3 Key Issues Spectrum Pharmaceuticals Must Address
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On Tuesday October 9 Spectrum Pharmaceuticals’ (NASDAQ: SPPI) CEO Dr. Rajesh “Raj” Shrotriya was presenting at the 11th Annual BIO Investor Forum to provide an overview of the company’s business strategy and commercial and development-stage programs. As an investor in this company, I must admit, that once I saw the press release that Raj would be giving yet another presentation I was trembling, because I knew that the last couple times that Raj has spoken the stock has traded lower. However, the stock didn't trade lower by its usual 5% on the words on Raj, but rather just 2%
It has become almost an inside joke among shareholders, and among those who follow the company, when Raj speaks the stock trades lower. It has provided shorts with the perfect opportunity to make a significant amount of money. However, I can’t tell you why this occurs. Raj isn’t saying anything bad, he has kept true with all of his promises in the past. He recently gave revenue guidance of $300 million for 2012, and he continues to sell the company on the notion of its upside potential and its valuation. Overall, he gives a good presentation and isn’t saying anything to create pessimism, but he’s not saying what investors really want to hear either.
I am one of the more loyal followers of this company, but often express my dissatisfaction with its stock performance. The company is a fundamental gold mine, with industry leading growth, a massive pipeline, and strong cash. Yet it’s a technical nightmare, with high short interest, and patterns that are so easily predictable that those who follow the stock can easily call its hour-to-hour performance. But what’s even most frustrating than its trend is that Raj could quickly and easily change the perception regarding this company, along with its dismal performance. And if he’s reading then I hope he listens, because there are only three things that investors “really” want to hear:
How to Grow Zevalin?
Spectrum Pharmaceuticals is a company that grows through acquisitions. It finds cheap and promising products and then buys the products for value presenting prices. This has worked to perfection for Spectrum, and it now has three approved drugs and is projecting revenue of $300 million to end 2012 compared to $192.96 million in 2011; which means the company should see at minimum another $105 million of net income. However, one of its drugs, Zevalin, has underperformed, and the company’s CEO admits that it has underperformed. But all he says is that “the drug is far better than Rituximab” and that “it could control 5-10% of the lymphoma market with $300 million per year potential”.
Like I said, he says all the right things. But last year the company had what investors thought was a huge win when the bioscan requirement was lifted, therefore making it cheaper for the patient and the physician to use Zevalin. Therefore investors have constantly asked why the drug hasn’t seen any level of increased sales. Raj says there are hurdles that the company must overcome and that once it attacks and conquers all logistical and regulatory issue that sales will start to rise and become the company’s next “Fusilev” (its fast-growing drug). But what investors really want to know is how will the company attack these issues, how long will it take, and when will Zevalin finally post gains in sales? We know it has potential, but what we don’t know is how the company will create growth from potential. And Raj needs to address and answer this question to move the shares higher.
What’s Going on with Fusilev Prices?
Fusilev is the company’s fastest growing drug. It has exceeded all expectations and continues to prove the naysayers wrong. Investors have been saying for the last year that generic competition will be the death of Fusilev, yet the company continues to report record sales quarter-after-quarter and surprise everyone with its continuous growth. However, after recent data indicated that sales of Fusilev should’ve accounted for larger revenue, in the company’s most recent quarter, some have begun to question whether or not the company is slashing its prices. The company has responded by saying that it's not slashing prices of Fusilev and that prices have gone up. In a previous presentation, Raj specifically spoke about a program called “STAR” in which patients who can’t afford Spectrum drugs are given them for free. In a way, perhaps this answers the questions regarding discounts, but Raj refuses to explore and elaborate on why it may appear as though the company is slashing prices by as much as 40%!
Honestly, if the company is slashing prices then it doesn’t really matter, it’s not a big deal. The company is still posting great sales regardless if the price is being slashed or not. The concern is why Raj hasn’t addressed the issue. Raj could easily put this issue to rest, which has contributed almost solely to the stock’s decline. He says that they have increased the list price, but what about discounts, returns, or fees that could have affected the top line for Fusilev sales? At first I dismissed this issue, but after another writer pointed it out, the company’s net/gross revenue ratio has declined substantially, from 84% in Q4 of 2011 to 67% in Q2 of 2012. Obviously there is something going on. We just don’t know what is causing this decline. So far the company has declined to comment or elaborate on the concern, and this is what investors really want to know. We already know the company has great potential, incredible revenue growth, and a large pipeline, but why avoid the question? Why does it appear that Fusilev is not producing the sales compared to its usage? Raj desperately needs to dig deep into this issue to create momentum in shares of the company.
Quit Buying Shares, It Doesn't Work! Give Us A Dividend!
If you compare and consider the growth of other fast-growing biotech stocks, then Spectrum Pharmaceuticals should never see a price below $30, or a P/E ratio below 20. But instead it trades with a P/E ratio around 8, which is less than Questcor Pharmaceuticals (NASDAQ: QCOR), a company that’s facing more questions in the next few months than Spectrum has in the last two years. Last week I wrote an article in which I looked at Questcor Pharmaceuticals, and briefly compared the two companies. But after Questcor's recent rise, and Spectrum's fall, the two companies are even further apart in terms of valuation. Spectrum has a more attractive trailing P/E and price/sales ratio, more cash, comparible growth; three approved products compared to one, a larger pipeline, and isn't facing the same company changing events that Questcor could face in the next few months. Therefore, Spectrum is cheap, and the company's executive knows that its stock is cheap, and have been aggressively buying back shares. However, it is obviously not working, especially when Raj unloads nearly 8% of his shares at the same time as the company buys back its shares. Basically, they need to do something different, and try a new approach. They need to follow the lead of Questcor Pharmaceuticals and offer a dividend to create optimism and excitement.
During a previous presentation the company mentioned, very briefly, a dividend, and twitter was on fire. All investors want a dividend and if the company were to provide it then the value would simply be too great as an investment. The company could easily return a 4% yield on its current price and the stock would most likely trade to new highs, making the 4% yield less. For a company with so much promise, such a great past, and so much cash, there are way too many reasons that investors find to avoid buying the stock. In comparison with other biotech stocks the problems with Spectrum are very minimal. However, a dividend would be a great way to show investors that Spectrum is confident in the future of its own product. The buybacks just haven’t worked, therefore return capital in a more efficient manner. As a result, when Raj decides to unload shares he’ll get more bang for his buck. If Raj isn’t working on a dividend for shareholders then he desperately should. And hopefully soon, the company will be addressing this issue, and Raj can quit talking about the buyback program in place, which has been inefficient at best.
I view this article as a letter to Raj, and I hope he’s reading. The company, and Raj, tries desperately to convince shareholders that this is a great company, and according to the fundamentals there is no better value in the market. But unfortunately, investors in this market are not going to be loyal to a company based on its potential, we want results! Raj should have used the opportunity on Tuesday to address these issues and explore what we really want to hear. He’s tried pumping the stock, and it doesn’t work, so talk about the Fusilev prices and a detailed plan for Zevalin, and since he “mentioned” a dividend in a previous presentation, why not talk about it or mention it five-10 times. Bottom line: Address the issues, announce a dividend, and the stock will rise to new highs, perhaps over $20 a share. Or in the next month SPPI will be trading with a yearly loss, which could become even more fuel for shorts and an even bigger psychological loss for this company
BrianNichols owns SPPI. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.