Spectrum Pharmaceuticals: Biotech Dream With a Safety Cushion

As of Friday, before S&P downgraded the U.S. credit rating from AAA to AA+, the top three Wall Street indices - Dow Jones Industrial Average, Nasdaq, and the S&P 500 - had fallen over 10% in the ten preceding sessions. The Russell 2000 Index fell over 15%.

Israeli shares on Wall Street fell over 20% over the same period - which does not include Monday's sell-off.

By Friday, it may become clear whether the slaughter in the midsummer heat is only a technical correction, and there will be a rebound at the end of August as happened in 2010, or if the market is telling us of a second recession three years after the last one.

At the microeconomic level, nothing has happened at specific companies, especially in the past few days. I am sure that companies such as Alvarion Ltd. (Nasdaq:ALVR), which has fallen almost 30% since celebrating its return to profitability in July, would change anything in its guidance given at that time.

I am exploiting the last week's plunge to add Spectrum Pharmaceuticals Inc. (Nasdaq:SPPI) to my portfolio. I am using money from my sale of Mellanox Technologies Ltd. (Nasdaq:MLNX) shares to pay for the purchase, after Mellanox rose 260% since I added it to my portfolio in early 2009. I believe that Mellanox will continue to rise, so I will continue to hold shares in it, but at a proportion more suited to the portfolio.

Spectrum Pharmaceuticals is a small biotechnology oncology company, which I believe has strong upside potential. On one hand, it is an investors' dream, with two drugs with huge market potential under development, while also providing investors with a safety cushion in the event of failure in a clinical trial or U.S. Food and Drug Administration (FDA) rejection, because Spectrum has strong sales from two products.

Roth Capital gives Spectrum Pharmaceuticals a "Buy" recommendation with a target price of $15, compared with yesterday's close of $7.75, giving a market cap of $403 million.

Spectrum Pharmaceuticals' flagship product is Fusilev, a treatment for colectoral cancer, which has $110 million in annual sales in the U.S. The share price has a high short level of 7.9 million shares, or 15% of its share capital, because some parties believe that Teva Pharmaceutical Industries Ltd. (Nasdaq:TEVA), which has a similar and cheaper generic drug, will hurt Spectrum Pharmaceuticals' sales.

Published by Globes [online], Israel business news - www.globes-online.com - on August 9, 2011;Reprinted on Seeking Alpha with permission; © Copyright of Globes Publisher Itonut (1983) Ltd. 2011

Disclosure: The author holds both MLNX and SPPI in his portfolio tracked by Globes