Spectrum Pharmaceuticals: Despite Share Offering, Still Cheap vs. Other Cancer Drugmakers

On Friday, Spectrum Pharmaceuticals (SPPI) announced the company sold $50 million worth of common shares at $7.55. As is often the case when a company sells additional shares, the share price fell.

Shares of SPPI closed down -4.39% to $7.18 in Friday trading.

As result of this most recent offering SPPI will now have roughly 48.5 million shares outstanding. At Friday's close, the company retained a market cap of approximately $350 million. Compared to other optionable cancer drug makers, similarly situated, SPPI’s total shares outstanding still falls below the average of 63.12 million while retaining a market cap of half the average. See table below.

Since shares fell today, some investors have expressed some concern for the move. Honestly, I would prefer that institutional investors buy shares in the open market like everyone else. I do share the sentiment with those who are frustrated with the company for agreeing to yet another offering especially since shares fell upon the early approval of Zevalin® on Friday, September 4.

Memo to the folks at Spectrum (SPPI): Stop by-passing your existing shareholders. (I hope they are listening.)

CAUSE FOR CONCERN VS. VOTE OF CONFIDENCE
So, is this recent dilution of SPPI’s common shares a cause for concern and should investors throw in the towel? Not yet.

From my view, SPPI continues to resemble a growth company. As evidenced in the daily chart above, it's still trading like a growth stock (for now).

More importantly, SPPI has a strong pipeline of cancer drugs, including Zevalin®, Fusilev®, and Eoquin®. In early October, the FDA is expected to decide whether they will expand the use of Fusilev to patients with colorectal cancer. I remain confident that Fusilev will be approved. For more details on Fusilev and Eoquin, please reference this June 19 article.

As result of the recent offering, however, previously held price targets must be adjusted - again - to account for the additional shares. On June 12, I projected SPPI would retain a market value of $1.12 billion in 12 to 18 months. So, my longer-term price target for shares of SPPI has been adjusted down - again - to $23.09.

With future growth from sales of Zevalin and Fusilev as well as the company’s collaboration agreement with Allergan (AGN) potentially worth an additional $255 million in milestone payments for the development of SPPI's bladder cancer drug Eoquin, I contend that SPPI still remains undervalued at $7.18. For more details on Zevalin's potential sales growth, interested investors should review this article from September 11.

With approximately $156 million in cash, shares are trading just under 2.3 X cash, which is relatively cheap compared to other cancer drug makers. See table below.

CONCLUSION
For all of the reasons detailed above, this most recent $50 million investment certainly looks more like a vote of confidence rather than a cause for concern. If, however, SPPI continues to bypass existing common shareholders in the future, then such action may be a cause for concern.

Again, I do hope the folks at Spectrum (SPPI) are listening.

