Seeking Alpha
Long/short equity, deep value, value, research analyst
Profile| Send Message|
( followers)

Big Pharmas these days are constantly working to bring new drugs thru the FDA approval process, then to market. They spend millions in research and development (R&A) to get a new drug on the market mainly because their current drugs on the market will eventually lose their patent protection.

Specturm Pharma (NASDAQ:SPPI) engages in an entirely different way to go about bringing drugs to market. The company does not spend millions on R&D to create a drug, rather, they look for small bio pharmas with drugs already in development, and/or current FDA approved drugs not being marketed correctly. As I remarked in a recent article, the Spectrum business philosophy was brought to the company by the current CEO Rajesh Shrotriya, and goes back to his years at Bristol-Myers Squibb (NYSE:BMY). Most of BMY's cancer drugs were acquired with the same business philosophy that Shrotriya is currently implementing at Spectrum.

In September 2000, Dr. Shrotriya joined the company as president and chief operating officer, and in August 2002, he was appointed chief executive officer.

Dr. Shrotriya is a Ernst & Young Orange County Region Entrepreneur of the Year award winner, winning the award last year for specifically turning around Spectrum. Dr. Shrotriya was chosen from 15 finalists by a panel of independent judges.

Zevalin (ibritumomab tiuxetan) was targeted and acquired by Spectrum following Dr. Shrotriya's business philosophy. Zevalin is a treatment for certain types of non-Hodgkin's lymphoma, and was originally Developed by IDEC Pharmaceuticals, which is now part of Biogen Idec (NASDAQ:BIIB).

In December 2007, Cell Therapeutics Inc (NASDAQ:CTIC) acquired the U.S. rights to sell, market, and distribute from Biogen for approximately US$30 million, or the equivalent of about two years' net sales revenue in the U.S. for the drug. Outside of the U.S., Bayer Schering Pharma continues to have the rights to the drug.

In March 2009, Spectrum Pharmaceuticals acquired 100% control of RIT Oncology, LLC, to commercialize Zevalin in the U.S. Sales have declined recently for Zevalin as reported in the company's last 10Q summary, but are still doing well, having decent margins. The sales drop is to be expected after the first 2 years of sales of Zevalin were heavily driven by an aggressive market campaign.

By going the route to actually acquire smaller pharmas, Spectrum does not spend millions upon millions in R&D, which also requires large staffing and various other cash burning expenses.

*Financial Highlights
Fiscal Year
Fiscal Year Ends:Dec 31
Most Recent Quarter (mrq):Sep 30, 2011
Profitability
Profit Margin (TTM):25.69%
Operating Margin :30.83%
Management Effectiveness
Return on Assets :16.49%
Return on Equity :37.51%
Income Statement
Revenue :173.93M
Revenue Per Share :3.35
Qtrly Revenue Growth (yoy):204.90%
Gross Profit :56.67M
EBITDA :58.80M
Net Income Avl to Common :44.68M
Diluted EPS :0.80

Rather impressive numbers above from a young company like Spectrum. In various other articles of mine that cover bio-pharmas, I stress the importance for a company to have good management. It is the number one factor I consider before making an investment in any company. Since I prefer to invest in smaller companies that are just beginning to make head-way that have top management, I decided to make a large investment in Antares Pharma (AIS) because my due diligence tells me Antares has this very type of top management I look for notwithstanding other factors, some of which I have written about that includes VIBEX MTX and insider buying.

If I had some extra capital freed up, I would definitely be investing it in Spectrum. Again, I am just very impressed with the company's management team.

It is certain Dr. Shrotriya will continue his business model at Spectrum, looking for smaller companies with promising drugs in development or already approved by The FDA.

I have heard some rumors lately about a small bio-pharma company named OncoVista Innovative Therapies (OVIT) that might be currently targeted for acquisition by a larger pharma. Ovit has a tiny market cap of 6.35 million and a few million shares outstanding, which would make for an easy buy-out for a larger pharma. However, I am not sure this tiny company fits Spectrum's bill on what they look for, but the company does have 2 very promising drugs in development, and seems to be in decent financial shape considering its low pps of $0.29. I will likely write an article soon that includes Ovit, as I find it an interesting and virtually unknown company with potential.

My first article on Spectrum covered its currently marketed drugs and pipelined drugs, but did not give my price target for it. Because of the business model Spectrum engages in, and because of the excellent management team the company has, I estimate that in 3 to 5 years, Spectrum should be selling in a range of $30 to $50 a share.

*Data sourced from Yahoo Finance.

Disclosure: I am long AIS.

Disclaimer: This article is intended for informational and entertainment use only and should not be construed as professional investment advice. Always do you own complete due diligence before buying and selling any stock.

Source: Spectrum Pharma's Business Model Is A Winner