Since my last post which was published about a month ago, the price of Spectrum Pharmaceuticals (SPPI) rose by more than 50%, breaking last 52 weeks high of $16. The rise occurred despite of the fact that the latest short data indicates short interest got higher by ~2M shares. In this post I will try to estimate the results of Q2 of 2012 which just ended.

**Revenues**

The revenues of spectrum are generated from three sources:

1. Sales of Zevalin (for treating Non-Hodgkin Lymphoma).

2. Sales of Fusilev (for treating Colorectal cancer).

3. Licensing revenues.

**Sales of Zevalin**

Zevalin sales are steady in the recent quarters :

Quarter | Sales |

Q1 2012 | $5.784M (total product sales-$56.784M, Fusilev $51M) |

Q4 2011 | $6.81M |

Q3 2011 | $6.94M |

Q2 2011 | $8.4M |

So far the revenues generated from this drug are quite low - The company stated in the last conference call that the reason for that is due to the NCR regulations, since Zevalin is a radioactive drug. Although every conference call Zevalin is being introduced as a very promising drug, it still stays as a promise, and I suspect it will stay the same in this quarter as well. **My estimation is $6M** -- everything above that will be a pleasant surprise. Please note that I decided not to include any estimation regarding the worldwide Zevalin sales.

**Sales of Fusilev**

Fusilev sales are the key factor to Spectrum's result. Sales have been growing in the recent quarters, and are expected to grow this quarter as well. The sales of Fusilev can be estimated using the Wolters Kluwer survey, which tracks prescription sales data. This issue is well explained in this excellent article by LifeSci Advisors. The combined WK data for April and May is $47.2M ($22.3M and $24.9M respectively). Looking at the trend for the WK monthly results, I estimate that WK results for June (yet to be published) will be ~$27M. In order to be conservative, I will use the same percentage of sales (~90%) as part of WK results (probably due to discounts given when signing big and/or long term contracts). However, Sales can also be higher - for example, in Q4/2011 sales were higher almost 20% above WK results. If my assumption is correct, than **sales of Fusilev will reach at least $67M**.

**Licensing revenues**

This is the easiest part to estimate -- Each quarter Spectrum recognizes $3.075M of licensing revenues, related to the Apaziquone.

To summarize:

Zevalin sales | $6M |

Fusilev sales | $67M |

Licensing | $3M |

Total sales |
$76M |

**Operating costs and expenses**

**Cost of sales**

In order to estimate the cost of sales, I will look into the gross margin in the recent quarters:

Quarter | Gross margin |

Q1 2012 | 84.72% |

Q4 2011 | 79.4% |

Q3 2011 | 81.55% |

Q2 2011 | 80.77% |

Looking at the numbers from the recent quarters, estimating a gross margin of 81% seems reasonable. Therefore, cost of sales are 0.19*73 =~ $13.9M.

**Selling, general and administrative**

Considering the recent quarters, I estimate that this section will be around $16M.

**Research and Development**

Considering the recent quarters, I estimate that this section will be around $7.5M.

**Amortization of purchased intangibles**

Considering the recent quarters, I estimate that this section will be $0.93M. In total, operating costs and expenses are $38.33M. So, putting it all together, we get that **income from operations is ~$37.7M.**

**Provision from taxes**

based on the last 2 quarters, provision from taxes is ~8.5% from the income from operations, which means $3.2M.

**Net Income**

Based on the above figures , **I estimate that the net income will be ~$34.5M.**

Looking at the past quarters, it is reasonable to assume that the number of shares (diluted) grew by ~1M shares from the recent quarter. This brings us to 66.5M shares. **This brings us to EPS (Non-GAAP) of $0.52.**

**Important Notes:**

1. All of the calculations here are Non-GAAP numbers. This does not include:

- Adjustment for stock-based compensation expense recognized in the period
- Add back the change in fair value of common stock warrant liability

2. The calculations here do not include also one time expenses (which affect GAAP results). One time expenses can be:

- The agreement with Hanmi Pharmaceutical Company signed on the end of January
- Acquiring Zevalin worldwide rights

3. I did not include any worldwide sales of Zevalin, as I'm not sure

**References:**

**Disclosure: **I am long SPPI.