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Biotech Stock Mailbag: Spectrum Pharma

Biotech watchdog Adam Feuerstein answers readers' questions about drug and health care companies.



) --Patrick A. gets the ball rolling on this week's

Biotech Stock Mailbag


"Why not talk recently of

Spectrum Pharmaceuticals


and its sales of Zevalin? Spectrum is posting encouraging sales numbers with first quarter revenue coming in at $6.5 million, a 27% quarter-over-quarter increase from the fourth quarter. Considering that Zevalin sold a total of $12 million in all of 2008, these numbers have to be exciting for Spectrum shareholders since the company's sales force was completely implemented in the first quarter. What are your thoughts on the future of Zevalin sales? How high can they go?"

Analyst coverage of Spectrum is hit or miss, so I don't have a sense for the consensus sales expectation for second quarter, if one even exists. Is it reasonable to expect the first quarter sequential sales growth (27%) to continue? If so, Spectrum should post second-quarter Zevalin sales of $8.2 million.

Zevalin sales in 2009 totaled $15.7 million. Spectrum needs to at least double Zevalin sales this year, if not more. Based on first quarter growth trends, Zevalin sales of $35 million to $40 million in 2010 should be an achievable target, especially since Spectrum's sales force and the company's full-time marketing efforts are underway.

If Spectrum can grow Zevalin sales to these targets -- if -- the stock in the low-$4 range is undervalued.

Investors are still in show-me mode, witnessed by the flattish performance of the stock this year. I have questions about Spectrum's commercial capabilities, as well. On April 12, two high-level executives, Chief Medical Officer Andrew Sandler and Chief Commercial Officer Amar Singh, resigned from the company unexpectedly.

Spectrum CEO Raj Shrotriya couldn't tell me exactly why both Sandler and Singh left the company, although Shrotriya intimated that personal reasons, including an out-of-state commute, played a role. Neither Sandler nor Singh had new jobs lined up, according to Shrotriya, and I haven't been able to track either of them down for comment.

The unexpected exit of two top executives at any drug company is reason for concern. The situation at Spectrum might be more worrisome because Shrotriya, in the past, has made the point of talking about recent hires like Sandler and Singh as evidence of the company's ability to turn around the fortunes of a drug like Zevalin.

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When I asked Shrotriya about this, he told me that the Zevalin commercial launch is on track and that a replacement for Singh has already been hired. He added that Singh, despite the title of chief commercial officer, was more involved with new business development deals than he was in overseeing the Zevalin sales team. As CMO, Sandler was an important link between the company and physicians when it came to discussing Zevalin clinical data. He has not yet been replaced.

Spectrum chose not to disclose the departures of Sandler and Singh to investors because neither was considered a "key executive" per SEC rules, which would have required disclosure, says Shrotriya.

That might be a perfectly defensible argument from a legal perspective, but if I were an investor in Spectrum, I'd want to know that two top guys decided to find work elsewhere.

If Spectrum puts up solid Zevalin sales numbers in the second quarter and beyond, investors won't worry about the exit of Sandler and Singh. Until then, it's an overhang.

Joel K. emails, "Thanks for your insight. I use to be a doubter of your columns but after getting burned multiple times by going contrarian, I have started listening and stopped losing. I would like to hear your thoughts on



and whether it is a good speculative play. I was impressed with the phase 3 erectile dysfunction drug data that was just released and I think the obesity drug has a good shot of approval."

I'm on record ranking the three obesity drug stocks in this order: 1) Vivus, 2)

Arena Pharmaceuticals


and 3)

Orexigen Therapeutics


. My view seems to be in line with the market. Vivus is outperforming its weight-loss peers so far this year, even with the stock at $!0.60 down from its 52-week high of $13.68 reached last month.

I do worry that Vivus' run is done, or slowing down, now that we're less than a month away from the FDA advisory panel on July 15 which will review the company's weight-loss drug Qnexa. A positive recommendation from the FDA panel is no sure thing. Qnexa does a good job in helping obese patients lose weight, but the safety and tolerability of the two-drug regimen is a question mark.

Already this week, we're seeing signs that investors and analysts are growing nervous about what FDA and its panel will think about Qnexa. On Tuesday, Lazard analyst Bill Tanner downgraded Vivus to hold from buy, citing concerns about Qnexa safety ahead of the FDA panel. The downgrade caused a selloff in Vivus.

I'm not necessarily agreeing with Tanner's bearish Vivus thesis (by the way, he has a buy rating on Orexigen and a hold on Arena), but I do think he's right to be worried about the outcome of the FDA panel. Instead of trading up into this very important event, I expect Vivus shares to remain fairly flat, if not fall, until we get more clarity from the FDA and its experts on the efficacy and safety of Qnexa.

