Spectrum Pharmaceuticals (SPPI)

• Incidence of Cancer

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Jb Lo

Additionally Spectrum's pipeline includes a new drug which is in Phase III of clinical trials under a strategic collaboration with Allergan Inc. Another of Spectrum's products is going through Phase II of clinical trials. Spectrum owns rights on the majority of its products and has been buying right to in-license outside drugs in various development stages.

Spectrum owns a quite young molecule portfolio with its two drugs being released in 2008 and with most patents lasting till at least 2015 . Although it has never been profitable in its history, its growth potential remains intact and the coming years should see a sizable increase in revenues. Since 2004 revenues have been multiplied by 10, to $28.7 million in 2008.

Company Overview

Spectrum Pharmaceuticals markets its own products and aims at commercializing in-licensed products. Thus its revenues will mainly come from product sales but Spectrum also earns income from partnerships with other pharmaceuticals companies. While Spectrum has constantly devoted large sums to its R&D pipeline, it is also highly focused on its sale force expenses. Over the last few years Spectrum has released two products and its revenues have witnessed a double-digit growth.

Business and financial metrics

• While sales are starting to pick up and will likely grow in the next years, Spectrum's main source of income remained its contract and license agreements. In 2008 it received about $20 million in milestone payments. These streams of revenues are thus very unstable and depend on R&D progress or sales milestones. The company has stated that it is unable to forecast future sales revenues on its two marketed products. Spectrum first recorded significant product sales in 2008. Besides Spectrum has never been profitable and won't be profitable in the short and medium term.

• The company has managed to keep SG&A expenses under control while it has had to support the launch of two new products with a growing sales force. As with any biotech company, R&D expenses remain high and uncorrelated with sales. Furthermore a portion of R&D expenses related to the development of Apaziquone is reimbursed by Allergan Inc. However over the last 5 years, its operating margin has greatly improved, showing that revenues cover a higher portion of operating expenses.

• Spectrum's balance sheet can be considered as really strong. In fact its cash and marketable securities are higher than its total liabilities. The company invests a great portion of its assets in short term securities thus allowing Spectrum to record interest revenues every year. Spectrum has no long term financial debt and contrary to many biopharmaceutical firms, it has been able to maintain shareholders' equity.

• Spectrum has followed a policy focused on the issuance of new equity and no financial debt. Moreover the cash level protects the firm from any short term default risk. While this strategy places Spectrum in a very good situation to face future challenges, one can question the decision to hold so much liquid asset and the opportunity to use these liquid assets in R&D investments.

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Business Segments

Spectrum is entirely focused on the development of drugs to fight against cancers. It has bought rights to develop some drugs from other companies but also has some products available for out-licensing. Thus Spectrum earns revenues from its two marketed products and royalties and milestone payments from out-licensed products.

• Zevalin: used in the treatment of Refractory Non-Hodgkins Lymphoma through radioimmunotherapy. Zevalin US rights were bought from Biogen Idec, Inc through a joint-venture with Cell Therapeutics Inc. In 2009 Spectrum bought back CTI's 50% stake in the joint venture which is now a wholly-owned subsidiary of Spectrum. Spectrum is contractually required to make milestone and royalty payments to Biogen Idec. Spectrum earned $0.3 million from Zevalin sales in 2008. Spectrum has a sale force of 40 executives devoted to Zevalin. Zevalin costs between $24,000 and $30,000 per patient and project sales could reach about $100 million a year, or more.^[2]
• Fusilev: an orphan drug prescribed in the treatment of osteoarcoma. Fusilev is a proprietary drug of Spectrum and was released in August 2008. Sales in 2008 were about $7.7 million. Fusilev was bought from Targent Inc. in 2006 and under a contract agreement Merck Eprova AG is to receive royalties and milestone payments from Spectrum on Fusilev sales. For H1 2009 Fusilev were about $12.2 million.
• Other sources of revenues: Spectrum also earns revenues on various license and collaboration agreements. In 2008 Spectrum made $20 million from the sale of assets to Pharmaceutical Resources (PRX) and in H1 2009 it recorded $2.1 million licensing revenues from the amortization of a $41.5 million payment made by Allergan Inc. in 2008.

Key Forces and Trends

A young but risky pipeline

Spectrum has acquired and developed a quite young pipeline of products with the majority of patents expiring after 2014. Thus the company can have more room to develop and market its products. Moreover two of its drugs are going through Phase II of clinical trials and one of them is currently in Phase III while Spectrum has filed with the FDA for extensions of regulatory-approved uses of its two marketed products. Therefore we can consider that Spectrum's pipeline is promising and has a potentiality to deliver new revenues to the company.

However one must note the high risk involved in this pipeline with products targeting narrow but highly profitable markets. Besides Spectrum's pipeline is focused on niche markets where R&D outcomes are unpredictable. Furthermore cancer treatments are subject to tough regulations from insurers and national health agencies which could result in uncertainties concerning the revenues from these drugs.

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Spectrum and Its Partners

As with many biopharmaceutical companies Spectrum has engaged in contractual relations with numerous partners in the industry. These partnerships can guarantee Spectrum with a more certain source of revenues since the company has in-licensed many of its products that have been previously developed by other pharmaceutical companies. Spectrum has also followed a strategy of partnership in R&D and commercialization of its products. Its main partnership as of 2009 is the development of Apaziquone with Allergan Inc under which Spectrum is entitled payments up to $304 million based on the achievement of certain milestones.

While partnering represents an opportunity to share risks and to benefit from the experience and the scale of its partners, it is also a risk that can lessen Spectrum's ability to earn revenues. Partnership contracts increase the uncertainties about future revenues.

Competitors

The treatment of cancer still remains a very large field of research and given the high stakes, the oncology market is one of the most profitable. Thus the majority of leading pharmaceutical companies have made oncology and cancer fight a top priority and they have devoted large amounts to this goal. Given the variety of cancers and the great number of ways to fight against it, there exist numerous different products and the oncology market is very large and encompasses many different drug classes. Spectrum is therefore competing against major drugmakers such as Pfizer (PFE) , Sanofi-Aventis SA (SNY) , Novartis AG (NVS) , GlaxoSmithKline (GSK) ... and also biopharmaceutical companies.

While Spectrum may seem very small and limited compared to the world's leading companies, it also can benefit from its size through a greater reaction capacity.

References

1. ↑ http://investor.spectrumpharm.com/financials.cfm Spectrum Pharmaceuticals Inc, Form 10-K, FY2008
2. ↑ [ http://seekingalpha.com/article/163153-how-zevalin-is-helping-spectrum?source=email ] Seekingalpha.com, 9/24/09]
3. ↑ http://files.shareholder.com/downloads/ABEA-2YJ7RY/700021265x0x304577/AD4C06C4-47EB-419D-920D-119AEEDB9687/2008_Annual_Report.pdf, Spectrum Annual Report 10K, 2008