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Summary

  • Spectrum, a small-cap biotechnology company, has five FDA-approved drugs generating revenue and a deep pipeline for hematology and oncology treatments.
  • It has three drugs in the late stage of development: SPI-2012, Apaziquone and CE-Melphalan. The current market for Melphalan is worth $130 million annually.
  • The upcoming catalysts for the company include NDA filing for CE-Melphalan next month, SPI-2012 Phase III go/no-go decision, and Apaziquone NDA filing by the end of this year.
  • The current price level is a good entry point to go long Spectrum, as the company has sound financial conditions, approved products, prospective candidates and commercial operations.

Spectrum Pharmaceuticals, Inc. (SPPI) is a small-cap biotechnology company with a focus on developing drugs for hematology and oncology. Its main focus is on acquiring, developing and commercializing a broad pipeline of late-stage clinical products. The company has five FDA-approved oncology/hematology products in the market (Fusilev, Folotyn, Zevalin, Marqibo, and Beleodaq), two late-stage candidates, and a diverse pipeline. The company is also fully capable of commercial activities to market and sell its products in the U.S. and partnerships for commercializing activities outside the U.S.

The company has strategic alliances with a number of companies, such as Hanmi Pharmaceuticals, Ligand Pharmaceuticals, Bayer, Biogen Idec, Mundipharma, TopoTarget, Fujifilm, Inex, Hansdok and Nippon Kayaku. The company acquires late-stage products and then develops them instead of discovering drugs in-house. Thus, these partnerships are of paramount importance for the company.

Cancer is widely researched by many companies and there are myriad drugs already in the market. The companies targeting similar indication as Spectrum include, among others, Endo Pharmaceuticals, Astra Zeneca PLC, Eli Lilly & Co., Genentech, Novartis AG, and Abbott Laboratories. Spectrum faces competition from the giants of the healthcare industry that have huge resources for their research. However, to date, Spectrum has been faring well.

Products

Fusilev is Spectrum's lead product, originally approved in 2008 to rescue after high-dose methotrexate therapy in osteosarcoma and to diminish toxicity among others. In 2011 it was approved by the FDA for the treatment of advanced metastatic colorectal cancer, and is used in combination chemotherapy with 5-FU. The company predicted a fall in sales of Fusilev in 2013 due to generic competition, which lead to a decline in the share prices of the company. However, the sales figure increased over that period of time, coming as a surprise. In the last quarter the sales were $26.6 million, an almost 106% increase from the same period last year. Sales of Fusilev are expected to remain stable, thus suggesting a positive outlook.

Folotyn, first approved in 2009, is indicated for treating relapsed or refractory peripheral T-cell lymphoma (PTCL), an aggressive form of non-Hodgkin's lymphoma. It was the first treatment for PTCL and was approved under the FDA's accelerated approval process. In the previous quarter, sales of Folotyn were $12.6 million, a 25% increase over the first quarter.

Zevalin is an intravenous injection for the treatment of relapsed follicular B-cell non-Hodgkin's lymphoma when other cancer drugs fail, and for newly diagnosed NHL when initial anticancer therapy shows no response. The company also intends to study it for additional unmet conditions that are not yet disclosed. In the last quarter, sales of Zevalin were $6.3 million.

Marqibo is an FDA approved drug for the third-line treatment of Philadelphia chromosome-negative (Ph-) acute lymphoblastic leukemia (ALL). It's also being studied for the additional indication of broader ALL and NHL, with a Phase II study intended for NHL in 2014. In the last quarter sales of Marqibo were $1.4 million.

Beleodaq is indicated for the treatment of PTCL and was approved in July 2014 under the accelerated approval program. The safety and effectiveness of the drug was evaluated in 129 patients, out of which 25.8% patients' cancer disappeared or shrank after the treatment. Full approval will be granted after analyzing the results of a Phase III confirmatory trial in combination with CHOP (cyclophosphamide, vincristine, doxorubicin, prednisone). The approval of Beleodaq didn't give the stock the boost that was expected, mostly due to the fact that it targets such a rare disease.

