Spectrum Pharmaceuticals Trumps The Shorts

Tonight, October 2011 will enter the pages of Wall Street history as one of the best Octobers for decades, with the Russell 2000 up by as much as 18%, and its reputation as a bear killer month will grow. Because October saw the two biggest crashes of all time, in 1929 and 1987, the short players tend to raise their short positions in September, but start to panic and get wiped out as October wears on without another collapse.

Among the small, non-Israeli stocks that I hold in my portfolio and has risen substantially, is biotech company Spectrum Pharmaceuticals (NASDAQ:SPPI). It has risen 35% this month. This is a unique company among small biotech companies, most of which are hugely risky, being completely dependent on an FDA decision or the outcome of trials, and usually lose a great deal of money and need to raise funds constantly.

I put Spectrum in the portfolio because its CEO, Dr. Rajesh Shrotriya, has a different approach from that of most small biotech companies. He believes the company should buy from others rights in drugs that are already approved, or are at the last stages of development, to continue with trials until approval is obtained, and leave the giants with deep pockets to invent drugs from scratch. His strategy has worked well in recent years, and in my opinion, the stock is cheap relative to the company's numbers.

Spectrum currently has a market cap of $585 million and over $150 million cash. It is highly profitable thanks to sales of two cancer drugs, despite high expenditure on the development of two more cancer drugs in the pipeline. These drugs have a very large potential market, and will be submitted for FDA approval in 2012.

The company will soon come to an important milestone, because on November 20 the FDA is due to decide whether to cancel a certain procedure that needs to be undergone before Spectrum's Zevalin, which is already sold, is administered. If the procedure is removed, sales will grow substantially.

Four months ago, even before I added the stock to my portfolio in August this year, I commented on it because it stood out for the level of the short position in its stock, and because of a series of what I considered as over-the-top articles against it by TheStreet.com biotech reporter Adam Feuerstein. Feuerstein kept repeating the claim that Spectrum's high sales of its colorectal cancer treatment Fusilev would subside towards the end of the year, because Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA) had an equivalent, and much cheaper, generic treatment.

Teva's U.S. plant that produced this drug was temporarily shut down early this year, and a shortage arose from which Spectrum benefitted. Feuerstein would not cease threatening investors that the share price would collapse, because Teva would soon start producing its drug again. On the other hand, Spectrum's CEO maintained that even if Teva did start producing again, there was room for everyone, and he did not expect a collapse, but rather the opposite. My criticism of Feuerstein met with an article in which he accused me of indulging in fantasy.

Teva has indeed gradually restored production at its U.S. plant over the past few months, but Spectrum's third quarter results, released last Thursday, surprised everyone by how good they were-- including Feuerstein and the short funds that listened to him. Sales of Fusilev rose to $14 million in the quarter, 21% more than in the previous quarter, helping the company report non-GAAP earnings per share of $0.40, and $0.34 unadjusted, three times what the market had expected.

In response, on Friday, Feuerstein published an apology of a kind you don't see every day, writing, "It's time to admit my error" and of Shrotriya that "Today, he looks to be right. I was wrong." Of the situation with Fusilev he writes, "In fact, as the weeks pass, the likelihood of a permanent leucovorin shortage grows. Doctors, meantime, need drug to treat their colon cancer patients so they are embracing Fusilev, which is now on a $160 million annual run rate and growing." I will probably receive an apology for his personal remarks impugning my integrity the day that the Turks receive an apology from Bibi.

Another non-Israeli small cap in my portfolio, QuickLogic (NASDAQ:QUIK), shot up 37% last week. I regard QuickLogic as a dream company, which, should it succeed in leveraging its unique technology, will see its share price rise substantially. It reports its results tomorrow, but last week's jump came because it announced that a first smartphone produced Japanese manufacturer Kyocera (NYSE:KYO), sold by the KDDI network, is based on its screen technology.

This is technology that improves the visibility of the screen in bright daylight, while saving energy. Rumor has it that QuickLogic's technology is combined with advanced cellular processors by Qualcomm (NASDAQ:QCOM), the leading producer processors for cell phones. Tomorrow's results from QuickLogic are irrelevant to the potential of its technology, because sales in this area will only start to be significant next year.

Published by Globes [online], Israel business news - www.globes-online.com - on October 31, 2011 Reprinted on Seeking Alpha with permission; © Copyright of Globes Publisher Itonut (1983) Ltd. 2011

Disclosure: Author holds a position in mentioned stocks in his portfolio tracked by Globes.