Spectrum Is An Interesting Biotechnology Investment

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Summary

Spectrum invests in late stage oncology candidates and circumvents the risks associate with drug discovery.

The company has recently filed an NDA for its Multiple Meyloma drug CE-Melphalan .

Spectrum has a steady revenue stream but the rising SG&A expenses have negatively effected the bottom line.

Spectrum Pharmaceuticals (NASDAQ:SPPI) has announced the filing of an NDA for its oncology product CE-Melphalan. The drug will make treatment of multiple myeloma (MM) more convenient by slower infusion rates, longer administration periods and yet lower toxicity. The company has a number of marketed products but the weak bottom-line performance is a concern. Investors looking for a biotechnology speculative bet can go for Spectrum after their own due diligence.

The Business

Spectrum Pharmaceuticals is a biotechnology company with already commercialized drug in its portfolio. The company primarily develops and commercializes hematology and oncology treatments. It is currently marketing Fusilev, Folotyn, Zevalin, Beleodaq and Marqibo. Collaboration agreements are important for small biotechnology firms because they ease the burden of trials expenses and are also a vote of confidence to the company's potential. Spectrum has a number of collaboration agreements with major players like Bayer, Biogen Idec, Hanmi, etc.

The business model of Spectrum is a little different as compared to other small biotechnology firms. Rather than running its own drug discovery platform, the company invests in late stage drugs through partnerships and acquisition. While this increases the cost of a product, it also reduces the risks associated with development candidates. This is because high prices are asked for drugs in late development stage as the risk associated with failure in early development stages is removed.

New Drug Application

The company has recently submitted a new drug application with the FDA for yet another candidate. The company has applied for the approval of Captisol-Enabled Melphalan HCI (CE-Melphalan) for the use as a conditioning treatment before stem cell transplantation (hematopoietic progenitor) and palliative treatment (for whom oral therapy is not appropriate) for patients with multiple myeloma.

Multiple Myeloma is a blood cancer which is primarily a rapid growth of abnormal plasma, which manifest as tumors in the bone marrow. According to estimates, there are around 20,000 cases of multiple myeloma diagnosed each year in the U.S. alone. There were around 11,000 deaths due to MM in 2010. In simple words, the treatment for MM is harvesting the cells from the patient's own blood/bone marrow, treating the bone marrow with high dose chemotherapy and then re-introducing the healthy blood cells. These healthy blood cells then start creating more healthy cells.

One of the biggest concerns for patients undergoing treatment for MM is the resulting toxicity from drugs and especially chemotherapy. As propylene glycol is not used in the preparation for CE-Melphalan, it greatly reduces the risk of toxicities with that excipient. Details on the harms associated with intravenous administration of propylene glycol can be found here. CE-Melphalan has better solubility and stability; it will be an attractive treatment option for both transplant conditioning and palliative treatment of patients with multiple myeloma who cannot take oral Melphalan. The drug will enable slower infusion rates, longer administration periods and yet lower toxicity. The FDA has already issued orphan drug status to the compound. Moreover, the company will be using its existing sales channels to promote and market the drug which will significantly cut back on costs.

The candidate has shown promising performance in trails, meeting its primary and secondary end points. The primary objective was to find the safety and toxicity profile of patients on 100mg/m CE-Melphalan as a myeloablative therapy prior to ASTC (Autologous Stem Cell Transplantation). The secondary endpoint was to study the efficacy of the candidate in the same patient population by measuring the Multiple Myeloma Response Rate.

Fundamentals

The revenues of Spectrum have fluctuated around the $200 million mark over the last few years. The sell side is expecting sales to be around $184 million for 2014 and rise to $207 million by the end of 2015. However, the company is expected to continue incurring losses with loss declining to $-0.25 per share (2015) from $-0.76 per share (2014). The bottom-line has suffered due to rise in Selling and Administration expense and R&D. SG&A expenses have increased from being 37% of sales in 2011 to 51% of sales in the recently concluded quarter.

Despite the losses, the company has a very strong cash balance of around $176 million or approximately 40% of market capitalization. This would mean that from the current share price of $6.9 per share approximately $2.8 is cash. The current ratio is pretty high at 2.05x and P/s pretty low at 2.6x as compare to industry average of 5x.

Valuations

One of the biggest risks associated with biotechnology investment is the uncertainty of clinical trials. The investors get excited about drugs in their first or second phases, which sometimes don't even make it to an NDA. Spectrum is different. Not only does the company already have a number of marketed products but only invests in late stage candidates. This greatly reduces the risks associated with a typical biotechnology investments. This is probably why the sell side has a target price of $13 per share for spectrum, an almost 100% upside to current valuations. From the 5 analysts covering the shares, 2 have a hold rating and 3 have a buy rating.

Bottom-line

Spectrum is different from your run of the mill biotechnology firms. The company only invests in late stage candidates, eliminating the risk of candidates failing in early stages. The company has a number of products in the market and a pretty strong pipeline. With a hefty cash pile and an optimistic sell side, the shares seem a pretty good speculative biotechnology investment with less than usual biotechnology risk. However, investors should do their own in-depth due diligence before making any investment. The aim here is not to give investment advice but to increase awareness about interesting biotechnology companies and candidates.

Please also note that if the product is approved, Spectrum will have to pay royalties and licensing fees to Ligand (NASDAQ:LGND). The approval of NDA can take around 10 months.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.