Candidates

Spectrum Pharmaceuticals has an impressive pipeline, with two late-stage candidates and seven other candidates, as well as the marketed products being studied for additional indications. The company also has a portfolio of three neurology drug candidates in preclinical phases for schizophrenia and attention deficit hyperactivity disorder (ADHD), available for out-licensing.

The first candidate of interest is the Captisol-enabled Melphalan for treating multiple myeloma. It met the primary endpoint in a Phase II/b trial and an NDA filing is expected next month. Melphalan is an anticancer chemotherapy drug that has been in use for ages, but it's administered with propylene glycol (PG) as a co-solvent. The problem here is that PG is known to be poisonous for the renal system and also causes cardiac side effects. This limits the amount of Melphalan a patient can take, thus reducing the benefits that can be derived from it.

However, the Captisol-enabled Melphalan, as being developed by Spectrum, is free from these problems since it does not use PG. Instead, it uses the Captisol technology to safely deliver the drug with reduced toxicity. This will allow for increased dosage of Melphalan to better achieve the intended pre-transplant chemotherapy. The Captisol technology allows for better solubility, stability, facilitates delivery, safety and facilitates faster development. Thus CE-Melphalan, when approved, will be the first PG-free formulation of Melphalan for this indication. The approval is very likely since Melphalan is an already approved drug and its benefits are proven; also, Captisol is a validated technology and various other products using this technology are already approved by the FDA.

The Melphalan market is currently worth $130 million annually, and the predominant use is for stem cells transplants. Thus, CE-Melphalan will be grabbing major share from this market. Furthermore, there is a 3.3% annual increase in the patients of autologous stem cell transplant (ASCT) for multiple myeloma, thus increasing the revenue prospects.

The other candidate worth attention is Apaziquone for the treatment of non-muscle invasive (superficial) bladder cancer (NMIBC) following the transurethral resection of a bladder tumor (TURBT) -- i.e., surgical removal of the tumor. In NMIBC, the cancer is present in the surface layers of the bladder and hasn't spread to the deeper muscle. Furthermore, it's a highly recurrent disease with approximately 80% patients seeing it return within five years, and a majority of patients having it return within two years.

The bio-reductive enzymes, over-expressed in the bladder, activate the Apaziquone to become a cytotoxic alkylating agent, which reacts with the DNA and inhibits cancer cells reproduction. This allows for lower toxicity in the system and destroys the cancer cells and tumors that weren't observed during the resection. There is still doubt over the approval of Apaziquone following the failure to meet the primary endpoint in the Phase III trials in 2012.

However, treatment with Apaziquone did show significant treatment effects in the rate of tumor recurrence at two years at p-value = 0.0174 and in the secondary endpoint of time to recurrence (p-value = 0.0076). Additionally, the FDA has requested a confirmatory Phase III trial, and an NDA filing is expected at the end of this year or the beginning of next year. Since currently there are no FDA approved drugs for post-resection chemotherapy, the chances are bright for the drug's approval based on positive results.

The third candidate of interest and potential is SPI-2012, a treatment for chemotherapy induced-neutropenia -- a condition where the ability of the body to fight off bacterial infections is reduced. SPI-2012 is currently in a Phase II trial, with results expected in the next few months and a Phase III trial go/no-go decision to be made. SPI-2012, based on Hanmi Pharmaceutical Company's proprietary LAPSCOVERY Technology, is a granulocyte colony-stimulating factor (GCSF) that stimulates production of white blood cells by the bone marrow, more specifically after the chemotherapy for breast cancer. SPI-2012, when approved, will be competing in a worldwide market of over $6 billion. If it is able to capture only 10% of the market, that means sales of about $600 million and, subtracting the milestone payments, still gives Spectrum major revenues. One thing to note here is that Spectrum holds the worldwide rights for SPI-2012, except in China, Japan, and Korea.

Market Performance

Shares of Spectrum have not seen major appreciations this year, despite the approval of a fifth drug and better earnings over the quarter. The year-to-date performance is rather dismal at -10.01%, and as of Aug. 26, 2014, the share price was at $8.15. However, with the upcoming catalysts, this is a good entry point to go long Spectrum.

Analysts covering the stock have a consensus price target of $11.38, with the highest price target of $15. The lowest price target is at $7.50, very near to the current price. Thus, in my opinion, the price has seen its lows and will be appreciating in the foreseeable future. Furthermore, the mean recommendation for the stock is a buy, with the most recent buy rating reiterated by H.C. Wainwright & Co. at a price target of $15.

