Is This Biotech for Sale?

Sherrie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For the last five years, Spectrum Pharmaceuticals (NASDAQ: SPPI) CEO Rajesh Shrotriya has always insisted that Spectrum was an acquisitive company, rather than “for sale”. But after a rough 2013, and many investors doubting the company’s future, the company might be exploring a sale.

The Run-Down

Before you Spectrum bulls get too excited, I’m not suggesting a $1 billion buyout or a 100% premium. Instead, I'd predict a small buyout premium – like what Spectrum paid for Allos Therapeutics – due to little support for its long-term plan of building through acquisitions.

Shrotriya has always said that he would rather lead a company with several small drugs in the market, rather than having one blockbuster product. The 18 years he spent at Bristol-Myers as an Executive Director of Worldwide CNS Clinical Research, during a period of substantial acquisitions, gave him great industry contacts and prepared him to execute the growth strategy he had envisioned.

The problem for Shrotriya, as seen with many companies, is that the plan to be diversified with several product offerings – Spectrum has three marketed products and 10 in clinical development – has backfired. Indirectly, the company’s colorectal cancer drug Fusilev became its primary source of revenue; contributing $204.3 million of its $267.7 million in revenue during 2012.

Its other drug, Zevalin, a blood cancer drug, is very efficient but has been a disappointment commercially. The company’s third drug, another blood cancer product, Folotyn, is growing, but most analysts don’t expect more than $100 million in peak sales.

Due to the company’s dependence on Fusilev, its shares were crushed when 2013 revenue guidance was lowered to just $170 million following new generic introductions.

Bringing new manpower to the table

Now, the company appears as though it may be trying something a little different. In the past, Spectrum acquired all of its products/pipeline and kept individuals on its board of directors who had a great deal of success at operating high-growth biotech companies. But on Monday, the company announced two new board members: Dr. Dolatrai Vyas and Raymond Cohen.

Dr. Vyas was at Bristol-Myers for more than 30 years as leading researcher and developer. This addition strengthens Spectrum’s connection to Bristol-Myers, a team that has a history of being acquisitive.

Mr. Cohen was the CEO of Vessix Vascular, a company that was acquired by Boston Scientific for $425 million.

These two new board members alone do not add value to Spectrum’s growth plan. But they might indicate that the company is bringing on new board members that have experience in marketing the sale of a company/product. These two additions could at least help to create an alternative business strategy.

Who Would Buy Spectrum?

Bristol-Myers is always a thought, thanks to the number of Spectrum directors, board members, employees, and also the CEO who began their career at the major pharma company. Yet strategically, such a buyout makes more sense for two other companies.

Eli Lilly (NYSE: LLY) is going to be hit among the hardest by the patent cliff over the next few years. The company is losing patents on two of its top-selling drugs: Cymbalta and Humalog. Already, the company has been hit by generic versions of Zyprexa. Combined, this could create a $5 billion hit to the company’s top line, or 10% of its revenue.

Eli Lilly is prepared to tackle the patent cliff by raising prices and cutting costs, and it has not been active in acquisitions. However, the company faces additional patent expirations in 2014 and 2015. Moreover, the company has among the weakest pipeline among big pharma.

An acquisition of Spectrum Phamaceuticals could add 10 candidates to this pipeline. While Spectrum’s $170 million in revenue this year does not add value to Eli Lilly’s stock, its pipeline might.

Spectrum has a pipeline estimated to be worth $3 billion if all drugs are developed with success. With a $466 million market cap and $163 million in cash, Spectrum might be worth the risk to a struggling big pharma company such as Eli Lilly.

The second, and the most logical acquirer is Allergan (NYSE: AGN). Aside from Spectrum being cheap, having a large pipeline, and having a significant pile of cash, Allergan and Spectrum are already partners. The two are developing Apaziquone together, a product that was unsuccessful in its late stage study, but a product that longs believe still has a shot at approval due to the collective data and the design of the study.

Moreover, Allergan needs to make a splash. The company’s stock has come under fire as of late, losing 27% of its value in the last three months. The company now faces new generic products, has a weak pipeline, and just recently posted a poor quarterly report.

The company is expected to produce total sales in the neighborhood of $6 billion for this full-year, meaning an acquisition of Spectrum would not add value to the stock. However, its pipeline might, and Allergan is a company that desperately needs 10 additional products in its pipeline.

Conclusion

In the midst of this conversation, you begin to realize that in the long term, Spectrum Pharmaceuticals might present value. 

The problem with Spectrum is that people simply don’t trust its management. The CEO has a history of overhyping and underdelivering, which was evident with its guidance of $300 million in sales heading into 2013 -- and then the sudden cut soon after.

Spectrum continues to be one of the most heavily shorted stocks in the market, and for this fact, management may finally be seeing that investors are no longer buying its promise. Those investors want to see a move, and the sale of Spectrum Pharmaceuticals could be that move.


Sherrie Stone has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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