Does Spectrum's Q4 Earnings Make It a Buy?

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On 03/12/13, Spectrum Pharmaceuticals (NASDAQ: SPPI) announced its Q42012 results, and its shares declined 35% to $8, setting a new low for the company.

Spectrum is a biotechnology company with integrated commercial and drug development operations with a focus in hematology and oncology. It markets three oncology drugs: Fusilev, Folotyn, and Zevalin. It has a strong track record of licensing and acquiring differentiated drugs. It also has a robust and growing pipeline of product candidates in advanced stage studies. During FY13, it will file 2 New Drug Applications, or NDA's.

Its revenues have grown from $7.7 million in 2007 to over $250 million in 2012 and it has been a profitable company for last 2 years. In FY12 alone, it saw over a 40% growth in product sales and 95% growth in net income. 

In the recent earnings announcement, the company indicated a decline in the ordering pattern of its key drug Fusilev, following the recent stabilization of the folate analog market. Let us go into some details

4Q12 performance

  • 4Q12 sales increased 32% y-o-y to $70.1 million, mainly driven by increase in product revenues
  • Total R&D expenses doubled to $13.9 million, primarily due to an increase in clinical expenses of $3.7 million, and an increase in drug product expense of $2.1 million.
  • Selling, general and administrative expenses increased 7.5% due to increases in advertising, branding, marketing and promotion of its drug products. As a result, operating income increased 18%.
  • The company expects strong sales from all three products, and anticipates revenues in the range of $160 to $180 million for FY13. It continues to manage operating expenses and expects to be profitable in 2013.

Products

Fusilev, accounting for 80% of total sales, increased 33% for the full year, but revenues declined on a q-o-q basis despite a mid-single-digit increase in volumes. This was mainly due to an increase in the customer mix that receives government mandated rebates, per 340b regulations

To understand this better - the company sells its products to community doctors, the government, and the discounted hospital. In the second half of FY12, the business shifted more towards accounts qualified for government pricing, especially 340b purchasing, leading to a ten-fold increase in government rebates inclusive of 340b chargebacks ($3.8 million in 2011 to $47.3 million in 2012.)

The company noted that hospital sales are shifting towards generics, but the demand from clinics continues to be stable. However, the company mentioned that going forward; it expects a stable demand from this segment. It also stated that 75% of its sales come from clinic segment, and it expects potential upside in this segment since fully half of the doctors in this market have not been exposed to the drug. When asked about the competition from generic products, management mentioned that it doesn't see it as a serious threat, as the competition is more intense between generic products.

Other products

Spectrum has more than a dozen other drugs in development in its pipeline. Further, it has broadened its scope with the recent purchase of Allos Therapeutics, bringing along its lymphoma drug, Folotyn (which for the 4 months since acquisition had sales of $20.4 million) as well as cost savings. Further, in 4Q12 it established its global footprint (in EU and Japan) as the single worldwide owner of Zevalin (which for the nine months since acquisition had sales of $30.3 million). It has also recently secured rights for the bladder-cancer drug Apaziquone, and according to management this has tremendous growth opportunity as no drug has been approved and marketed in this segment in the US for more than 20 years.

Healthy balance sheet

The company ended the year with $143 million in cash which it can use to fund acquisitions, new drug development, and return to shareholders. In FY12, it paid its first dividend payment of $9 million to shareholders. It also has in place a $100 million share repurchase program with a balance of $88 million.

Competitors

Spectrum has two key competitors who are also expected to benefit from their strong pipeline of drugs:

Biogen Idec (NASDAQ: BIIB) was recently upgraded to a Buy rating from a Hold rating by Canaccord Genuity, based on the company's increased confidence in its Tecfidera launch and the huge potential of the drug. Apart from its strong pipeline (in Tecfidera, Tysabri and the hemophilia franchise), the company boasts strong free cash flow generation characteristics, combined with low financial leverage.

Roche (NASDAQOTH: RHHBY) owns some of the world's best-selling oncology drugs like Avastin, Herceptin, and Rituxan, and these drugs have helped the company to achieve sales of $5 billion. However, sales of these drugs are expected to be lower in the future, as the European patents for Rituxan and Herceptin will expire in late 2013 and mid-2014 respectively.

Conclusion

Biotech investment is always risky until it begins to realize its potential. Key parameters while investing in biotech companies include both cash on hand, and a strong pipeline of products and Spectrum has both. The slowdown in its key product Fusilev is a concern, but as a mitigant, it is also experiencing positive sales growth for Folotyn and Zavalin.

In comparison with its key competitors, it is much smaller in size on the sales front but its margins are not far behind. With a strong PE of 5.42, EPS of $1.46 supported by a steady growth and solid pipeline, Spectrum seems like a good bet.

Its revenues have grown from $7.7 million in 2007 to over $250 million in 2012 and it has been a profitable company for last 2 years. In FY12 alone, it saw over 40% growth in product sales and 95% growth in net income.


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