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Why Spectrum Fell on Beleodaq Approval but Will Rocket on Melphalan Approval

NEW YORK (TheStreet) -- Food and Drug Administration approvals can be a very exciting investment sport. Sometimes they can get too exciting and trip you up even if you make the right call. That's why, when playing the FDA approval game, investors need to keep in mind two things: the bottom-line numbers, and the degree of certainty of those numbers.

Case in point: Spectrum Pharmaceuticals (SPPI - Get Report) . Look what happened to this stock in late June to early July.

SPPI 6-Month Chart

In late June, the FDA was on the verge of announcing its decision on Spectrum's latest pipeline candidate Beleodaq. Beleodaq is a chemotherapy that preferentially kills tumor cells in certain subsets of Non-Hodgkin's lymphoma.

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As decision day closed in, investors placed bets that Beleodaq would be approved. On July 3, it was. Then Spectrum fell 26% in one month.

What happened? What seems to be the case here is that novice biotech investors started placing bets on approval without keeping the hard numbers in mind. Beleodaq is not a first-line treatment. It is for relapsed NHL and is specifically most effective for a subtype called angioimmunoblastic T-cell lymphoma, which accounts for 1% to 2% of all NHL cases. There are around 550,000 NHL cases in the U.S. per year, which puts the rare form at between 5,000 and 10,000 cases a year. Minus first-line treatments, there's not much left.

Some FDA approvals will obviously bring companies major revenue. Some, however, may not, and it is important to differentiate between the two. Although we don't know what the numbers will be on Beleodaq yet, the Spectrum's fall since the Beleodaq approval seems to suggest they won't be stellar. But luckily for those who bought at the top and are still hanging on, there is hope for Spectrum yet.

To see why, let's look at what's happened since the stock bottomed on Aug. 4. Simply, sales picked up more than 40%, and the quarterly loss shrank unexpectedly to 6 cents a share. Its other drugs came through for the quarter, and shares broke back through $8. Investors have not yet lost faith.

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