Spectrum - Pullback An Opportunity To Jump In

Summary

A small, often ignored biotech with two approved drugs in the market.

Poor revenue guidance resulted in the stock taking a hit, but revenues stable now, with steady growth expected.

A strong pipeline that includes Belinostat, an HDAC inhibitor for NSCLC.

Recommended as a buy on fundamentals, as well on unconfirmed reports of a potential takeover.

Spectrum Pharmaceuticals (NASDAQ:SPPI), a little-known biotech company with five FDA-approved drugs in its portfolio and an impressive pipeline, is a small cap company that has the kind of growth potential that biotech investors have seen in the past in the likes of Amgen (NASDAQ:AMGN) and Gilead (NASDAQ:GILD) - now the giants of the biotech industry. Spectrum focuses on development of oncology and hematology drugs, and is one of the few undervalued stocks in the sector. Unconfirmed reports suggest that it is in talks for a potential takeover.

Products

Spectrum's lead product, Fusilev, was approved by the FDA in 2011 for treatment of advanced metastatic colorectal cancer. It is also indicated for "rescue after high-dose methotrexate therapy in osteosarcoma".

Zevalin, first approved by the FDA in 2002 for relapsed follicular B-Cell non-Hodgkin's lymphoma, got approval for an expanded label of first-line treatment of non-Hodgkin's lymphoma in September 2009. Folotyn, also approved in 2009, is indicated for relapsed peripheral T-cell lymphoma. Marquibo, which got accelerated approval in 2012, is indicated as a third-line treatment of adult lymphoblastic leukemia.

Pipeline

Despite its small size, Spectrum boasts of an impressive pipeline. A full preview of the company's pipeline can be accessed here.

Most promising among its pipeline candidates is an HDAC inhibitor, Belinostat, being developed as an intravenous and oral treatment for non-small cell lung cancer (NSCLC), peripheral T-cell lymphoma and other solid tumors and hematological malignancies.

HDAC inhibitors have recently been in the forefront as anti-cancer agents after approval by the FDA of the first drug in the class, Vorinostat of Merck, for cutaneous T-cell lymphoma.

In preclinical trials, Belinostat has shown anti-cancer activity of inhibiting cell proliferation and inducing apoptosis in multiple cancers. In clinical trials, the drug has demonstrated that it may be well-tolerated, allowing its use in combination with chemotherapy without causing excessive toxicity. It is being evaluated as a monotherapy for peripheral T-cell lymphomas and as a combination drug for treatment of NSCLC and carcinoma of unknown primary.

The other pipeline candidate worth a mention is Ozarelix, being developed as a treatment for hormone-dependent prostate cancer. Currently in Phase II clinical trials, the drug works as a luteinizing hormone releasing hormone antagonist, and has demonstrated its ability to suppress testosterone and pituitary hormones.

In addition to its strong pipeline, Spectrum has a global license from Ligand Pharmaceuticals (NASDAQ:LGND) for development of and commercialization of captisol-enabled Melphalan for patients of multiple myeloma receiving autologous stem cell transplants.

Spectrum is also collaborating with Allergan (NYSE:AGN) in development and marketing of Apaziquone for treatment of non-muscle bladder cancer,

Financials

2013 was a bad year for Spectrum, which was also the reason for the stock taking a big hit. Most of it was due to the company's guidance that it feared a drop in sales of Fusilev, the company's primary revenue driver that accounts for 78% of product sales, due to introduction of generic competition. However, Fusilev sales are holding up and have apparently stabilized.

For a developmental-stage small biotech company, Spectrum is relatively strong financially, with reported quarterly product sales of $40.1 million for the first quarter of 2014. This was 37% above the $29.3 million that the company reported in the comparable quarter of 2013. Non-GAAP earnings were $0.01 per share, whereas GAAP earnings stood at -$0.44 a share. In 2012, the company paid a dividend of 15 cents a share.

As of March 31, 2014, the company had $117.73 million in cash and equivalents.

Catalyst

A major catalyst is waiting to happen in the shape of the progress of the Belinostat study. The FDA has accepted the company's NDA filing and classified it for Priority Review, fixing August 9, 2014 as the decision date. The drug has been tested on more than 1,000 patients, and has demonstrated a favorable safety profile at full dose.

Data from ongoing studies of Belinostat for NSCLC and carcinoma of unknown primary are other catalysts that could drive the stock up.

Potential takeover candidate

Speculating on potential takeover bids is a risky strategy, because there are too many ifs and buts in that. However, in the case of Spectrum, quarterly revenues have stabilized in the $40-50 million range. If the company is able to maintain revenue within this range, it could even report a profit in 2014. Joseph Pantginis, analyst at Roth Capital Partners, expects Spectrum to "continue to grow the Fusilev franchise at least over the next several quarters, and to put the pieces in place to potentially grow the market for Zevalin."

Spectrum's profile reads something like this:

  1. Sales of currently marketed products, all protected by patents, provide a stable foundation and downside protection.
  2. A strong balance sheet.
  3. A pipeline of more than ten oncology candidates with a reasonable growth potential and at least one nearing approval stage.

It is these fundamental factors that are driving reports (unconfirmed) that a merger or acquisition is likely.

Risk

Besides the general, well-known risk of an FDA rejection, speculating on potential takeover bids is a risky strategy because there are too many "ifs" and "buts" in that. In this case, the acquirer would be purchasing a pipeline of a company that has an established revenue stream. Big Pharma is known to make speculative acquisitions of companies, offering two, even three times projected peak sales of promising pipelines. This would mean a takeover price of anything between $1-2 billion, which, in my opinion, is a tall order.

Moreover, rumors of a possible takeover have been around for more than three years now; if an offer was to come, it would have been made by now.

Conclusion

Spectrum's valuation is expected to grow, driven by the three factors discussed above. Analysts predict sales of $188 million by 2015 and non-GAAP EPS of 4 cents. Spectrum deserves inclusion in a biotech portfolio for a long haul.

Disclosure: I am long SPPI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.