Some would argue that commercial stage biotechology investing is less risky than those in clinical development with no marketed products. However, recent developments with Benlysta at Human Genome Sciences (HGSI) and Provenge at Dendreon (DNDN) have proven otherwise. Successful commercial drugs in the pharmaceutical/biotechnology space are no different than products in other sectors such as technology. There has to be a need in the marketplace, establishment of logistics/distribution channels, and execution of promotional and sales strategies. When compared to the clinical development stages, a different set of challenges present themselves for biotechnology companies after product approval and commercialization begins.
The initial metrics of profitable small cap biotech companies (less than $2 billion), quarter-over-quarter sales growth of greater than 25 percent netted two promising companies. Jazz Pharmaceuticals (JAZZ) and Spectrum Pharmaceuticals (SPPI) are companies that have demonstrated successful launches and selling of their FDA-approved products. At market capitalizations of $2 billion and $800 million, respectively, there is significant upside in these commercial-stage companies.
A specialty biopharmaceutical company, Jazz has a portfolio of 12 marketed products addressing areas such as women's health and the central nervous system. At 32.5 million dollars, net income at Jazz more than doubled in the third-quarter. Year-over-year quarterly revenue growth increased by over 60 percent with Luvox Cr and Xyrem, the company's two lead commercial compounds, demonstrating strong sales growth.
Sales of Xyrem, a drug indicated for narcolepsy, increased 68 percent to $62.5 million dollars in the third quarter. The drug competes in a space where Provigil by Cephalon (CEPH)/Teva (TEVA) had sales of $1 billion in 2010. Xyrem demonstrates efficacy for symptoms of narcolepsy as it is currently endorsed by the American Academy of Sleep Medicine as a standard-of-care treatment for cataplexy, daytime sleepiness, and disrupted sleep secondary to this neurological disorder. In addition, Xyrem is recognized as an effective off-label therapy for fibromyalgia, a large global market valued at $1.7 billion in 2010 with a compounded annual growth rate of 4.3 percent that will reach 2.4 billion in 2018. Treatments for fibromyalgia are few, with only 3 FDA approved products-Lyrica from Pfizer (PFE), Cymbalta from Eli Lilly (LLY), and Savella from Forest Laboratories (FRX). With the exception of Savella, Lyrica and Cymbalta are blockbusters with $1.5 billion and $2.6 billion in 2010 sales, respectively. Like Xyrem, sales for Luvox Cr, a treatment for Obsessive Compulsive Disorder, increased substantially at 46 percent in the third quarter.
Recent activity of Jazz has further improved the company's outlook. The merger of Jazz with Azur Pharma will significantly expand the company's drug portfolio, penetration in different therapy areas, and reach in global markets. On top of this, there is strong institutional ownership at 92 percent and strong insider/hedge fund transactions as seen by the recent purchase of $121K worth of Jazz shares in the open market by Kathryn E. Falberg, the CFO of the company.
Earnings and revenues at Spectrum have increased substantially in their most recent quarterly report. The company reported a net income of $20 million versus a net loss for the year-ago quarter and revenue increasing by over three-fold at $51 million dollars versus $16.7 million in the third quarter of 2010. The strong revenue growth was derived mainly by the company's two lead products: Fusilev and Zevalin.
Fuseliv, indicated for advanced metastatic colorectal cancer and high-dose methotrexate rescue therapy in osteosarcoma, experienced close to a seven-fold increase in sales when compared to third quarter sales in 2010. This increase becomes even larger when compared to a nine-month period. Sales of Fuseliv for the nine-month period ending on September 30, 2011 showed an increase of twelve-fold when compared to the nine-month period in 2010.
Legitimate concerns exist for a Spectrum investment if based solely on Fuseliv -- namely, the leucovorin shortage and patent challenge. The large increase in sales, in part, has resulted from the lack of leucovorin availability and the market realizes that this provided a short-term, but significant demand in Fuseliv. However, investors should be reassured as Rajesh Shrotriya, CEO of Spectrum, stated that revenue will be on par, if not increased, from the third quarter of 2011. Looking beyond the fourth quarter, clinician exposure to Fuseliv will continue and sales will remain on a strong trajectory, albeit at a slower pace relative to the third quarter as the leucovorin shortage eases.
The patent challenge announced in December should be a non-event as Spectrum will be able to successfully defend the patent. Fuseliv or levoleucovorin, is derived from leucovorin, a generic drug used to treat non-Hodgkin lymphoma and methotrexate toxicity. Because of this, some are concerned that the patent challenge will be successful and diminish the main franchise, Fuseliv, at Spectrum. The notion of Spectrum losing this patent challenge is inaccurate. Spectrum has a high probability of patent defense as there are many big drugs on the market that are still patent protected and "derived" from a drug that is generic on the market. Nexium or esomeprazole is an isomer or "derived" from generic omeprazole or Prilosec. Nexium, from Astrazeneca (AZN), was the top-selling drug in 2010 with $5.2 billion dollars in sales. Similarly, Lexapro or escitalopram is an isomer or "derivation" of citalopram, a generic antidepressant. Lexapro, from Forest Laboratories , had sales of $2.5 billion dollars in 2010. Fuseliv has the orphan drug designation and market exclusivity through 2018 with therapeutic composition patent expiring at the end of December 2019.
The case for Spectrum strengthens when one considers the other marketed compound, Zevalin, and the drug pipeline. In November, the FDA approved the removal of the pre-treatment biodistribution evaluation or "bioscan." Not only does this simplify treatment with Zevalin, but it also minimizes the radiation exposure. The company also purchased the international rights to Zevalin from Bayer in January that should expand the size of the market. Sales for Zevalin should increase as the bioscan requirement is removed and potential market increased. Indications for Zevalin should also expand as positive data demonstrated promise in patients undergoing bone marrow transplant.
The company has a sizable pipeline with one candidate, apaziquone, in Phase III studies. Apaziquone is being studied for the treatment of non-invasive bladder cancer and top-line data should be out in the first half of 2012.
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