Financials

In its second quarter the company reported $46.9 million in product sales, which has increased 45% vs. $32.2 million in the second quarter of 2013. The increase in product sales is attributed to the rise in Fusilev sales. Furthermore, the company reported a loss of $3.6 million for the second quarter as compared to $9.7 million in the second quarter of 2013. With the evident increase in sales, and an addition of two marketed products, there is a good chance that the company will turn profitable sooner rather than later. This is also easy to believe because they have stable costs and expenses when compared to previous year's quarter. Usually after the addition of two marketed products and other late-stage candidates, expenses are expected to increase sharply -- but Spectrum has been able to keep them under control. Additionally, the EPS estimate for 2015 is -0.74, with the highest estimate going to 0.30, which shows that analysts have high expectations for the company.

As of June 30, 2014, the company has cash at hand of $136 million, up 15.5% from the $117.73 million in the previous quarter. The company expects this cash to suffice for the next 12 months with the current activities and those that are planned.

Upcoming Events

The NDA filing for CE Melphalan is expected by September. The pivotal study of CE Melphalan met its primary endpoint and the company had a positive meeting with the FDA regarding the NDA submission. Thus, we see this as a catalyst for the stock price that's just waiting to happen.

The SPI-2012 Phase III go/no-go decision is expected by the end of this year, which is also a major catalyst since SPI-2012 is touted as a blockbuster potential drug. Additionally, positive results from the Phase II study, when announced, will also drive the stock price up.

Positive news regarding the NDA filing of Apaziquone is also expected toward year-end or early next year, which will boost share prices. It will be the first approved drug for NMIBC in the U.S. in the past 30 or so years.

The company is expected to submit abstracts for Beleodaq for the American Society of Hematology this year. Additionally, recruitment for the Phase III confirmatory trial (BelCHOP) of Beleodaq is also expected to be completed in the fourth quarter of 2014, with the study expected to begin in the first half of 2015.

Risks

A major risk for Spectrum at the moment is the decision on the lawsuit against Sandoz, Inc. and Innopharma, Inc., as they applied to produce generic versions of Fusilev. If the generic version of Fusilev is allowed, it would negatively impact sales of the product and the stock price would likely nosedive following the decision. Spectrum does hold patent rights for Fusilev, but a final decision from the court will determine the drug's fate.

Additionally, the company received a subpoena from the SEC last April to investigate the ordering patterns of Fusilev, following the dip in stock prices in 2013. To date, no outcome has been announced regarding this investigation. However, it is a risk where a negative result from the investigation could affect the stock price, and there might be monetary penalties.

Spectrum Pharmaceuticals, being a development-stage company, is faced with the inherent risk of failure in clinical trials or the rejection of NDA from the FDA. This not only hampers the progress of the development, but also proves to be detrimental for the stock price and the cash position. The company works by acquiring developing candidates and if such an opportunity presents itself in the near future, they may have to raise cash to fund this investment. Thus, a dilution in the future is not out of question.

Bottom Line

Spectrum is a good long-term investment based on five products already in the market, a strong pipeline, commercializing abilities, encouraging growth numbers, and to top it all off a sound financial condition. The candidates, if and when approved, will be competing in rather lucrative markets with high revenue generation prospects -- for instance, treatment for bladder cancer is considered to be one of the most expensive cancer treatments on a per patient lifetime basis, mostly due to the high recurrence rate.

The company has a number of major catalysts on the horizon as mentioned; additionally, it has multiple ongoing trials that could produce results or news at any time, thus impacting the share prices. Based on previous incidents it can be summed that the reaction of the stock price may not be exponential, but it will definitely be substantial. The stock does come with some risks, which include the ones mentioned above and the incorrect guidance provided by management last year. In my opinion, it's about time to put that behind us and move forward, since the company does have potential and the future doesn't look very bleak. Thus, in my opinion, the risks associated with this stock don't outweigh the possible long-term benefits. Going long at the current low stock price might just be among the better investment decisions one can make.

Source: Spectrum Pharmaceuticals: A Long-Term Bet