Spectrum Pharmaceuticals: Undervalued Growth Company with Strong Late-Stage Pipeline

Includes: AGN, SPPI
by: Justin M. Hall

With two potential approvals coming up in the next 120 days, Spectrum Pharmaceuticals (Nasdaq: SPPI) appears to be a hidden gem.

Investor’s Business Daily bases its rankings on the relationship that one company has with other companies within the same industry. In my June 12 article, I indicated the company could likely generate $280 million in annual revenue within the next 12-18 months upon approval of both the company’s cancer drugs Zevalin and Fusilev. The table below is a list of other drug makers who are generating annual revenue between $230 and $300 million – comparable to SPPI’s projected $280 million. Please note each company’s current market cap as it relates to annual revenue.

Market Cap
BioMarin Pharmaceutical (Nasdaq: BMRN)
PDL BioPharma (Nasdaq: PDLI)
United Therapeutics (Nasdaq: UTHR)
Alexion Pharmaceuticals (Nasdaq: ALXN)
Techne (Nasdaq: TECH)
Data Source: Google Finance
Variations in market cap are most likely due to the strength of the underlying drug maker’s pipeline. SPPI prides itself on having a risk-reduced pipeline, which primarily consists of cancer drugs. In this article, I would like to highlight the company’s other two late-stage products, Fusilev and Eoquin. Please note that all information and data below was presented by SPPI at the 8th Annual JMP Securities Research Conference on May 21, 2009, which should still be available at the company’s website.
Fusilev was launched in late 2008 and approved in the US for the treatment of osteosarcoma, a form of bone cancer, in February 2008. Post US launch, sales ramped up well. In the first quarter of 2009, Fusilev sales were about $9.4 million. With approval of the colorectal cancer indication, the company believes they will be able to market the drug more effectively.
Fusilev has been approved and used to treat colorectal cancer for over a decade in Europe and Japan. Outside the US, Fusilev is marketed by Wyeth (NYSE: WYE) and Takeda and brings in approximately $200 million in annual revenue.
Colorectal Cancer: A generic version of leucovorin is widely used in the US and typically prescribed in doses of 500 mg. Leucovorin or is most often used in conjunction with 5-FU a common treatment for colorectal cancer.
While the generic version currently prescribed to patients in the US is an inactive isomer, Fusilev is a pure active isomer of leucovorin.
Pure Isomer (Fusilev) v. Inactive Isomer (generic leucovorin): The inactive isomer tends to compete with the active isomer and leads to more variability of biological outcome. This means, patients tend to react to the inactive isomer version (generic leucovorin) with more variability. Such variability is not as noticeable in the pure isomer version (Fusilev).
Head to Head Study: A study comparing equivalent doses of Fusilev and generic leucovorin indicated there was a statistically significant reduction in toxicity with Fusilev. The results showed there was nearly a complete reduction in severe grade 3 and 4 toxicities in patients treated with Fusilev. It is worth pointing out that Fusilev is prescribed in 250 mg doses, half that of generic leucovorin.
Due to the benefits of less variability and reduced toxicity, Fusilev should be preferred over the existing generic version with more variability and increased toxicity.

Over the next 12-18 months, I projected that sales of Fusilev under both indications will very likely hit $100 million.
Eoquin is a phase 3 drug indicated for bladder cancer.
Bladder cancer is a recurring cancer that is currently treated surgically via trans-urethral surgery. Approximately 235,000 trans-urethral surgeries are performed each year. Nearly 80% of bladder cancer patients recur to higher risk disease or with high frequency.
Eoquin attacks the primary reasons for early recurrence of bladder cancer:
-- It tends to kill remaining free-floating cells post surgery as well as portions of the lesions which treating physicians may miss during surgery.
-- It also addresses any undiagnosed or undetected [small] lesions not removed during surgery.
Phase 3 full enrollment or 1400 to 1600 patients is expected by year-end 2009. Currently, there are over 1000 patients in the study. Complete data from the first phase 3 trial is expected by early 2012.
Another study in BCG Failure patients is also ongoing. These patients will receive multiple treatments over a two-year period.
Some analysts have estimated sales of Eoquin could peak at or near $1 billion annually. SPPI has a collaboration with Allergan (NYSE: AGN) to market Eoquin. Under the agreement, SPPI could receive up to $300 million in milestone payments from AGN. To date, SPPI has already received around $41 million from AGN for the completion of the ongoing phase 3 trial. The sentiment I have received from several shareholders is that Eoquin has blockbuster potential as there is no comparable drug to treat bladder cancer patients. With 235,000 patients annually, I have to agree.
I reaffirm my price target of $31 for SPPI over the next 12-18 months. At $31, SPPI will retain a market cap of $1.12 B. Go back to the top and review the table of comparable companies. As it relates to market cap, I found my price target to be fair and reasonable when compared to the market caps of other companies similarly situated.
July 2, I expect SPPI will be successful in obtaining approval for Zevalin as first-line consolidation therapy for non-Hodgkin’s lymphoma.
October 8, I also expect SPPI will receive approval for Fusilev to treat colorectal cancer.
As of yesterday’s close of $5.87, SPPI remains undervalued.
Disclosure: Long SPPI