Spectrum Pharmaceuticals (SPPI), a biotech, research and development company, keeps one eye firmly focused on commercialization of its products and the other on retaining a continual, positive cash flow. On the surface, the company seems to have "bet the entire store": cancer drugs. Still, there is no cure for cancer on the horizon, and with so many variations of the disease becoming more evident every day, it's a field with quite a bit of opportunity for new drug development.
Most recently, the company's clinical trials for its key drug apaziquone failed. The company's intrinsic value is permanently impaired on that news; however, it does not mean the company is headed into bankruptcy or in need of immediate cash just yet. While approval and marketing risks still face its other drug candidates, investors should not immediately discount its potential future earnings prospects from its currently approved drugs, Zevalin (radiotherapy for non-Hodgkin's lymphoma) and Fusilev (for colorectal cancer).
Spectrum certainly has neither the range nor the depth of products offered by its much bigger competitors. The pharmaceutical giants in the industry, like Johnson & Johnson (JNJ), offer a range of drugs aimed at a very wide variety of diseases, from cancer and diabetes to general pain management. This makes Spectrum a "niche" competitor of the large drug corporations, as opposed to a head-to-head, full-on, market competitor. However, within its niche, Spectrum does have a variety of drugs. Zevalin and Fusilev, which are FDA approved, put Spectrum's bottom line into the black for the first time last year. It also has a number of drugs in its pipeline, currently navigating through the required steps for clinical trials. One of those drugs is apaziquone.
Risk of a Failed Clinical Trial Diluted by an Acquisition
Apaziquone is a drug within the hematology-oncology family. Recently, it became a double-edged sword for Spectrum when it failed its Phase II clinical trial. The news of the failure sent the Spectrum stock into a 23% decline. This caused the stock price to move from the $12 to $13 per share range two weeks ago, to its current trading position of $9 per share. It's a typical investor's reaction to a clinical trial failure, as clinical trials are seen as a keystone for projected sales and revenue over the subsequent 12 months. Under the circumstance of a failed clinical trial, the downward effect on the stock price would have occurred even for Spectrum's larger competitors.
However, that view of apaziquone may be a bit short-sighted. While the specific trial outcomes were not favorable for the drug, much has been made of the better reports for the pooled data. While it is not likely the FDA will approve a drug based on pooled data, it is likely the FDA would be willing to sit down with Spectrum and have a discussion on where to go next with the drug. Apaziquone targets non-invasive bladder cancer, and there has not been a new drug approved and marketed for that disease in over 20 years. Spectrum has announced it will continue to pursue apaziquone and this line of research. With the complete lack of other solutions on the horizon, there is no reason to think the FDA would not encourage Spectrum's effort. But the damage of a failed clinical trial has already been done to Spectrum's stock price and its sales forecast, which is now left without the projected revenue for apaziquone.
Spectrum did mitigate the news of the apaziquone clinical trial failure with the announcement of the acquisition of Allos Therapeutics (ALTH). The Allos purchase comes with the drug Folotyn, developed for the treatment of refractory peripheral T-cell lymphoma. Allos has a viable, FDA approved drug in Folotyn. It's currently awaiting approval in Europe to expand to that market, but does not have the marketing and delivery capabilities of Spectrum. Spectrum's sales forecast now speaks to the expansion of sales of Folotyn from $50 million in calendar year 2011 to the $100 million level. This will neatly offset a good portion of the now-defunct sales forecast for the failed apaziquone. Even if apaziquone is not revived to the point of FDA approval, Spectrum has already established a replacement revenue stream with Folotyn.
Risk and Risk Mitigation
The risk is in another overstated sales forecast if Folotyn does not receive approval for the European market. Rejection would close the European market and reduce the sales forecast for the drug, which would undoubtedly have the expected adverse affect on Spectrum's projected bottom line. However, at the moment, there is no indication of such a rejection by the European regulatory bodies, and Spectrum announced it will provide an $.011 per share cash premium if both the approval is received, and the first commercial sale of Folotyn occurs in Europe, prior to Dec. 31, 2013.
Spectrum's two drugs, which are FDA approved, have direct competition that is dominating the market. Its drug for non-Hodgkin's lymphoma, Zevalin, has a lower-priced counterpart, Rituxan, made by Biogen Idec (BIIB). Rituxan also outsells Zevalin by a 40:1 margin, realizing $280 million in sales per quarter, compared to Zevalin's average of $7 million in sales per quarter. Biogen is also focusing on the development of a viable drug treatment for ALS, more commonly known as Lou Gehrig's disease.
Spectrum's other revenue stream comes from its second FDA approved drug, Fusilev. Fusilev's direct market competition is from a generic, Leucovrin, manufactured by the heavyweight of generic drug manufacturers, Teva Pharmaceuticals (TEVA). However, chronic shortages in Teva's production line for Leucovrin have seen the sales of Fusilev soar to $153 million, as the sales of Leucovrin tanked. Teva's production issues will most likely not be solved until late in calendar year 2012 -- if then -- leaving the field to Spectrum and Fusilev for the immediate future.
Spectrum does have another drug coming through its pipeline. Belinostat is an HDAC inhibitor for treating peripheral T-cell lymphoma and solid tumors. It ensures there will be a continuum of a new product from Spectrum, in addition to Folotyn.
Spectrum was profitable for the first time in calendar year 2011, and looks to stay that way in calendar year 2012. It had a 52-week high of $16 per share and a low of $7 per share. The investment community may drive the price a bit lower by continuing to beat on Spectrum after the community's experience with Idenix Pharmaceuticals (IDIX). The clinical trial failure of its drug IDX184 for the hepatitis C virus resulted in a "hold" imposed by the FDA for over a year, and investors taking a bath.
The possible beating aside, with a current price-to-earnings ratio at 11.30 and while the industry averages a price-to-earnings ratio between 15 and 32, Spectrum looks undervalued and will be a good buy in the short term. Nonetheless, before they invest investors should understand that companies can and will see clinical trials fail, and investor dollars will be on the hook.