If there's anything I've learned, it's that Spectrum Pharmaceuticals (SPPI) is one of the most volatile stocks in all of the market. It has the ability to change directions in the blink of an eye, is heavily shorted, and is currently among the most undervalued in terms of valuation compared to fundamental growth. Spectrum has difficulty in gaining momentum, and trades with a valuation that simply doesn't make sense. However, after a very bullish presentation on Thursday, made by the company's CEO, at the Southern California Investor Conference, I now believe that its days of underperforming will be short lived, and that the final four months of the year will produce market-leading gains, as a result of the key developments that are sure to occur.
First, for a little background information: Spectrum Pharmaceuticals is one of the fastest, if not the fastest, growing company in biotechnology. It has a massive pipeline, two marketed drugs, and is very cash rich. Yet despite its growth and its promising future, the company is valued with a P/E ratio of just over 8, which is far less than the forward ratio of biotech companies with similar growth such as Regeneron Pharmaceuticals (REGN) and Alexion Pharmaceuticals (ALXN). In fact, because of its modest valuation one might think it has similar problems to a company such as Dendreon (DNDN), as the valuations of both companies are similar. However, Spectrum has shown no signs of slowed growth nor has it given any indication of fundamental problems; it is one of the true head-scratchers of the market. With that being said, if a company does well, its stock eventually follows, and after the developments from Thursday's presentation, Spectrum's days of being plagued by short-sellers, and speculation, are coming close to an end. Below, looks at a few key points from the company's CEO during his presentation on Thursday, along with a little analysis from myself.
All information in this article is based on the presentation at the Southern California Investor Conference, which can be found by clicking here.
Last year (in 2011), Spectrum reported revenue of $193 million, and in the presentation on Thursday, Spectrum Pharmaceuticals' CEO (who is known as Raj) said that the company expects $300 million in revenue for this year. So far, during the last 12 months, the company has reported revenue of $232.56 million, with $128.56 million in the first two quarters of 2012. Therefore, if it were to simply match sales for the last two quarters, its full-year revenue would be only $257.12 million. As a result, the company is expecting very aggressive growth of its two products, Fusilev and Zevalin, beyond the explosive growth during the first two quarters of the year.
If Spectrum were to post 50% revenue growth year-over-year for the remainder of this year, it would report 2012 full-year revenue of near $285 million. Perhaps Raj was giving guidance based on the earned revenue from its acquisition of Allos Therapeutics. However, the company is not expected to close the acquisition until September 5, therefore I find it hard to believe that he would give guidance on Folotyn before the company has actually acquired the drug. Either way, $300 million is incredible, it further shows that Fusilev sales are nowhere near slowing, and are expected to grow aggressively, which will be a major catalyst for large returns over the next few months.
Speaking of growth and expectations for the full-year, Spectrum announced on Tuesday that the Federal Trade Commission terminated the waiting period related to the pending acquisition of all outstanding shares of Allos by Spectrum. This acquisition of Allos is one of the factors that have driven shares lower over the last month, as investors have grown frustrated with the continuous extensions. With the acquisition of Allos, which is expected to close on September 5 (according to the presentation), Spectrum will not only be gaining a fast-growing drug in Folotyn that has incredible synergy with Spectrum's other approved drugs, but Spectrum can also take advantage of Allos' strong cash position and incorporate all three drugs with the same marking approach that will not require an individual sales team, therefore keeping costs in check and not effecting margins. According to Dr. Raj, Folotyn can grow to revenue of $100 million and will also be crucial in the continued growth of Spectrum's other two drugs over the next year, possibly leading to more explosive revenue growth.
Fusilev: Not Slashing Prices
Throughout the presentation, Raj's comments were both intense and personal to a point where you could feel his optimism for this company, and his disgust for those who doubt and question its growth. As a writer who has interviewed many CEOs, I like to believe that I can tell when a CEO is being genuine versus reading from a script, and in regards to Fusilev, Raj was incredibly consistent and could not stress enough that Fusilev sales are stronger than ever. In regards to the doubters of Fusilev and those who have said that sales will decline, Raj responded by saying, "I've been proving them wrong for eight quarters." He then added, "We have not slashed the prices of Fusilev in fact we have increased prices." Raj went on to repeat that Fusilev prices have not been cut and then discussed an "aggressive program" called STAR, in which patients who can't afford Spectrum drugs get them for free, so that everyone receives the treatment. Raj talked about the benefits to Fusilev and the benefits for physicians who prescribe the drug, and explained how the synergy between all three drugs (Folotyn included) will actually benefit the growth of Fusilev.
