Inside Wall Street: Is Big Pharma eyeing Spectrum?
The profitable biotech's two cancer drugs could make it an attractive target.
For a little-known, small-cap biotechnology company, Spectrum Pharmaceuticals (SPPI) boasts of two anti-cancer drugs that have produced healthy earnings -- and, not surprisingly, attracted the attention of some U.S. and foreign-based drug makers.
The stock rose to a high of more than $17 a share in July of last year from a low of $7.07 in October 2011, though it has since pulled back to around $11.60.
Some biotech investors view Spectrum not only as a growing young biotech but as a potential takeover target and see this pullback as an opportunity to jump in.
"We have been getting inquiries from some Big Pharma companies, including foreign drug makers, most particularly from Japan and Europe," says one executive who preferred not to be identified.
One large Japanese pharmaceutical company, he adds, has expressed more interest in Spectrum than the other potential suitors. Spectrum Chairman and CEO Dr. Rajesh C. Shrotriya, however, declined to comment on rumors that any pharmaceutical companies have made inquiries about a buyout deal.
Some analysts put the value of Spectrum based on its products on the market and drug pipeline alone at $20 to $28 a share. And some investors believe the company could be a very attractive acquisition target for the likes of Abbott Laboratories (ABT), Merck (MRK), and Pfizer (PFE).
In just 10 years, the well-managed Spectrum has grown quickly into a profitable biotech with two cancer drugs, Fusilev and Zevalin, already on the market, and another 10 oncology drug candidates in clinical development -- two of them in phase 3 clinical trials and others undergoing phase 1 and 2 clinical studies.
Spectrum acquires, develops and commercializes mainly oncology and urology drug candidates. It turned profitable in 2011, earning $48.5 million, or 84 cents a share, on sales of $192.9 million.
Fusilev, which is indicated for the treatment of osteosarcoma and colorectal cancer, is the big revenue driver for Spectrum, accounting for 78% of the company's total sales. And sales of Zevalin, aimed at treating non-Hodgkin lymphoma, have also been on the rise.
"We expect Spectrum to continue to grow the Fusilev franchise at least over the next several quarters, and to put the pieces in place to potentially grow the market for Zevalin," as well as continue to maintain a strong balance sheet, says Joseph Pantginis, analyst at Roth Capital Partners. He rates the stock a "buy" with a 12-month price target of $28 a share.
He notes that Fusilev has continued to enjoy "increasing product revenue growth and market share ticking upwards." The positive results were initially the result of a shortage in the generic leucovorin, a rival drug, but that has changed, says Pantginis, after the Food and Drug Administration approved Fusilev for use in colorectal cancer patients.
The analyst figures Spectrum will earn $1.59 a share in 2012 on estimated sales of $273.2 million. "We believe the new sales and marketing efforts at Spectrum will be instrumental in continuing to drive the Fusilev franchise forward," says Pantginis, along with that of Zevalin.
Adrian Butt, analyst at RBC Capital Markets, who rates Spectrum as "overweight," continues to believe that the risk-reward on the stock is favorable at current levels, and that its current valuation "reflects potential floor levels." Shares of Spectrum could appreciate further, he argues, as long as Fusilev sales stay above $25 million per quarter. Right now, he estimates Fusilev sales in the fourth quarter of 2012 at $45 million to $50 million.
Spectrum has an "impressive pipeline for a company its size," notes Edward White, managing director and analyst at investment firm Laidlaw & Co., who rates the stock a buy. Spectrum's market capitalization has ballooned to $757 million from just $300 million about three years ago.
"We believe that Spectrum is undervalued compared to its peers," he says, especially when considering that none of its small-cap biotech peers have two marketed products or a pipeline of 10 diverse drugs.
Meanwhile, Spectrum has been busy in the M&A front, as well. It's in the process of acquiring Allos Therapeutics, whose drug, Folotyn, is a small-molecule therapeutic for cancer. Spectrum has also signed an exlcusive collaboration with Allergen (AGN), a technology-driven global health care company, to develop and commercialize Apaziquone, an agent aimed at the treatment of non-muscle bladder cancer.
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Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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