Spectrum Pharmaceutical's (NASDAQGS: SPPI) has seen sales for FUSILEV grow dramatically in the last year and these sales have been, and continue to be, the primary driver of the stock. Prior to the survey of oncologists that we conducted in October 2011 and published, Spectrum had reported FUSILEV sales of $33.9MM (2Q11), $35MM (1Q11), $23MM (4Q10) and $6MM (3Q10). Our survey of oncologists, which we published on October 18th, ahead of the 3Q, when the stock was approximately $8.70, revealed that FUSILEV demand was growing and we suggested the stock was undervalued. In this article, we proposed that the next leg of FUSILEV growth is occurring, as indicated by recent prescription data, and that the stock is poised to move higher on 2012 sales.
Since the time of our survey, Spectrum reported 3Q11 FUSILEV sales of $41MM, up $6MM from the prior quarter. The stock subsequently hit an all-time high of $16.00 of January 12th. Spectrum then reported full-year 2011 sales, which showed FUSILEV sales had grown to $43MM in the 4Q, up another $2MM from the report 3Q number of $41MM. While still moving upwards, the observation of a slowing FUSILEV growth rate resulted in a weakening of the stock price to $13.00, where the stock is currently consolidating. Investors may believe that FUSILEV sales are starting to plateau and that shares are fairly valued at this level. As we describe below, we strongly believe this is wrong and again we expect a substantial move upwards.
At $13.00 per share, a cash balance of $161MM (as of 12/21/11), and 59.3MM shares outstanding (as of 2/16/12), Spectrum Pharmaceuticals has an enterprise value of $610MM. In the 4Q, Spectrum reported FUSILEV and ZEVALIN sales of $43.1MM and $6.7MM, respectively. This gives an annualized run-rate of $172MM for FUSILEV and $26.6MM for ZEVALIN, or $199MM combined. Hence, shares of SPPI are trading at a 3.1x multiple on sales, which some could say is "fair" value, or the midpoint, should sales flatten. If however, sales are growing rapidly, we'd probably apply a 4x to the current run-rate of sales, and the stock would be undervalued. Again, we will argue that FUSILEV sales are on the rise and that the stock should be valued in the low $20s.
The shorts continue to believe that a generic resupply of leucovorin is imminent. As of February 29, approximately 15.7MM shares of SPPI, out of a fully diluted share count of 59.3 MM shares, or 26.5% of the outstanding shares, were short the stock. This high short interest indicates that the shorts believe that generic leucovorin will resupply the market and oncology practices will stop using FUSILEV. The shorts argue that if this were to occur, shares of SPPI could plummet. Again, based on the data we present below, we strongly believe this short thesis is incorrect and that the shorts will soon need to cover their position, further fueling an appreciation of the share price.
We have looked extensively at the short thesis and believe that it is misguided. Even if the generics do resupply the market, we expect that FUSILEV will retain ~80% of the market for the following reasons. First, according to our diligence, Spectrum has entered into long-term supply contracts with oncology practices. Hence, these practices are now contractually bound to continue to use FUSILEV. Second, oncologists make more money (Average Selling Price + 6%) by prescribing the higher priced branded product over the lower priced generic. Hence, they are financially motivated to continue to use the branded product. Third, generic supply is unreliable. Hence, oncologists do not want to switch back to the generic if they feel that at any moment they will run out of the generic and have to re-switch their patients back to FUSILEV - better to just stay on the reliable product. Lastly, by staying on FUSILEV they avoid any dosing errors that may result from moving from one product to the other (FUSILEV is dosed at one-half the dosage of racemic leucovorin).
The strongest evidence of resurgence in FUSILEV sales comes from Wolters Kluwer (WK) prescription data, which comes out every month. The WK data is not comprehensive, as it does not track sales data from all distributors. For example in the 4Q11, WK reported FUSILEV sales of $33.5MM versus the actual reported sales of $43MM. Hence, WK appears to be capturing 76% of actual sales.
Importantly, the WK prescription data for FUSILEV was just published for the month of February, showing sales of $18.5MM, which is up 34% over January sales of $13.8MM and up 28% over December sales of $14.5MM. If we annualize February (x12) and assume the capture rate of 76% is accurate, then FUSILEV's run-rate is now at $292MM annually, up 70% from the 4Q11 run-rate of $172MM. Furthermore, we would not be surprised to see FUSILEV growing beyond the $300MM run-rate in the relatively near future.
Supporting evidence comes from the WK prescription data for generic leucovorin. WK reported 2,170,000 units sold in 3Q11 and 1,810,000 units in 4Q11. Importantly, unit volumes continue to decline precipitously: only 190,000 units were sold in January and 176,000 units were sold in February (newly published data). Hence, the generics are not resupplying the leucovorin market. To the contrary, the generic shortage is getting worse, which is reflected in lower leucovorin prescriptions and concomitant increased FUSILEV prescriptions, as captured by WK month over month.
Given these WK data, we believe shares of SPPI are poised for the next move upwards as FUSILEV sales increase faster than expectations. Even if FUSILEV sales flatten at the current $300MM run-rate, ZEVALIN sales stay at $26.6MM annually, and cash remains at $161MM, and we apply the current 3.1 multiple on sales, we get $19.40 per share. Applying a 4x multiple on sales, which is appropriate for growing revenue, gets us to $24.20 per share.