Disappointment Is Coming For Spectrum Pharmaceuticals

Summary

The negative Adcom vote on Qapzola will most definitely translate to a CRL on the December 11, 2016 PDUFA date. The timeline has been pushed back 5-6 years.

The management did not pay heed to FDA’s advice on not filing the NDA for Qapzola, and also did not disclose this pertinent information.

Spectrum needs to overhaul its communication and management strategies.

The last I wrote about Spectrum Pharmaceuticals (NASDAQ:SPPI) was almost two years ago, and the stock price was around $8. Two years on, the company has launched a new drug, advanced its pipeline and the stock price stands at $4.82, as of Friday. Digging a little deep into the news and issues, I don't feel overtly bullish about the stock - as was my last stance. I still believe the science and the pipeline is sound, but Spectrum is marred with management issues, which it needs to straighten up pronto. I will briefly touch on the negative Adcom vote, as part of the NDA process of Apaziquone (Qapzola) for non-muscle invasive bladder cancer (NMIBC); and the general grievances and distrust in the management.

December Decision?

FDA occasionally requests the recommendation of the Advisory Committee - a panel of independent outside experts - to advise the FDA on scientific issues and questions. However, this review is not the final verdict and the FDA is not required to go with the Adcom decision - yet the success of any product is found largely dependent on these meetings. Historically, 87% of the times FDA has followed the recommendations of the advisory committee. That leaves a bleak 13% chance left behind for Apaziquone, which was reviewed by the Oncologic Drugs Advisory Committee on September 14, 2016. The fact that the Committee voted unanimously (14-0) against the drug, obliterates the remaining 13% chance into nothingness. FDA had earlier discouraged Spectrum from filing the NDA with existing results, and as we can see, they raised the recurrence issue with the Adcom.

The committee reserved that Apaziquone did not show substantial treatment effect when compared to the placebo. Despite the drug targeting an unmet need i.e. NMIBC, lack of substantial effect invalidates the essence of new drugs. The fault has been found in the trial design, since the pooled results of the two phase III trials, with identical designs, were statistically significant. Resultantly, Spectrum is enrolling patients in another phase III trial, with increased dosage and better trial design. However, the primary endpoint is still the 2 year recurrence rate. The results of this trial are expected by 2021, and the drug should reach the market by end 2021, if the results are encouraging.

The PDUFA date of December 11, 2016, has lost the charm, and Spectrum will most definitely be served with a CRL. If we look at it this way, it is for the better, even though the investors will suffer. The trial results were peculiar, pooling two trials and pitching significance wasn't really a smart move. Based on these results there would have been skepticism regarding the drug's effectiveness, which means pitching it to the physicians would have taken extra effort. By 2021, if the results are solid, the approved drug will be readily accepted for intravesical chemotherapy.

The end of Apaziquone?

No, Apaziquone lives to tell the tale, so far. And the prospects are good with the current phase III trial, though the results are far off. The drug is addressing a major unmet need, and there are currently no FDA approved drugs for intravesical chemotherapy for post-transurethral resection of Bladder tumors (TURBT) NMIBC patients. Other companies developing treatments for NMIBC, focus on different stages of the disease, while others are not intravesical chemotherapies. Thus, Apaziquone still has the edge over competitive forces that may emerge over the years.

What concerns me here is the fact that the patents for Apaziquone expire in 2022 for the formulation and in 2024 for the method of treatment of bladder cancer. Thus, once approved the drug will not be able to enjoy longer exclusivity. The company claim (pg. 11) that they have filed and also plan to file additional patents for Apaziquone, covering new formulations and uses. But given the history of Spectrum on patent protection, this may be a risk, as Fusilev was also guaranteed patent protection until 2019, and we all are aware what happened to it.

Management Distrust

Since I started researching Spectrum, I have come across multiple views regarding the company's management. One view that has held its ground, all these years, is that the management is not trustworthy. This view also found its way to the comments of the article I wrote on Spectrum. The question is what really is wrong with the management. The thing is, historically, they have not been very forthcoming regarding the pipeline and forecasts of the drugs already approved. In 2014, Fusilev guidance and generic competition estimates were off and were downgraded, when earlier the management had claimed encouraging estimates. Okay - giving the benefit of the doubt, we can say that the estimates are well just that estimates, so they can be in certain instances incorrect. But a sound management does not make these kinds of mistakes and the estimates most often translate to actual events, a slight difference is negligible.

Furthermore, the communication pattern with the investors is also flawed. A recent example, is the NDA issue of Apaziquone, where the company failed to disclose that the FDA had advised against NDA filing in December 2012, based on the trial results.

Source

The company went on to file the NDA anyway, based on post-analysis of the trials. The result, as we can see, is an impending CRL - which will not only cause a price drop, but will further dampen the investor sentiment regarding the management. The problem here is that the CEO should have been more objective regarding this process, we are talking about not only the hopes of the patients awaiting the drug, but also the investor sentiment. This impatience or mistakes - if we can call them that - cost a lot more than just a price drop. Case in point - the previous lawsuits, and the fresh investigation announced by Goldberg Law PC, and by Block and Leviton LLP on Friday, and by Bronstein, Gewirtz and Grossman, LLC today.

We cannot also say that the management is entirely defunct, they have managed to bring the company this far, and also launch a couple of products over the years, with others in the pipeline. That being said, the red flags must be addressed and the management has to work on its communication with investors, not only to improve the trust-deficit, but also to attract more investors. Without questioning the management's motives, the verdict still holds that they should realign their goals and better plan their strategies - a do-over is inevitable.

Financial Outlook

Spectrum has six approved products in the market and in the previous quarter generated revenues of $33.9 million. The slow uptick in the revenues is substantially delaying the company's breakeven goal. Even more dismal is the fact that the company expects the existing sales of Fusilev to drop significantly, due to the presence of generic competition. On the other hand, it expects the sales of recently-launched Evomela to improve in the second half of 2016. However, the analysts do not have very high hopes regarding the earnings potential, the EPS estimate for this year is a bleak -1.11, and average sales of $135.88 million.

As for the cash position for financing existing trials, Spectrum is relatively sound on that part, since it raised almost $74 million in an aftermarket securities offering. As of last quarter, the cash position stands at $155 million, which should suffice for the next 12 months. Need for additional cash will be fulfilled at the expense of the investors, since the company has historically undertaken dilutive measures.

Bottom Line

In view of these issues, is Spectrum really an attractive new investment at the moment? It's definitely not amongst the top best investments of the year. First, the price will falter come the December 11th PDUFA or CRL date. I'm not betting on the bleak 13% chance of FDA accepting the drug with a 14-0 negative Adcom vote. Second, the management needs to straighten up their issues to better attract investors and also adopt transparent communication. Spectrum has an attractive pipeline, there is no doubt about it, but that pipeline needs to be developed more efficiently and without the hope of cutting corners.

That being said, I still believe that Spectrum has a sound pipeline, and Qapzola will see the light of the day, i.e. if the trial results are positive. The drug is addressing an unmet need, the trial is being run under the SPA, and so far there have been no adverse events - the prospects are good, but the results aren't - YET. Other pipeline candidates SPI-2012 and Poziotinib are set to compete in a multi-billion, if and when approved. Which may seem attractive but at the moment given the management issues and the impending CRL by December, I don't think the stock is going anywhere higher soon.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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