Spectrum Pharmaceuticals: High Potential, Despite Failures

Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Anti-cancer treatments have become big business for biotech and pharmaceutical companies in recent years. Many companies have developed treatments for lesser known cancers in addition to introducing treatments for well-known cancers such as prostate, lung and breast cancer. But before a drug treatment enters the market, it must pass a series of clinical trials in order to receive approval from the FDA or other public safety agencies in Europe and other countries. And while this is a necessary step for companies, clinical trials are not predictable, even with tons of preliminary data.

Companies that participate in clinical trials are taking a huge risk. Even if initial testing in a lab or on animal subjects proves positive, this data cannot gauge with 100% accuracy whether a clinical trial will be successful or not. For investors, the promise of a positive outcome of a clinical trial should be taken for what it's worth and should not be used as a reason to invest or continue to invest in a company. Clinical trials are just that, trials of drugs that may or may not be effective in treating disease or other illnesses and conditions.

Spectrum Pharmaceuticals (NASDAQ: SPPI) has announced the failure of two trials involving its bladder cancer drug, apaziquone. In two separate studies, the drug failed to prevent tumor growth. And even though company CEO, Rajesh Shrotriya, mentioned the company has ample amounts of cash to continue testing and is planning to consult with the FDA about the possibility of combining results from both studies to determine if combined data paints a more accurate picture of drug effectiveness in patients, many investors pulled out causing a 10% decline in stock value after news of the failure. The stock continues to drop.

Spectrum is not the only company to experience investor wrath when it comes to clinical trial failures, however. Idenix Pharmaceuticals (NASDAQ: IDIX) suffered a similar fate when its experimental Hepatitis C drug, IDX 184, failed to have any real effect on patients. For companies like Spectrum and Idenix, clinical trial failure could give the competition an advantage when it comes to getting drugs to the marketplace first.

Idenix, for example, now faces competition from Abbott Laboratories (NYSE: ABT). The company has just completed successful trials of its new Hepatitis C drug treatment. This means Abbott will be applying for FDA approval soon. So while Idenix tries to figure out where it went wrong, Abbott can move through the FDA approval process and get its drug treatment out there without having to worry about the competition. It's a great place to be in from a business perspective.

Successful clinical trials alone don't always signal continuous profits and security for investors, however. Even after the completion of clinical trials, companies must secure FDA approval to sell drugs in the United States. Depending on the outcome of clinical trials and other data presented by a company in its application, the FDA will have the final word on whether or not a drug can be sold to the public.

In a strange turn of events, Sanofi (NYSE: SNY) witnessed the failure of its cancer fighting drug, Zaltrap (aflibercept) during Phase III trials for the treatment of prostate cancer around the same time it received word from the FDA that the agency would conduct a preliminary review of the drug for its use in fighting colorectal cancer – this is usually a good sign that it will receive approval. But with a Phase III failure to contend with, the FDA will probably not approve the drug to fight either type of cancer without more evidence of its effectiveness.

The treatment of cancer has become more urgent in recent years for various reasons including an increase in average life expectancy (people living longer means greater chance of developing cancer or other types of disease), better medical equipment and diagnosis methods, and an increase in public outcry for treatment options. Once upon a time, cancer patients had the choice between chemotherapy and other types of radiation or surgery (sometimes both). With new medications on the market, patients can now choose a combination of radiation and medication, medication and surgery or medication treatments alone.

From an investment standpoint, investing in companies working to develop new cancer treatments may seem exciting and even a charitable way to help those afflicted with cancer. But the reality is that it only takes one or two failed clinical trials to put an end to a once promising drug. Most companies, unless they have the resources and solid investors that will stick by a company no matter what, simply cannot afford to continue testing drugs that fail in clinical trials.

In Spectrum's case, investors need to review the company's product portfolio and also keep themselves updated on the latest news concerning the company. For example, Spectrum just announced its acquisition of Allos Therapeutics. This is a smart move as Spectrum will inherit the rights to the drug Folotyn, used to treat certain types of blood cancer. Even though the drug only made $50 million in 2011, it has been successful so far and is up for EU approval. Investors should see this move as one way the company can redeem itself. Even though news of two clinical trials failures should cause investors to worry, it's how a company handles the news and what it does to move forward that really matters. 

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