OPTIONABLE CANCER DRUG MAKERS

Symbol	Last (USD)	MktCap	P/S	P/C	Shares Out ($M)
(CTIC)	1.55	839 M	161.62	70.02	541
(HGSI)	20.10	3.20 B	11.97	13.28	159
(DNDN)	29.20	3.38 B	30,726.36	11.76	116
(LGND)	2.49	281 M	8.11	5.07	113
(ARIA)	2.51	273 M	33.59	6.91	109
(EXEL)	6.81	731 M	6.51	3.73	107
(SGEN)	14.67	1.44 B	34.84	9.09	97.9
(INCY)	7.29	713 M	206.04	5.07	97.8
(GERN)	7.41	675 M	438.1	3.59	91.1
(ALTH)	8.04	719 M	0	6.85	89.4
(REGN)	21.28	1.66 B	5.96	4.35	77.9
(IMMU)	6.28	472 M	15.72	17.23	75.2
(DYAX)	4.34	315 M	6.59	5.92	72.5
(ZGEN)	6.04	417 M	4.38	3.53	69.0
(MITI)	8.29	569 M	22.51	11.57	68.7
(ONXX)	34.27	2.09 B	9.13	4.53	61.1
(CYTK)	4.00	243 M	2.99	1.81	60.8
(SUPG)	3.27	193 M	4.71	2.22	59.2
(OSIP)	34.95	2.03 B	5.26	3.66	58
(IMGN)	8.28	472 M	16.88	6.64	57.1
(SLXP)	19.90	972 M	4.85	11.29	48.8
(SPPI)	7.18	351 M	9.92	2.3	48.5
(KERX)	2.14	102 M	4.57	7.63	47.8
(SCLN)	4.41	204 M	3.06	9.32	46.3
(ARQL)	5.23	234 M	11.98	1.99	44.7
(BCRX)	10.02	385 M	7.37	9.12	38.5
(RIGL)	7.71	284 M	0	3.55	36.8
(GTXI)	12.32	449 M	33.24	6.51	36.4
(PARD)	7.06	246 M	0	4.91	34.8
(SNTA)	3.20	109 M	9.81	1.79	34.0
(MDVN)	27.15	909 M	20.08	3.82	33.5
(OSIR)	7.97	261 M	8.6	5.02	32.8
(PGNX)	5.78	182 M	3.58	1.6	31.4
(ONTY)	6.34	163 M	4.41	7.16	25.7
(IDRA)	7.85	184 M	5.84	3.65	23.5
(OGXI)	36.18	218 M	0	38.27	6.03
Averages		$701.76 M	32.06 (ex. DNDN)	6.99 (ex. CTIC)	63.12 (ex. CTIC)

Data Sources: eSignal and FinViz.com

Disclosure: Long SPPI and ARIA.

Comments

[albatros:]

1) Fusilev is pure isomeric form of leucovorin and hence more stable and predictable in behaviour (as Wyeth sales of isovorin are about 100 millions euros in Europe)

2) Starting jan 2010 is much probable that CMS will admit ASP methodology for reimbursment so that oncologist will use zevalin finally for the firs time having correct reimbursment.

3) In contrast to mitomycin (MMC), EOquin® is not a skin irritant and is not absorbed through the bladder mucosa when given intravesically.


On Sep 21 10:48 AM rrtzmd wrote:

> ...no offense but maybe you should consider sticking to law...try
> to evaluate on SPPI on the MERITS of its products as opposede to
> the hype surrounding them..."fusilev" is NOTHING but levleucovrin...it
> is in NO way superior to just plain leucovrin...so there is NO argument
> for convincing third party reimbursers that they should pay more...so
> after pharamcies complete stocking up the drug, don't expect sales
> to go anywhere but DOWN afterwards...zevalin?.... that's only been
> approved now for SEVEN YEARS...how big are US sales currently?...that's
> kind of important for TWO reasons...first, Bayer owns ALL rights
> outside of the US...second, even though the company gained approval
> for an expanded label, it's current sales PROBABLY reflect off-label
> use as well....so DON'T expect such approval to have any significant
> effect on sales...eoquin?...that's NOTHING but a prodrug for an antique
> drug called mitomycin C...it is NOT superior to plain mitomycin...so,
> like levleucovorin, how are they going to convince reimbursers to
> pay for it?...and now you understand the REAL motivation for the
> secondary -- strike while the suckers are biting...because once reality
> rears its ugly head, they won't be able to give the stock away...

Sep 22 09:09 AM

[sam_togo:]

OK tell me Sppi or Kerx -- put my money into what stock -- want long term and bang for my buck

Sep 22 10:05 AM

[Justin M. Hall:]

Sam Togo:

While I do like KERX, it drugs are in earlier-stages and not yet approved. Make no mistake, I do like KERX.

If I was absolutely forced to choose between the two, then I would bet on SPPI. I view SPPI as a mid-term (less than 24 months) growth company with plenty of cash. From my view (and despite what my critics think or say), SPPI is highly likely to be acquired eventually.

If you are able, then divide your investment capital between the two. I do NOT recommend that you concentrate your investment capital in any one company or industry.

I hope this helps! Good luck!


Justin

PS: Thank for looking out Albatros!

Sep 22 10:27 AM