Spectrum Pharmaceuticals: It's Do or Die Before Earnings
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Spectrum Pharmaceuticals (NASDAQ: SPPI) may be looking to repeat a bit of history that I’m sure it wishes to avoid -- between November 2009 and November 2010, the stock traded with a modest loss; if SPPI does not begin to trade with an aggressive uptrend, it could experience the same fate. With earnings on Wednesday, it’s do or die for Spectrum Pharmaceuticals’ short-term trend.
The company will announce earnings next week, and with several mixed messages, investors aren’t sure what to expect. The company’s CEO has guided $300 million in sales for 2012, which indicates record performances for both Q3 and Q4, yet he continues to sell his own shares at such low prices. Wolters Kluwer data has consistently announced monthly sales records for its lead product Fusilev. Yet, as thestreet pointed out, it’s hard to correctly estimate potential sales because of discounting and other operational changes that are affecting the sales per prescription of Fusilev.
Despite there are “mixed messages”, the problems at Spectrum Pharmaceuticals are relatively minor compared to other companies in biotechnology. Questcor Pharmaceuticals (NASDAQ: QCOR) has fallen by nearly 50% since September after an investigation of its business practices followed the news that Aetna dropped most of the coverage on its only product, Acthar Gel. Yet, despite these problems, Questcor Pharmaceuticals continues to trade with a valuation that trumps Spectrum.
If you need more examples of Spectrum’s value, ImmunoGen (NASDAQ: IMGN) lost 20% of its value last week. Yet, despite the loss the company’s market cap is $350 million greater than Spectrum, meanwhile ImmunoGen has revenue of just $16 million, a large accumulated deficit, and significantly more questions as a developmental company. Even troubled biotechnology company Dendreon (NASDAQ: DNDN) has a similar market capitalization, despite $578 million in debt and an accumulated deficit of $1.7 billion.
If you break down each and every biotechnology company in the market you can find problems with each company, and most have problems that far exceed that of Spectrum Pharmaceuticals. Spectrum has a large pipeline, three approved drugs, and market leading growth. Yet, it also remains one of the most heavily shorted stocks in the market. It has simply built a reputation as being an underperformer. However, history shows us that the stock has a long history of sudden gains that create new highs, which always seem to occur at a time that allows the stock to maintain its year-over-year gains.
With just one week remaining, will SPPI maintain its two year trend of year-over-year gains? I am in no way, shape, or form a technical trader, but to invest in Spectrum you have to watch trends. To me, the trend of Spectrum is encouraging and suggests immediate gains. Like I said, the stock always trades with an undervalued price and will then pop to new highs, and has maintained this trend for two years. On Sept. 30, 2011 the stock fell below its low range to $7.63 before beginning its trend to new highs, on June 13, 2012 it dipped below its $11.30 support before trading to new highs, and finally last week it fell below $11.50 support to $11.00, so the question is “will it trade to new highs?”
Prior to each of its three rallies, the stock has always fallen below its support, before the trend violently trades to new highs. Right now, the catalyst is present with earnings next week. However, it could go either way. The company trades with a P/E ratio of just 7.50, has nearly $200 million in cash, is very profitable with $93 million of net income during the last 12 months, and if the $300 million sales guidance is reached, it would represent growth of 70% year-over-year for the final two quarters of the year!
As a fundamental investor, Spectrum looks to be a gold mine. Fortunately, expectations are very low for this upcoming quarterly announcement. We expect strong sales growth, however it was discounting and high expectations for Fusilev that led shares lower in Q2. For this upcoming quarter we don’t know what to expect from Fusilev sales, which will be good for the stock. We know that sales will be strong, but investors should somewhat discount the Wolters Kluwer data. Therefore, I conclude that with all things considered, including its valuation and growth, the upside far exceeds the downside, and that Spectrum Pharmaceuticals will ultimately trade higher regardless of its near term trend.
BrianNichols owns shares of SPPI. The Motley Fool owns shares of Dendreon. Motley Fool newsletter services recommend ImmunoGen. 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.