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Spectrum Pharmaceuticals (NASDAQ:SPPI) was down over 10% at one point on December 9th, because the FDA posted an application for a generic form of Fusilev (on page 19). I was puzzled by this as Fusilev is patented until 2019. I figured this news was just an excuse to profit take, as I wrote in my "stock talks" section. By the end of the day, SPPI had gained back most of its losses.

I have done a lot of research on Spectrum and its Fusilev drug recently, ever since it started hitting new 52 week highs in the past couple weeks. I've been trying to figure out if Spectrum's gravy train will be coming to an end and if it merits a short position soon. Generally-- with stocks in any sector-- when everything is going great for a company and it looks invincible, that's about the right time to sell. The icing on the cake for Spectrum's invincibility was biotech analyst Adam Feuerstein's "mea culpa" article, where he reversed his bearish position.

Fusilev, aka levoleucovorin, is almost identical to leucovorin, which has experienced a shortage for the past three years. Patients suffering from colon cancer can take either drug by way of injection. Because of the growing amount of patients with colon cancer, demand far outstrips supply for leucovorin and the shortages have been getting worse to the point that now even Fusilev is in short supply. As studies have shown, Fusilev hasn't been proven to be superior to leucovorin, but is much more expensive. Fusilev is about 10 times the cost of leucovorin. Spectrum is profiting handsomely from the chronic drug shortage problem in the U.S.

Spectrum's recent rise in share price is mainly due to Fusilev sales. In the latest quarter ended September 30, 2011, it recorded revenue of $51.02 million, with $41 million of that-- 80%-- coming from Fusilev.

If the leucovorin shortage ends, that will be bad for Spectrum's Fusilev. From my research, I have found signs that the shortage might be ending.

Good news for leucovorin, bad for Fusilev:

1. Producers have stopped selling leucovorin to wholesalers, and now sell directly to the hospitals.

Here is a list of drugs in short supply on the FDA website. I called the three listed manufacturers that produce leucovirin to ask about the shortage. All three have stopped selling to wholesalers, Bedford Labs just ended this on November 19th, and the company now only sells directly to the hospital pharmacies, in order to better ration out the drug.

(On a side note, noticing that Levoleucovorin (Fusilev) is now also on the list would've been a good indication that its earnings report was going to be great.)

2. The FDA Is Starting To Get Concerned

The FDA has asked Teva (NYSE:TEVA) to import leucovorin into the U.S. , shipping it in from Hungary. Maybe the next place we'll be importing from is China (this is said only half in jest)?

One of the reasons there has been a shortage in the first place is because the FDA is no longer allowing drug manufacters to cut corners. For the past couple years it has started to strictly enforce the rules, which is making it harder to mass produce these drugs. However, now that it is starting to get concerned about leucovorin, it may start bending the rules only for drugs having shortages. That will enable more to go into circulation.

3. The Spotlight Is Being Put On Drug Shortages

On page 11 of this drug shortage crisis report it shows that although drug shortages have increased for the last 5 years, it stayed the same this year compared to last year. It's possible that actions are now being put in place to put a stop to increased drug shortages.

Last month Obama signed an executive order to prevent future drug shortages because Congress has been taking too long to take action. Generally, when problems start being widely discussed in society, and the government and people put a spotlight on it, things start to get done. While government isn't perfect and sometimes things go too far in the opposite direction, eventually steps are taken to change things.

In conclusion, as the leucovorin shortage starts to go away, which it will inevitably happen in my opinion, Fusilev sales will suffer. There's no reason for doctors to continue buying Fusilev for ten times the price of leucovorin. When this happens-- which could very well be in the next few months-- Spectrum may still report another stellar quarter, but its guidance for the next quarter might be lower than expected.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Spectrum's Fusilev Sales Will Suffer As Leucovorin Shortage Is Eliminated