Spectrum Will Surge Higher On Folotyn Approval

There's been some important news regarding Spectrum Pharmaceuticals (SPPI) and it has not been good. The news concerns the bladder cancer drug, apaziquone, a hopeful product that company trumpeted, has failed in two separate phase two trials. And, although this is seen as a major setback, many still consider Spectrum Pharmaceuticals to be a safe bet in terms of stocks.

The seeming disconnect in these viewpoints, namely that a) the failure of the drug will cause negative effects, and b) that the company will continue to remain strong despite this, both have evidence in their favor.

To begin, the failure of the drug has caused Spectrum Pharmaceutical stock to drop off more than 22%. Spectrum Pharmaceuticals has indicated a desire to continue the study until it reaches success and, although it is believed that the company has the time, money and resources to achieve this, a large number of investors have pulled out due to the failure of the drug.

There is still a hope that the FDA will approve the drug based on the pooled data from both trials, but it is largely accepted that this is a very slim hope. If you consider that one of Spectrum's rivals, InterMune (ITMN), who had a 50% success rate in its trials of a certain drug, tried to do the same and was still not approved by the FDA. The hope for any success with apaziquone seems thinner still.

If the failure of Idenix Pharmaceuticals (IDIX) with its IDX 184 drug and the price repercussions thereof are anything to go by, we can assume that Spectrum Pharmaceuticals may be the victim of increased "investor wrath" before very long. When the Idenix's drug failed to have an impact on most patients, a significant amount of investors pulled out, similar to the trend that we have seen with Spectrum Pharmaceuticals.

On top of that its competitors are now in a position to get ahead in the drug development arena. Abbott Laboratories (ABT) for example has recently achieved success in its trials for a drug aimed at treating Hepatitis C. Although Abbott Laboratories has not received FDA approval as yet, it can still be considered ahead of its major competitors. This puts Abbott ahead of both Idenix and Spectrum, meaning the two will have to play catch up in a highly profitable field of the industry.

So far, all of this speaks to the first point I mentioned of Spectrum seeing a falloff. But there is good news on the horizon too. That good news is that Spectrum has made a deal to acquire Allos Therapeutics, Inc. (NASDAQ:ALTH). As Allos has developed a promising drug Folotyn, Spectrum will be able to make the best of the acquisition in that its has the resources to maximize the amount of revenue earned from the distribution of this drug. This is considered by many to be an important step in offsetting the bad news of the apaziquone failures.

Folotyn is designed to help those with relapsed or refractory peripheral T-cell lymphoma. It has already been a profitable endeavor for Allos and both companies hope it will continue to be as such. Sales in Europe will be a big determinant of this outcome, and while the drug was rejected there last year, Allos, and now Spectrum, are hopeful that decision will be reversed and the drug will enjoy international success. Spectrum CEO Raj Shrotiya estimates that Folotyn could bring in as much as $100 million.

As compared to competitors like Sanofi (SNY), which also experienced a failure with its cancer fighting drug Zaltrap, Spectrum Pharmaceuticals has created a balance between failure and success in the acquisition of Allos. Consequently I'd advise you not to give up on Spectrum just yet. The drug failure is certainly an arrow in the side, but it's not the chest the company will live to produce many more drugs. The success of those, like Folotyn, will determine more than failure of apaziquone.

So, the focus should not be on the fact that Spectrum may have acquired Allos only to offset its own failures. The focus should be on Folotyn and whether Spectrum can still produce a profitable and sustaining drug for the pharmaceutical market. Some experts doubt that it can, and they make a good point. But the company has had some great success in the past and if Folotyn can move beyond its already successful track record it could be the step that Spectrum needs.

The stock is currently trading around $11 per share, so it comes in at a lower risk than some of the other large pharmaceuticals. Folotyn and Allos could prove to be worthy buys and boon the stock up to a very solid long-term investment. If the drug continues to sell, and continues to help its prescribed patients, Spectrum can rest its head having forgotten about the apaziquone failure.

And so, as is often the case, we have a two-sided coin with Spectrum. On one hand, the company is reeling from a large failure the likes of which can do great damage to the reputation of a drug company. The other side shows a keener business side and a solid foundation for future planning in the Allos acquisition. We can't know what will come of things, but I'd venture to say that the healthcare industry, and certainly its consumers, tend to associate successes more than failures and Spectrum is hoping its found its ticket.

You will have to bear with Spectrum as is in for a rocky ride. As I mentioned, the stock is already down over 20% from last week, which has taken away from growth of last year's success with Zevalin, a non-Hodgkin's lymphoma drug. Success with Folotyn could boost the company right back to where it was last year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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