Spectrum Pharmaceuticals (SPPI) has much to be proud of after posting its very first fully profitable year in 2011. The company's newly gained confidence has encouraged it to dash out of the starting gates and set its goals higher than ever, looking to continue its meteoric growth. In 2011, Spectrum recorded total revenue of $193 million, a 160% increase from 2010, the majority of that profit due to its two FDA approved and on the market drugs Zevalin and Fusilev. Rajesh C. Shrotriya the president of Spectrum released a statement on its landmark year, "Today, Spectrum Pharmaceuticals is in a strong position of solid growth over the next 5 years." With that statement Spectrum has two drugs, Apaziquone and Belinostat. Shrotriya believes Apaziquone will get through clinical trials and be ready for the market in late 2012. Along with these two drugs, Spectrum has a large batch of 7 separate drugs in phase 2, phase 1, and preclinical trials that it is developing simultaneously over the next few years.
Spectrum has been getting a decent amount of positive news from sites such as The Motley Fool, and 'strong buy' ratings from sites such as Stocknod.com. Yet, the stock price has declined 23% from the beginning of January to present. By performing a solid analysis of the products sold by Spectrum, as well as where it stands with its pipeline drugs, I see no upside potential for profits this year. I believe the share price will fall until the end of 2012.
Spectrum banked $153 million in profit in 2011 from its colorectal cancer drug Fusilev. That cash flow is due to the sudden scarcity of a generic drug leucovorin, which causes similar effects to and is widely favored over Fusilev. Leucovorin supply is currently no longer lacking in 2012 and due to Fusilev's higher costs and similar efficacy as leucovorin it will be trumped by doctors' decisions to administer leucovorin. Sales will not mimic those in 2011.
The research and development that Spectrum has put forth is commendable. It focuses solely on diseases and afflictions that are in great need of resolution and have only one or two treatments available. However, a problem arises when creating drugs for afflictions that have only one other treatment. If your drug is not better than your competitor's or your drug is much more expensive, then your drug will be much less marketable and therefore less profitable.
As is the case with Spectrum's only other FDA approved drug Zevalin. Spectrum's competitor in non-Hodgkin's lymphoma medication is Biogen Idec (BIIB). Biogen has partnered with Genentech to create the drug Rituxan, a more cost efficient and equally effective treatment. Furthermore, it is recommended that Zevalin be administered in compound with two or more doses of Rituxan, so for every Zevalin sale Rituxan makes two or more. While Zevalin only netted $28 million in 2011, Biogen's Rituxan made $288 million in only the second quarter. Both of Spectrum's FDA approved drugs cannot compete with the market.
Spectrum currently shows a price to earnings ratio of 14.54 and a 52 week range of $7-$16. Spectrum's competitor is Biogen which shows a price to earnings ratio of 25.36 and a 52 week range of $73-$130. Lastly Spectrum is also competing with the biotech industry GlaxoSmithKline (GSK), which has a price to earnings ratio of 27.4 and a 52 week range of $39-$47. GlaxoSmithKline also carries well over 100 different drugs that also compete with Spectrum's two FDA approved drugs. While Spectrum has been around for much fewer years than both Biogen and GlaxoSmithKline, as a $700 million dollar industry it is going to have a rough year competing with two multibillion dollar industries.
Biogen recently reached a share all-time high in late March. Being well positioned for continual growth in the near future, Biogen has shown a 184% increase since 2007, and its drug pipeline has so many promising drugs cruising through phase 3 trials that I think its stock is underrated. Just recently it was released that Biogen has made a groundbreaking discovery towards the treatment of Lou Gehrig's disease (ALS). The drug is currently in phase 2 trials, showing positive results. Breaking the market wide open with a new treatment for ALS plus the other promising pipeline drugs, I would not be surprised to see share price increase to somewhere around $150 or higher over the next year.
GlaxoSmithKline has fallen 19% since 2007. Yet, GlaxoSmithKline still holds its place as one of the leading drug companies in the world. Netting 6.3 billion pounds in 2011, GlaxoSmithKline paid a 5.9% dividend yield, which is 3.6 billion pounds in dividends. This company has a market capitalization of $225 billion will remain on top. This company is still an overpowering competitor.
Overall, my outlook for Spectrum in the near future is bleak. With only two FDA approved drugs on that market that are being out-competed, Spectrum is putting all of its energy into the success of Apaziquone at the end of the year. Belinostat is only at the end of phase 2 clinical trials and it could take years before it is approved and sold on the market for profit.
If there's one thing that I highly advise against, it is investing in drugs that are not yet approved by the FDA. My experience in pharmacology and biotech has convinced me that more often than not drugs that have been developed for over a decade end up ineffective towards the disease it was created to resolve. Any number of other problems pertaining to efficacy and toxicity could also render the drug unusable. This scenario ends with a scrapped drug and millions of dollars down the drain. Spectrum has a tough road ahead, I foresee a continual fall in share price due to competition with GlaxoSmithKline and Biogen this year.
If you are a long-term investor, then sit tight until the end of the year and pay attention to the phase 3 trial reports of Apaziquone before they file for approval with the FDA. If the phase 3 results are solid and effective, then Spectrum will have major upside potential by cornering the market due to a complete lack of other treatments for bladder cancer beyond chemotherapy, immunotherapy and surgery.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.