The Many Reasons To Consider Spectrum
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Would you buy a biopharmaceutical company that recently reported record yearly sales, earnings and cash flow and yet sells at a relatively low price to earnings ratio (for a biotech company) of 12, and a price-to-sales ratio and price-to-book ratio of only about 3? Revenues of $193 million were up 160% from the previous year revenues of $74 million.
Spectrum Pharmaceuticals (NASDAQ: SPPI) describes itself "a biotechnology company with fully integrated commercial and drug development operations." With a market cap of about $600 million, it is relatively small but is included in a number of stock market indices, among them the NASDAQ Biotechnology Index, the Russell 3000, Russell 2000, Russell Global and most recently the S&P SmallCap 600. The company currently markets two oncology drugs, Zevalin and Fusilev, and for a small company, has an impressive pipeline of drug candidates in various stages of development. The company's latest potential blockbuster for bladder cancer, apaziquone, failed in late-stage trials. On a valuation basis, however, Zevalin and Fusilev are worth more than the current market price for shares.
Zevalin is a monoclonal antibody to B-cell antigen p20 fused to a radioactive element Yttrium-90. It is used treat low grade or follicular non-Hodgkin's lymphoma. Treatment regimens include two doses of another monoclonal antibody, rituximab, marketed by Biogen IDEC and Roche Holding, to reduce circulating B-cells, followed by one dose of Zevalin, which actively attacks the lymphoma. Because the antibody is radioactively labeled, it kills neighboring cells, most of which are also tumor cells, in addition to the cell to which the antibody binds.
The drug that competes most directly with Zevalin is Bexxar, a similar p20 monoclonal antibody that is complexed with radioactive Iodine-131. Bexxar is marketed by pharmaceutical giant GlaxoSmithKline (NYSE: GSK). There is little to differentiate the two drugs, other than the choice of radioactive agent.
The company's other drug, Fusilev, is used to treat advanced metastatic colorectal cancer in combination with chemotherapy involving methotrexate or 5-fluoro-uracil. The active ingredient of Fusilev is l-leucuovorin (aka folinic acid), a folate analogue, which has been purified to remove the inactive d isomer of the racemic mixture, so that patients only need half the dose. While not pharmaceutically useful, the d isomer may cause side effects. Leucovorin is used to "rescue" bone marrow after methotrexate treatments, but enhances the activity of the chemotherapy agent 5-fluoro-uracil. The main competition to Fusilev is Wellcovorin, which contains the inactive d-isomer. Wellcovorin is also marketed by GlaxoSmithKline. Fusilev seems to have the edge: Spectrum has recently expanded its capacity to manufacture the drug in response to increased demand.
Besides apaziquone, Spectrum has one other key drug in late stage development under the FDA's Special Protocol Assessment, belinostat.
First, Apaziquone was being investigated as an intravesicle instillation for non-muscle invasive bladder cancer. This type of cancer is recurrent in 80% of patients after the tumor is surgically removed. "Intravesicle instillation" means that it is introduced directly into the bladder. It is really a pro-drug that is converted into an active cytotoxic alkylating drug by reductase enzymes expressed preferentially by tumor cells. The company has conducted two multi-center phase 3 trials of Apaziquone used after tumor resection, but the drug failed to meet its primary endpoint of statistically significant reduced tumor recurrence at two years, analyzed individually. Trials with multiple instillations of the drug are likely to continue in some form.
Belinostat is a histone deacetylase (HDAC) inhibitor under investigation for the treatment of peripheral T-cell lymphoma (PCTL), non-small-cell lung cancer, and other solid tumors. Belinostat causes increased acetylation of Listor proteins, resulting in cell cycle arrest and cell death. Currently, Spectrum is testing Belinostat in a pivotal trial for PCTL. Currently, PCTL is commonly treated with anthracycline chemotherapy drugs, like daunomycin, marketed by as Cerubidine by Ben Venue Laboratories, a subsidiary of the German firm, Boehringer Ingelheim (not publicly traded).
Spectrum has three drugs in Phase II trials--Ozarelix for prostate cancer, SP-2012 for chemotherapy-induced neutropenia, and lucanthrone which sensitizes malignant brain tumor cells to chemotherapy agents. Ozarelix is a luteinizing-releasing hormone (LHRH) antagonist that blocks the release of sex steroids, including testosterone. SP-2012 is a long acting granulocyte-colony stimulating factor licensed from Hanmi Pharmaceutical, a division of Hanmi Holdings (Korean SE: 008930). Lucanthrone inhibits an enzyme called topoisomerase II needed to repair DNA damaged by chemotherapy or radiation. In early stage development, the company has SPI-014 for phosphatemia in end stage renal disease, an adjunct to chemotherapy called SPI-1620, MTRN-2696 for solid tumors, ortataxel for Taxane resistant tumors, and SPI-205 for neuropathy.
Recently, Spectrum announced the acquisition of Allos Therapeutics (UNKNOWN: ALTH.DL). Management expects the acquisition to be accretive to earnings by the end of 2012. Allos markets Folotyn (pralatrexate), which inhibits the synthesis of nucleic acids in tumor cells. Folotyn is the first and only drug to be specifically approved for the treatment of advanced or refractory PCTL. The same drug is in clinical trials for the treatment of cutaneous T-cell lymphoma, non-Hodgkin's lymphoma, non-small-cell carcinoma, bladder cancer, and breast cancer.
Spectrum is somewhat under the radar, with a following of just 5 analysts, all of whom rate it as an "outperform." Revenues are estimated, on average, at $217 million for 2012 and only modestly higher, $226 million for 2013. But estimates have doubled from a year ago. Revenues have surprised by double digit percentages on the upside every quarter of the last four.
However, profits disappointed in the fourth quarter, due to a higher cost of sales than analysts expected. Also, the failed Phase III trials of Abazaquinone have weighed upon the stock price. Much of the company's investment in the drug is likely to be sunk cost at least in the short-term.
The risks of investing in Spectrum are those you would expect of any small cap biotech stock. Risk is high, and uncertainty is high, too. Its pipeline drugs may not be approved as expected. It does not have the marketing prowess or resources of a big pharma companies like GlaxoSmithKline, which is currently a likely competitor and also a potential venture partner. Still, Spectrum's stock seems to represent growth at a reasonable price. With the Allos acquisition, Spectrum has three marketable drugs, a full pipeline, and has proven that it can grow its revenues. In addition, because of its pipeline and discounted value, I would not be surprised if Spectrum becomes a takeover target for a pharmaceutical giant looking to expand its oncology franchise.
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