A Reevaluation Of Spectrum Pharmaceuticals

Since Spectrum Pharmaceutical's (SPPI) announcement of the poor results of Apaziquone's (a late-stage treatment for bladder cancer) Phase III Clinical Trial last week, the stock has dropped over 22% to around $9.80/share. However, there is a sliver of hope (don't count on it) that the FDA will approve on the pooled data alone.

I will base my valuation on the assumption that the results are definitive and the expected additional $200-300mil peak annual revenue is now zeroed.

Concurrently, SPPI announced that they have inked an agreement to acquire Allos Therapeutics, Inc (ALTH) +28% for up to $206mil (CVR @ $0.11/share provided that certain Euro regulatory approval and commercialization milestones are met).

ALTH has a strong and growing drug, FOTOLYN (a treatment for refractory peripheral T-cell lymphoma) with sales up to $50mil from $35mil in 2011 and 2010, respectively. SPPI CEO Raj Shrotriya boasts to double FOTOLYN sales to $100mil - perhaps contingent on a successful outcome of European approval. FOTOLYN Total Rx data from Wolters Kluwer (NYSE:WK) seems to suggest there is still room for growth. Furthermore, since ZEVALIN and FOLOTYN are targeted to the same hematologists/oncologists, I believe SPPI can leverage their current distribution channels to maximize FOLOTYN revenue.

SPPI's prized drug, FUSILEV (a palliative treatment for advanced metastatic colorectal cancer) quadrupled in sales last year to $153 million while ZEVALIN (for non-Hodgkin's lymphoma) revenue dropped from $29mil to $28mil despite marketing attempts.

FUSILEV's growth is partially fueled by the persistent supply shortages in leucovorin (the cheaper, racemic, generic alternative) but based on new Rx growth (and 1. FUSILEV supply stability 2. Physician reimbursements 3. PT loyalty). Total Rx revenue in Jan and Feb 2012 have been reported to be $215k and $259k- representing a 117% and 123% increase over a trailing 12mo average).

At the moment the leucovorin shortage will most likely extend to end of Q2 (anticipated date for TEVA Pharma) yet I do not expect a full resupply until Q4 (because additional manufacturers have yet to publish a release date). Therefore I expect FUSILEV sales to see around 90% sales growth in 2012.

In late Nov 2011, SPPI announced FDA approval for removal of Bioscan requirement for the ZEVALIN treatment to simplify the ZEVALIN regimen. And on Mar 2012 ZEVALIN debuted a new Patient-to-Patient Educational Campaign to boost adoption. I expect a moderate growth rate of 20% because of these moves late last year.

My conservative DCF valuation puts SPPI at around $17.87 a share fueled by good FUSILEV growth in Q1-3 of 2012, moderate ZEVALIN growth and high FOTOLYN adoption. SPPI is still a buy.

Disclosure: I am long SPPI.