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What should investors take from yesterday’s action and decision from OSI Pharmaceuticals (OSIP)?



To investors looking for excellent long-term growth opportunities, pay close attention. Many small drug makers – namely and specifically cancer drug makers - are way undervalued at this time. Over the next two and three years, this industry – drug makers - will continue to consolidate. The key is to find undervalued cancer drug makers that pose nominal downside risk but retain potential for serious growth.

In this article, I am highlighting three optionable drug makers with key events (catalysts) coming up in the weeks ahead.

#1 Ariad Pharmaceuticals (ARIA)
Late March to Early April 2010

I own ARIA and have featured the company in several articles. In fact, I just alerted investors to ARIA at my blog last Monday, February 22. ARIA has climbed over 10% since last Monday and is up well over 50% since I began covering the company last summer.

In the coming weeks, ARIA is expected to announce Phase 3 results for its soft tissue and bone sarcoma drug, ridaforolimus (rida). For more details, interested investors should review this article from August 14, 2009. My sentiment on ARIA has not changed since last summer. I like ARIA and the growth prospects for rida long-term.

While the company retains a $1 billion+ collaboration agreement with Merck (MRK), ARIA also has the markings of a takeout target.



#2 Spectrum Pharmaceuticals (SPPI)
Late March to Early April 2010

Allow me to be direct. The price action for SPPI has been absolutely ridiculous. The company has been brushed off by investors as shares continue to be disturbingly controlled and held under $5. Like ARIA, I have also covered SPPI extensively over the past several months.

Back in October 2009, SPPI’s supplemental new drug application for Fusilev® (levo-leucovorin) for colorectal cancer was mysteriously delayed by the FDA. Oddly, Fusilev is already approved in the US for osteosarcoma (bone cancer) and was prescribed as well as reimbursed by CMS for colorectal cancer during a shortage of generic leucovorin in 2008 and 2009. Fusilev has been used to treat colorectal cancer in the EU and Japan for over a decade. For these reasons, I contacted Senator Richard Lugar of Indiana. His staff indicated that they would try to find some answers and forwarded my letter to the folks at the FDA. To date, the FDA has never responded to my October 2009 inquiry. For more details on Fusilev, interested investors should review this article. Following the October 9, 2009 Fusilev delay, shares of SPPI have fallen below $5 and failed to recover.

The issues surrounding SPPI’s price action, however, are not likely due to the Fusilev setback. Last summer and fall 2009, SPPI sold several million shares of stock to a few investors, and thereby diluted its shares. In return, SPPI received cash and a lot of it. Attached to each stock purchase agreement were warrants that would allow the holder’s to acquire an additional 6.9 million shares of the company’s stock. Reference the tables and links below.

Outstanding Warrants
$5.11
$5.83
$7.15
$7.55
Total number of shares that may be acquired
under all existing warrant agreements
6,931,600

So, if or when these warrants are exercised, then shares of SPPI would be diluted even further. For existing shareholders, that’s not great. Whether or not the investor(s) responsible for consistently pushing SPPI’s shares down really care about the dilution is debatable. However, the effect that these warrants have had on SPPI’s share price is fairly evident.

Interestingly, SPPI may be delaying its Q4 report until late March which just so happens to be around the same time that the third group of warrants (1.4 million shares) are set to expire, supra. That said, a late March report would also allow the company to shed more light on sales of its non-Hodgkin’s lymphoma drug, Zevalin, the company’s growth driver.

For more details on Zevalin, interested investors should review these articles: October 25, November 3, and November 22, 2009.

Like ARIA, I also like SPPI long-term. I firmly believe Zevalin will eventually become the standard of care treatment for NHL. And that is a big deal. Couple Zevalin’s growth with the other cancer drugs in the company’s pipeline, SPPI, like OSIP and ARIA, also makes for an attractive buyout candidate. For this reason, SPPI will eventually begin to move higher again and soon.


#3 Delcath Systems (DCTH)
Late April to Early May 2010

Back on January 5, I indicated DCTH was a buy. Since that time, shares have advanced a whopping +3.63%.

Coming up in April 2010, Phase 3 data for DCTH’s Percutaneous Hepatic Perfusion (PHP) system is due. In this trial, the PHP system is indicated to treat patients with metastatic liver cancer, which stems from melanoma. According to DCTH, the PHP system should reduce tumor growth or death in liver cancer patients by about 50%. So, the trial’s primary endpoint is progression-free survival (PFS) or the time following treatment, which tumor growth or patient death does not occur.

For more information, interested investors should take a moment to view this video on PHP.
While trading at $5.42 with a market cap sub-$145 million, I still like DCTH and believe it has more room to go.



Disclosure: Long ARIA and SPPI.
Source: Three Underappreciated Cancer Drug Makers