Zevalin: An Underperforming Drug in the Past
Dr. Raj spent a significant amount of time talking about Zevalin, and did not dismiss the fact that it has underperformed its expectations. He acknowledged that logistical issues and certain requirements for physicians have limited the sales of Zevalin. He compared the drug with the blockbuster lymphoma drug Rituximab, and showed how Zevalin is the better drug, with an 83% overall response compared to 55% for Rituximab. He summed up his comparison along with his reasons for believing that its revenue will grow, and that certain regulations will be lifted, by saying, "It will succeed because it is a better drug." Investors already know of the issues that have plagued the growth of this drug, and last year, the removal of the bioscan was a big step in the right direction. Raj explained that they plan to attack each regulatory and logistical issue one by one and that he believes the drug can control 5-10% of the lymphoma market, in other words, a $300 million per year drug.
The story of Spectrum is one that should be admired, but is also directly tied to the valuation and the underperformance of its stock. Over the last year, I have come to terms and understand that its valuation, and the perception of the company, is due to the unorthodox manner in which the company has achieved success, and is not a result of its fundamental growth. Spectrum is a company that does not develop its candidates from the preclinical phase, but rather searches for late stage candidates that are being underdeveloped and then purchases the candidates for a bargain price. For example, Fusilev was acquired in 2006 for just $20,000, and was viewed as a sign of desperation among many analysts and investors. However, it should be no secret that over the years, some of the better drugs have been purchased for cheap prices and then developed by teams that fully understood its potential.
The bottom line is that some people are incapable of understanding value, and believe that potential is based on the price paid to acquire a candidate. Some believed that Gilead Sciences' (GILD) acquisition of Pharmasset for over $10 billion indicates that the acquisition was good, or that Pharmasset's pipeline creates value. Or that Bristol-Myers' (BMY) purchase of Amylin for more than $5 billion equals a blockbuster product. However, the key to a successful biotechnology company is not high-priced acquisitions, but rather seeing value at cheap prices and returning large gains from the investment. Think about it, how does a $5-billion acquisition help a company if peak sales are just $1.5 billion? It doesn't make sense!
Unfortunately, because Spectrum has chosen to purchase its candidates for cheap prices, we are able to put a value (or a price tag) on the candidates. It doesn't matter that Fusilev has become an incredible drug in terms of sales and growth, we still remember its purchase price, and attach potential to purchase. And when companies such as Spectrum exercise this strategy of cheap acquisitions, and do so effectively, doubters will always exist, and the valuation of the company will be affected due to the thought process that a $10 million acquisition of a drug could never appreciate, result in approvals, or create large sales. Once again, it doesn't make sense, especially since SPPI has proved this to be incorrect.
In regards to valuation, Spectrum is projecting $300 million in sales for 2012, is about to close its acquisition of Allos, and has 10 drugs in its pipeline with three being late stage in which the company plans to file for NDA in the next 6-9 months. As a result, 2013 is setting up to be a far superior year than 2012, perhaps its best year yet. However, while most companies would trade with massive valuations in anticipation of a great year (to go along with several great years) Spectrum remains undervalued, trading with a P/E ratio of 8, which leads me to believe that unprecedented upside exists in the immediate future.
As an investor, I have 100% faith in the direction and plan of Spectrum and its CEO Dr. Raj. He made mention of a dividend in the presentation, and if so, then this stock will appreciate very quickly. The company is valued at just $715 million and has a P/E ratio of just 8, which does not make sense. In my opinion, Spectrum is worth at least $2.5 billion, which would be a price around $40 and a P/E ratio of 30, which would still be somewhat cheap compared to other fast growing biotech companies will equal growth and upside. The reason for my bullish belief is due to its explosive growth, its pipeline which includes three drugs that could come to market in the next 16 months, its acquisition and the synergy of Allos, and finally the possibility of a dividend to compliment an aggressive buyback program.
Spectrum has everything that I personally seek in a biotechnology company, yet is valued similar to a company with falling sales, or roughly half of companies such as Renren (RENN). I believe that in time, Spectrum will become one of the greatest stories of success in biotechnology, because after all, in only 10 years, it has went from near bankruptcy to projected revenue of $300 million, and it was all possible because of Raj executing on his word and buying candidates that no other company wanted. Therefore, why shouldn't I believe that this trend will continue or that there is another Fusilev in its pipeline? When you think about it, this seems much more reasonable than the story that Spectrum naysayers try to sell, because with this valuation and the year that lies ahead, it's hard to imagine that shares of SPPI could be kept down much longer. And if a dividend is announced (as Raj did mention) then watch out, this stock will explode and I would hate to be on the other side of the trade.
Disclosure: I am long SPPI.