Spectrum Could Sink In Wake Of Trial Failures

by Erica Thinesen

Over the past few weeks, Spectrum (NASDAQ:SPPI) has received a lot of attention, mostly due to the failure of two clinical trials for its drug aqaziquone, used in the treatment of bladder cancer, and for the recent purchase of Allos Therapeutics (NASDAQ:ALTH). Now the company has announced it will be added to the S&P SmallCap 600 Index, effective April 24th at the close of trading.

This is reasonably tame news as the company has received much criticism by analysts and investors. While the acquisition of Allos remains a questionable move by the company, with some analysts applauding Spectrum for a smart business move and others mentioning underwhelming sales of Fotolyn, a blood cancer drug manufactured by Allos which only earned $50 million in U.S. sales last year, many investors have moved on to other opportunities, which caused the stock price to fall. News of the company's addition to the S&P SmallCap 600 Index may sway remaining investors to take a closer look at Spectrum before moving on to other investment opportunities.

Spectrum CEO Rajesh C. Shrotriya sees the inclusion as a positive one, citing the company's growing pipeline and recent acquisitions as proof the company is on the right track. To earn a place on the SmallCap 600 Index, a company must have a market cap between $300 million and $1.4 billion; Spectrum has a market cap of 610.63 million. Currently, the index includes 600 companies which make up about 3% of the U.S. equities market.

Even though earning a place on this index is impressive, investors should concern themselves more with how stable Spectrum remains going forward. With two failed clinical trials, the company has many more tests to perform before it can apply for FDA approval for aquaziquone. And even then, FDA approval is not a certainty.

In some cases, FDA approval can take years depending on the type of drug and how extensive development and testing was to determine the drug's safety and overall effectiveness. If the drug does not receive approval, manufacturers then have to continue testing to make improvements or abandon the drug in favor of new ones. This process can be a painful one for both the company and its investors.

In Spectrum's pipeline are two blood cancer drug treatments, Zevalin, developed by Spectrum and Fotolyn. Both require more attention to marketing to achieve greater public appeal. Luckily, the FDA lifted the pre-treatment scan requirement patients had to complete to receive Zevalin. This should provide greater access to the drug. For investors, this should provide some relief as sales should stabilize going forward.

Treating lesser known types of cancer such as blood cancer and bladder cancer comes with its own risks and rewards. Before investing in Spectrum, which has two drug treatments for blood cancer and two failed clinical studies for its bladder cancer treatment, it's important to consider past failures by competitors, as this may help put things into perspective and give investors an idea of how Spectrum may handle future issues with its products.

In 2010, Pfizer (NYSE:PFE), one of the largest drug manufacturers in the world, pulled its blood cancer drug, Mylotarg, from the market after numerous deaths attributed to the drug were reported. Since then, however, the drug has been shown to help patients with acute myeloid leukemia live longer when used along with chemotherapy. Even though Mylotarg failed to help people with one type of blood cancer, it may help those with another type. Giving up a drug is not always the best way to move forward. With further testing, Spectrum's aqaziquone could prove beneficial in treating other types of cancer or other diseases entirely.

In 2011, Sanofi (NYSE:SNY) announced the failure of its breast cancer drug, iniparib, during an advanced clinical trial. Sanofi inherited the drug after acquiring the drug's manufacturer, BiPar in 2009. This goes to show that not all drugs obtained through the acquisition of another manufacturer will benefit a company. On a positive note, Sanofi was able to pull some of its data from the failed trial to use in subsequent trials. Iniparib, when combined with chemotherapy, did show some positive results, just not enough to consider the trial a success.

Other companies reporting failed clinical trials for drug treatments used to treat lesser known cancers include Eli Lilly (NYSE:LLY) and Merck (NYSE:MRK). The two companies worked together to develop Erbitux, used to treat advanced colon cancer. The drug had already received approval from the FDA when late clinical trials in 2010 revealed the treatment did not slow down the growth of tumors in patients as much as originally predicted. Erbitux, still on the market, does not provide definitive results in the slowing of tumor growth.

The main point investors should take away from this is that even though clinical trials fail, companies can still bounce back. Some develop other uses for the drugs, while others continue to market the drugs (with prior FDA approval) to at least help some patients with difficult-to-treat cancers. Regardless of whether a company succeeds each and every time it conducts a clinical trial is irrelevant when looking at the larger picture - the future.

For Spectrum, the future remains uncertain for now. News of the company's listing in the S&P SmallCap 600 Index may renew interest in the company from an investment perspective. With increased visibility comes increased scrutiny, however. If Spectrum follows in the footsteps of other companies that have suffered through failed clinical trials, it should come out on the other side a little wiser and a little more cautious moving into the future. Investors should also come out of this a little wiser and more cautious as well. After all, none of these other companies made the S&P SmallCap 600 Index.

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