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Over a period of five years, Spectrum Pharmaceuticals (NASDAQ:SPPI) has been one of the most controversial biotech stocks in the market. In previous years, the stock often had more than 45% of its float short. In recent months that short presence has declined… now to just 27.8%. The reason is due to a good balance of low expectations, high potential, and a lot of clinical catalysts in 2014 that could transform the company. Observing these developments, one could infer that this is the year to own Spectrum Pharmaceuticals stock.

Spectrum: A Tale of Good & Bad

After a rather impressive period of performance between 2009 and 2012, last year turned out to be disastrous for Spectrum.

The company markets four products in the oncology/hematology space, but the colorectal cancer drug, Fusilev, had always been the company's primary growth driver. In prior years, Spectrum's upside stemmed from the impressive growth of Fusilev and the promise of its follicular non-Hodgkin lymphoma drug, Zevalin. Investors bet that Fusilev sales would remain strong and that Zevalin would thrive once FDA regulations were loosened. Zevalin carries high costs for physicians and is time consuming, but led to optimism when a bioscan was lifted back in 2012.

However, the bullish scenario did not pan out for longs, as the bears' case proved to be correct: Fusilev sales would fall due to re-established generic supply, and Zevalin sales would never grow to $500 million due to its hassles. In early 2013, shares of Spectrum declined from $12 to $7 after the company cut its guidance in half. Essentially, a less expensive and similar drug to Fusilev weighed on sales and Zevalin never lived up to expectations, becoming what many have called "the most disappointing drug in recent memory." The company once touted peak sales potential of $500 million for Zevalin, which today would be lucky to earn $30 million.

Today, Spectrum is a company on pace to earn $170 million for the last 12 months, which is about $130 million less than what it earned in 2012. Yet despite these fundamental woes, many are whispering-- including RBC Capital s Adnan Butt-- that Spectrum has a good shot at large gains in 2014, and that its stock is priced low enough to where clinical catalysts could reignite optimism.

Okay, so what are these catalysts? And does Spectrum really have a shot at any greater gains to speak of?

In RBC's research note, the firm states that Spectrum has two NDA filings that include final data in 2014, a likely product approval, and Phase 2 data as being catalysts. Furthermore, final data and a potential NDA filing for CE Melphalan and Apaziquone are catalysts. However, it's the developments surrounding Belinostat and a clinical product called SPI-2012 that I find most noteworthy.

Two Drugs, Don't Expect Anything Special

With CE Melphalan we're talking about a conditioning treatment that's used prior to a stem cell transplant for patients with multiple myeloma. In a previous Phase 2 trial it proved safe, but there are questions as to how much demand will exist for such a product. And with there not being a lot of data, its clinical outcome really is a toss-up.

Additionally, I have absolutely zero faith in any trial that Spectrum tries to throw together for apaziquone. Back in 2012 apaziquone was supposed to provide the next levels of growth, but failed to meet endpoints in two multi-center, randomized, double-blind, placebo controlled, Phase 3 pivotal trials of single dose intravesical apaziquone for treating invasive bladder tumors. While I may be surprised with the data (and the FDA may respond well to the company's NDA), I wouldn't bet on any positive surprises from this study.

Two Catalysts That Could Drive Gains

Thankfully, no one really expects too much from either apaziquone or CE Melphalan. However, expectations are building for Belinostat, and SPI-2012 could be a wildcard.

Belinostat has been a solid clinical performer in multiple clinical trials. In 2012 it met the primary endpoint in a pivotal trial for patients with peripheral T-cell lymphoma (PTCL). It is an HDAC inhibitor and has shown a good safety profile throughout clinical testing, with more than 1,000 patients tested to-date. Ergo, Spectrum's NDA and sought approval for Belinostat in treating Peripheral T-Cell Lymphoma (PTCL) has an excellent shot at an FDA approval. Furthermore, ongoing trials treating Carcinoma of Unknown Primary (CUP) and Non-Small Cell Lung Cancer (NSCLC) will become catalysts as well.

Belinostat could become the big favorite or true winner for Spectrum. In treating PTCL, analysts estimate sales between $300 million to $500 million; but if successful in treating CUP, sales could reach $1 billion. Accordingly, this is a very important drug for Spectrum. Of course, a successful trial could be company changing. And I believe that for the reasons noted, Spectrum has a very favorable shot at earning an FDA approval in treating PTCL with such robust data backing it.

Next, SPI-2012 is not a product that gets widely discussed by Spectrum longs. For one, there hasn't been any real reason to discuss the candidate, because this is the first year that data has any meaning to the stock. But in looking at the data and understanding the upside, this could be a big (and unexpected) win for investors.

SPI-2012 is a biological drug that stimulates the production of white blood cells by the bone marrow. The goal is to accelerate recovery from neutropenia after chemotherapy. Neutropenia is a blood condition characterized by a deficiency of certain white blood cells that defend the body from bacterial and fungal infections. SPI-2012 is aiming to treat those who develop the condition after having chemotherapy-- specifically, breast cancer patients.

The drug most commonly used for this disease is Neulasta; but in a Phase 1 trial, Spectrum proved that SPI-2012 achieved the same clinical activity as Neulasta with one-third the dose, meaning fewer side effects and the same efficiency as with a higher dosage. If proven successful in its ongoing open-label dose ranging study, SPI-2012 would enter a market estimated at $5 billion globally… and could be the best-in-class treatment. This is a drug that doesn't have wide coverage, has no real expectations, but could move Spectrum's stock significantly if favorable results are yielded.

Conclusion

For 2014, the catalysts do not revolve around any of Spectrum's currently FDA approved drugs. At this point, we all know that sales of Fusilev, Zevalin, Folotyn, and Marqibo are likely to be either flat or only modestly higher. However, the potential FDA approval and/or data from two drugs with mega potential could greatly impact the valuation of this $650 million company.

The investor should also keep in mind that this is a company with 16 ongoing trials, with 7 being pivotal. Thus, catalysts can come at any day. For a company with such a robust pipeline and a history of earning FDA approvals, a $650 million market cap is almost unprecedented. On account of the company having two products that have billion-dollar potential in the pipeline, positive data or an FDA approval would almost certainly boost this stock to produce large gains. To conclude, investing in Spectrum is definitely a risk, but with very low expectations it does appear that the upside is many times greater than the downside.

Source: Spectrum Pharmaceuticals: Could This Year Mark The Return Of Gains?