Thank you! I will do my best.
Justin
On Jul 27 10:48 PM DuckThis wrote:
> Justin:
> Thanks for your insite. Continure to keep us up on SPPI. Your thoughts
> have been a great help. I am long SPPI and in a little deeper than
> bored. Lucky 13 list was great, wish I had more resources.
> DuckThis
I wish your mother the best. I am sure you have already told her about Zevalin. Should her NHL recur, as it often does, she should seek the opinion of an oncologist, likely nuclear, who can help her determine whether Zevalin or Bexxar might be a good fit for her.
Thank you for your comment.
Justin
On Jul 28 09:22 AM saltydog wrote:
> good article justin.
> my mother had a bought with non h. limphoma and spent 60 days at
> the clevland clinic for a bone marrow transplant. the standard treatment,chemo,etc.did
> not work but the transplant did the trick.
> $30,000.00 is nothing when moms total bill was ten times that figure.
>
> she is well today after a year and a half of treatments.
> i hope this drug can help people that have n.h.l.
> thank you for the fine article.
I think you made a good investment! Keep me posted on your progress.
Good luck.
Justin
On Jul 28 01:00 PM nibor wrote:
> Hi Justin,
> I found your analysis on SPPI very interesting. You were very thorough
> on the potential revenue expecations for both Zevalin and Fusilev.
> I bought 400 shares at $6.60. Looking forward to the stock increasing
> in value when they receive FDA approval in September and October.
Post approval price is difficult to determine and depends largely on the actions of institutional buyers as well as hedge funds. If both drugs are approved, I intend to add to my positions following each approval.
With that said, my guess is SPPI could see $20+ by year-end 2009.
Justin
On Jul 28 06:52 PM rgard32 wrote:
> what about a post approval share price for sept 7th and oct 8th??
>
>
> I think everyone here would like to hear that
Thank you for your comments. I do appreciate your feedback and welcome a fair and reasonable challenge.
I agree, earning matter most. With said, small-cap drug makers are different. These companies and their respective equity values function much differently from other industries.
Here, LLY is not an apples to apples comparrison.
The BIGGER Picture
Within this industry, consolidation is ongoing. Big Pharma and Biotech firms rely, in part, on the smaller firms to grow and fill their pipelines. Right now, smaller drug makers, namely and specifically those with late-stage and/or approved products, are and will continue to be acquired by the larger drug makers.
Your price target is reasonable. You will likely be right in the shorter-term. However, I do think your price target is way too conservative over the longer-term (12 to 18 months).
(1) Fusilev is likely to exceed my conservative estimate.
(2) Eoquin has blockbuster potential, which deserves some value.
(3) With both approvals this year, SPPI deserves a premium price as it will likely become a acquisition target.
What things should investors consider when estimating a premium price? (a) Current sales, (b) debt of the acquiree, (c) future sales - factoring a Big Pharma sales force, (d) pipeline potential - factoring a Big Pharma development team, inter alia.
If both Zevalin and Fusilve are approved, who is most likely to acquire SPPI?
1. Allergan (AGN): AGN is collaborating with SPPI on the development of Eoquin for bladder cancer where there is no current treatment. Eoquin has tremendous potential.
2. Bayer: As I indicated in a previous article, Bayer and other sponsors are currently running trials on Zevalin. While Bayer retains the worldwide rights to Zevalin ex. US, the US is the key market where exclusivity for Biologics is perpetual (for now).
Follow the money. Since Allergan (AGN) has committed $300 million in milestones for the development of Eoquin, AGN is more likely to acquire SPPI than Bayer. Interestingly, AGN also needs to expand its existing pipeline.
The two approvals for Zevalin and Fusilev coupled with a potential blockbuster Eoquin on deck, strong fundamentals, little or no debt, SPPI is likely to be perceived as a safe bet for Allergan.
For this reason, SPPI deserves a premium price following the approval of both Zevalin and Fusilev. I anticipate the market will reward the company with that premium price. From my view, that premium price is $31 within the next 12-18 months.
Excuse my typos.
Thank you again for your feedback. No balls busted here!
Justin
Earnings are not a good way to value a small cap drug maker.
What matters most? A company's PIPELINE matters most. Obviously, promising drugs with a novel mechanism of action which address life-threatening conditions are best. A company's pipeline is their lifeblood.
A company growing its earnings with existing, approved products that possesses an insignificant or shallow pipeline will not keep investors attention or their money very long.
With regard to smaller drug makers, investors generally bet on the future.
BIOLOGICS & VALUATION
Generally, companies with Biological drugs (AMGN, CELG, GENZ, BIIB, GILD, etc), which feature perpetual patent exclusivity (for now), fare better than those with Chemical drugs. For this reason, Biologic drug makers tend to trade at drastically higher P/E ratios.
As of late, biologic drug makers have taken a beating. Obama proposed limiting patent exclusivity to 7-years on biologics. Such limitation would have been a disaster for drug development and innovation. Most commentators believe the 7-year limitation is now off the table and that a bill which limits biologics to 12 years of patent exclusivity is more likely to be seriously considered by lawmakers. One expert that I follow, a professor from Duke University, propsed 16 years with which I agree.
Justin
I like Pharmaceutical companies and right now I am invested in ONYX Pharmaceuticals Inc (ONXX), Watson Pharmaceuticals Inc (WPI) and Spectrum Pharmaceuticals (SPPI). I have owned ONXX and WPI for about a year and they have done well. I do have one investment in Campbell Soup Co (CPB) (obviously not a pharmaceutical company) that is down around 14% from where I purchased it. I really like your top 13 list and would like to make some additional investments based on the background work you have done on these companies. From your list of Top 13, would you have a recommendation to replace CPB?
Thanks for any insight you can share.