Why Smart Investors are Watching Spectrum Closely
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Spectrum (NASDAQ: SPPI), located in Henderson, Nevada, is a commercial-stage biotechnology company, primarily focusing on oncology and hematology issues. The company is a catalyst in acquiring, developing and commercializing a broad range of diverse clinical and commercial products.
Zevalin, an FDA approved cancer therapy drug, is a key component to its rising strength. The biological drug is for patients in the treatment of Non-Hodgkin's Lymphoma. It was the first Food and Drug Administration approved radio-immunotherapy treatment for non-Hodgkin lymphoma. Treatment with Zevalin takes only a week on an outpatient basis.
Zevalin is different in many ways from conventional chemotherapy or external beam radiation treatments. Zevalin combines the cell targeting ability of a monoclonal antibody with the cell killing ability of a radioactive particle. The treatment is generally well tolerated by patients without the usual side effects of hair loss and nausea. The most common side effect is a temporary reduction in red and white blood cell counts.
Fusilev is a folate analog formulation. It received FDA approval in April 2011, for use in patients with advanced metastatic colorectal cancer.
In addition, the company has four major drugs in clinical trial stages. Apaziquone, an anti-cancer agent for the treatment of non-invasive bladder cancer, is in late stage development. Belinostat, a histone decytelase inhibitor is a drug for the treatment of peripheral T-cell Lymphoma and solid tumors including carcinoma of unknown origin, and Ozarelix, a luteinizing hormone for the treatment of prostate cancer. Both are in Phase II clinical stages. SPI-1620, a peptide agonist of endothelin B Receptors is in Phase I clinical trials.
Other drugs in the pipeline include RenaZorb, a lanthanum-based nanoparticle phosphate-binding agent, which is beginning the preclinical stage. SPI-014, a drug for hyperphosphotemia in end stage renal disease, and SPI-205, chemotherapy induced neuropathy, are both in development.
Sometime ago there was talk of Spectrum being highly undervalued and ripe for a takeover by Bristol-Myers Squibb (BMY), Pfizer (PFE), Merck (MRK), Teva (TEVA), Eli Lilly (LLY) or Abbott Laboratories (ABT). Spectrum seems to have its own idea about a takeover bid.
Recently, Spectrum and Allos Therapeutics (UNKNOWN: ALTH.DL) announced an agreement whereby Spectrum will acquire all of the outstanding shares of Allos for $1.82 per share in cash plus one Contingent Value Right (CVR). The CVR provides Allos stockholders an additional payment of $0.11 per share in cash if Folotyn receives European regulatory approval. The initial cash transaction is valued at up to $206 million on a fully diluted basis. The acquisition will be final most likely in the fourth quarter of 2012.
Both Boards of Directors unanimously approved the transaction. Spectrum will finance the acquisition with a combination of cash on hand and a revolving credit line with Bank of America. The purchase allows Spectrum access to Allos' T-cell lymphoma drug Fotolyn. Sales should be the same as last year, which were $50 million, or more. The acquisition will most likely boost Spectrum's earnings in the fourth quarter.
This acquisition adds diversification to Spectrum's source of revenue. It also enhances their hematology development in the treatment of lymphoma. Zevalin and Folotyn fall in the same target market of hematologists/oncologists for the treatment of different kinds of lymphoma. This merger expands the number of cancer patients that Spectrum will be able to treat.
Spectrum is a great value at just under $12 a share. There is a consistent average of 25% monthly gains. It is increasing both revenue and earnings. It is one of the fastest growing biotechnology companies in the market. During its most recent quarter, it was just shy of its 2011 earnings of $48.52 million by just $2 million. In 2011, it grew earnings from a loss of $48 million to a gain of $48.50 million in just one year. Revenue grew by 15.99% during most of the last quarter ($30.75 million compared to $26.51 million a year ago). With three FDA approved drugs, its growth is unprecedented. Many analysts see an $18.20 price target, which would be a gain of 60%.
Spectrum is indicating a huge upside recording its sixth straight quarter of profitability as revenue grew 37%. Shares are trading lower than they did prior to the revenue announcement. Fusilev seems to be driving the sales upward spiral. There is nothing wrong with one drug creating a landslide of profits. Amylin (AMLN) is utilizing the same strategy with Byetta. Elan (ELN) focuses on its multiple sclerosis drug Tysabril, which it sold off to Alkermes (ALKS). Spectrum may be looking at Fusilev to counter the losses it has experienced with apaziquone.
So, what is attracting investors and experts to Spectrum? People seem to be seeing Spectrum's blend of research and development and its strong plan that is creating continual cash flow.
Spectrum's income in 2011 of $193 million was a 160% increase over 2010. That strong growth continues into 2012 when in the first quarter Spectrum announces a $60 million first quarter revenue compared to $44 million in 2011 during the same period. If the company reports similar earnings for the rest of the year, this annualizes earnings at $1.60/share for 2012. One thing Spectrum needs to conquer is investors fear that Fusilev sales will go down as leucovorin, a generic drug, comes back into the market. Tang Capital, however, believes in Spectrum and has chosen to invest in this stock. As of May 2012, Tang Capital owns 4.58 MM shares of Spectrum, which is 7.8% of its outstanding shares. I expect Spectrum to show a strong year.
Some investors might shy away from biotechnology or pharmaceuticals. It appears, however, that these are on the upward swing and could be good investments for the savvy person, even if for the short run.
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