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A NECESSARY COMPROMISE

|Includes: ARIAD Pharmaceuticals, Inc. (ARIA), SPPI
Fusilev®
A practicing physician dropped me an email yesterday regarding FusilevBased on what is known from last Fridays announcement, it appears that SPPI could be required to conduct a non-inferiority trial to determine which drug is more effectiveThat is odd especially since the drug was approved for osteosarcoma in 2008 as well as a CMS reimbursement under the colorectal cancer setting during the leucovorin shortage of 2008.

There have been several phase 3 trials already conducted comparing both Fusilev and leucovorinThe most recent indicated that Fusilev or levoleucovorin has a superior risk profile compared to racemic [generic] leucovorin, which has been used since 1952In that phase 3 trial, however, no overall survival benefit was observed.

Some have correctly pointed out that Fusilev costs quite a bit more than the generic versionThe lack of an overall survival advantage coupled with a higher costonly applicable to colorectal cancerlikely generated the CRL and a request by regulators to meet.

AdmittedlyI didn't expect the CRLI did believe Fusilev was highly likely to be approvedHowever, I always anticipate that the worst can and often does happen when we least expectI purchased put options to hedge my long positions and repeatedly suggested that all investors do the sameIn ANY and EVERY environment where money is at risk, investors should ALWAYS make it a practice to hedge ALL long (or short) positionsUnfortunately, some have learned this the hard wayIve been there, and it's a very tough lesson to learnDespite the setback, you can and will get through itDo not give up and/or do something irrationalPick yourself up and press forward, but never forget the loss – if a loss has actually been realizedI am not advocating that anyone sell their long positions in SPPII dont view that the game is close to being over.

Lets move forward.  So, the FDA kicks out a CRL, indicating that Fusilev failed to demonstrate non-inferiority to generic leucovorinThe FDA is interested in meeting with the company and by the way the CRL wont affect SPPIs orphan status for Fusilev under the osteosarcoma indication (a good thing). In fact, SPPI did not specifically state that another trial was absolutely necessaryTo me, that's tellingIf nothing else, it's not the norm.

IF cost is the underlying issue here, another solution outside of conducting another trial existscut the cost of Fusilev.

Right now, the market appears to be focused on an expensive trial and is pricing that into shares and then someBut Fusilev is not just another new drug to regulatorsThe FDA should be very familiar with it.  They just approved it last year

While regulators do know and obviously believe that Fusilve is both safe and effective, the Federal Government (especially right now) is not willing to pay a premium price for the drugThat isunless it can be shown in a non-inferiority (NI) or head-to-head trial with leucovorin to provide colorectal cancer patients with an overall survival benefit.

SPPI knows a NI trial will cost more than the average phase 3 trial as it will require a much larger patient groupSPPI has no interest in spending a great deal of money to conduct another trialAs I stated above, the FDA has no interest in paying up for Fusilev.

However, the FDA is willing to meet with SPPI and maybe discuss another way forward, one that is not limited to another option that might help SPPI get Fusilev approved sooner than later.

If cost is the issue here, then SPPI must be willing negotiatea compromise is neededWhile nothing in this environment is certain, I do think it is possible that the FDA could still approve Fusilev without requiring another expensive and unnecessary trialIf SPPI is able and willing to negotiate the cost [down], then the FDA might be able to find a way to approve it.

This is exactly where the doctor, supra, and I both agreed.

Under this scenario, the FDA, SPPI and shareholders would winMy hope is that both the FDA and SPPI are willing to give a little to get it doneFingers crossed, but Im still hanging on to my puts.

Regarding the FDA, you might refer to this handbook for the 105th Congress by CATO.

Quick Notes on Zevalin
  • I remain tempered about Q3 Zevalin salesRevenue guidance will be important, and I certainly hope that the company will provide it.

  • Im not at all convinced that CMS will not give Zevalin a fair shot in November, especially since the FDA approved the treatment for first-line useFrom my view, the first-line approval was a game changer.

  • Q4 2009 Zevalin sales should shed some light on whether the companys strategy is working.


Shares on Sale
With regard to the recent sell-off, SPPI is now extraordinarily cheap compared to all of its optionable competitorsRight now, SPPI is trading at 1.43 times its cash value, which ranks 10th among 182 of optionable drug makersSPPI ranks 15th out of 182 in price to book value.

Below is a list of ALL 182 optionable drug makers (and some others), sorted by price to cashWith small cap drug makers, cash is absolutely criticalSo, price to cash is a very important metricIf I were wrong, ask yourself why is it that only THREE companies are trading under 1.0 X their cash valueIts important and in my opinion the lower the better.

Unlike most trading at or near their cash value, SPPI has two approved drugs and a solid collaboration with AGNSPPI is also highly likely to grow both its revenue and earnings over the next 12 monthsI have held that shares have been undervalued and oversold since $7.00While the price has certainly changed, my view has not

Unlike most, I do anticipate that SPPI will bounce back.

Final Thought 
I would like to reiterate the following two points which I have made consistently over the past four months (thats all) since I began writing here at SA:

(1) SPPI and ARIA are and should be viewed as longer-term investments.

(2) Hedge ALL long positionsBuying put options is an effective way to preserve and protect your hard-earned moneyDont assume unnecessary risk, manage it.


Please feel free to drop me an email at HiRxInvestor@aol.com
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Disclosure: Long ARIA and SPPI