Spectrum Pharmaceuticals (SPPI) hit a low of $13.50 on Thursday and traded with a 6.5% loss throughout most of the day. The loss came after the company said that it will buy the international rights to the lymphoma drug Zevalin from Bayer Healthcare for $24.7 million, expanding its market for the drug. This statement fueled the recent rumors that Spectrum's growth may be slowing or even stalling in the U.S. The reaction of the stock proves that investors believe that either the price is too high, after royalties from future proceeds, or that growth is subsiding. Either way, I believe the market is wrong and that this drop is just another opportunity for longs to load up on the undervalued shares of Spectrum Pharmaceuticals.
It's no secret that I have been bullish on SPPI's future for quite some time: I've called SPPI the best value in biotechnology, I've wrote an article saying that it will double in 2012, and that it has the third most upside of any stock within the market based on its current position. Therefore, it's safe to say that I like SPPI and that I am betting on its success.
But the truth is that with SPPI there is simply no bet. The company is growing faster than any other biotechnology company and is priced at just 35% of momentum stock Questcor Pharmaceuticals (QCOR), despite posting similar earnings and faster growth. The valuation of SPPI simply doesn't make sense, compared to its fundamentals. Investors such as myself can use opportunities such as this to buy more shares at a cheap price.
The loss that took place on Thursday is a common pattern in Spectrum's trend. In the last year SPPI has traded with 7 periods of loss that were greater than 10% in a time span of three days; however it always recovers to trade at new highs. The stock has posted a gain of 850% since January of 2009 which include a gain of 125% over the last year. Therefore, it should come at no surprise when investors decide to take profits. Yet trading with an 8.5% loss during the last three days, which include a 6% loss on Thursday, after expanding to a global presence is definitely a head scratcher. I think it's the best deal that Spectrum's completed since it bought the rights to Zevalin from Cell Therapeutics (CTIC) in 2008.
The deal with Bayer states that Spectrum will pay $24.7 million up-front, and then an unknown royalty payment on sales of Zevalin. Like I said, the only explanation for the loss is that investors think the price was too high compared to growth potential. However, Spectrum said in its release that about 350,000 cases of non-Hodgkin's lymphoma per year are diagnosed outside the U.S. Therefore, the potential for growth is enormous especially when you consider that Zevalin's outlook has never been brighter now that the bioscan requirement has been lifted by the FDA.
I urge investors to think about SPPI's current valuation and then rethink their positions. Zevalin is just a small piece in this company's growth strategy -- the patent protected Fusilev is the company's fastest growing drug -- and it has two additional drugs in its pipeline that are expected to be approved later this year.
During the company's most recent quarter it posted revenue that increased by more than 200% and reported net income of $20.25 million compared to a loss in the year prior. Yet despite this level of unprecedented growth, the stock is trading at just 14.66x future earnings, and since the company's exceeded expectations during each of its last 4 quarters, by a significant margin, I am certain that its trading much closer to forward earnings than what analysts expect.
I know that sometimes the emotion of the market can result in irrational decisions, but don't be blinded by the normal trading pattern of this stock. History tells us that it will soon recover and trade at all-time highs once again. Bloomberg's Molly Peterson has already beat me to the punch and quoted Rajesh Strotriya as saying "we will maintain our revenue, the same or better than Spectrum's third-quarter sales of $51 million," which means earnings are once again on pace to rise. Therefore, investors shouldn't get preoccupied with the company's decision to expand, because the only meaningful news is earnings, and SPPI is on pace to, once again, blow out expectations and continue growing for many years to come.
Disclosure: I am long SPPI.