Amy P. asks, "I find it very interesting that on the bottom of the web page for Crave-NX,

Generex Biotechnology


states that

Generex Oral-lyn is available for sale in India


It's interesting but not surprising. Generex's marketing people don't appear to be entirely on the same page as the company's lawyers, who have finally updated filings with the Securities and Exchange Commission to more accurately reflect the regulatory and commercial status of

Oral-lyn, Generex's oral insulin spray

, in India.

"To date, we have received regulatory approval in Ecuador, India, Lebanon and Algeria for the commercial marketing and sale of Generex Oral-lyn, although as per the terms and conditions of the regulatory approval in India, a

local clinical study must be conducted

before the product can be offered for commercial sale in that country," Generex disclosed in its 10-Q for the fiscal third quarter ended April 30, 2010. (Emphasis mine.)

The company's previous disclosure, in its 10-Q for the quarter ended Jan. 31, 2010, did not make clear that sales in India were conditioned upon completion of a study:

"The product

Oral-lyn was approved in India in January 2009, but per the requirements of the approval,

a study in India with Oral Recosulin is still ongoing

and we have not recognized any revenue from the Indian market to this point," according to the Generex's 10-Q for the fiscal quarter ended Jan. 31.

Emphasis mine.

The new, more transparent disclosure was made after I wrote an article on April 6 revealing that Generex did not disclose that the Drugs Controller General of India,

in March 200

9, had

revoked approval of Oral-lyn in India pending review


Even after sifting through SEC documents, company press releases and its Web site, it seems that Generex has not recorded significant revenue from Oral-lyn sales in any of the four countries -- Ecuador, India, Lebanon and Algeria -- where the company claims to have approvals in place. Moreover, Generex now concedes that Oral-lyn revenue is even further delayed:

"... we do not anticipate significant revenue from sales of Generex Oral-lyn in India

in calendar year 2010

, as we have to complete an in-country clinical study before the product can be offered for commercial sale. We also have entered in subdistribution agreements in Lebanon and Algeria but do not expect any significant revenue from the launch of the product in those countries in calendar year 2010," according to Generex's most recent 10-Q filing. (Emphasis mine.)

That's a change from Generex's 10-Q filed for the Jan. 31 quarter in which the company stated, "... we do not anticipate significant revenue from the initial commercial launch of Generex Oral-lyn in India

until sometime this fiscal year.

" (Emphasis mine.)

Generex's fiscal year ends July 31, 2010.

More nuggets from Generex's latest 10-Q:

  • Efforts to get Oral-lyn approved in Syria are delayed because the Syrian government requested Generex conduct an in-country clinical trial.
  • Generex has submitted Oral-lyn for approval in Bangladesh, Kenya, Yemen, Iraq, Iran, Libya and Sudan. My (admittedly snarky) comment: Generex looks to be cornering the Axis of Evil market with Oral-lyn, although there is still no word on the timing of the company's North Korean filing. Wait a second... hasn't it been reported that Osama bin Laden is a diabetic? Hmmm, makes you wonder.
  • In the last quarter, Generex awarded 1.75 million stock options to executives, directors and management employees with a fair value of just over $1 million. Me: Good for Generex's executives, not so much for Generex shareholders. For those keeping score at home, Generex's stock price fell 29% to 45 cents a share in the same time period. Since the fiscal quarter ended, Generex shares have sunk further and are now trading at 34 cents a share. The company faces delisting from Nasdaq unless shareholders approve a reverse stock split.
  • As for Crave-NX, Generex's diet glucose spray sold in drugstores and convenience stores, the company is being sued by a woman in California who alleges she was misled by the product's advertised weight-loss claims. Generex, in its SEC filing, says the company intends to fight the lawsuit.
  • Generex posted revenue of about $328,000 from its over-the-counter glucose and energy sprays in the April 30 fiscal quarter, up from revenue of $45,000 one year ago. But on a sequential basis, Generex's revenue in the recently closed quarter was down 24 percent from $431,000 in revenue in the Jan. 31 fiscal quarter.

Mark M. emails, "I have followed many of your articles on



. I have owned Dendreon for a few years now and, while I am very optimistic overall, I have one major concern and question: What is the likelihood of Dendreon getting reimbursement from the insurance industry and Medicare that is close to what their price for Provenge treatment is? Any word on this yet?"

No cancer drug approved on the basis of a survival benefit has ever been denied insurance reimbursement (private or Medicare) in the U.S. I don't see any reason for Provenge to be the first exception to that rule. The Provenge launch is in the early days, but Dendreon has told investors that doctors are receiving prior authorization from insurers for Provenge coverage, even if actual checks have not yet been cut. Insurers, including Medicare, can take up to three months to pay claims; Provenge has only been available for about a month. Dendreon has in place financing programs to help doctors and patients cover the reimbursement gap and co-pays.

Regardless, Wall Street's concerns about Provenge reimbursement will not be quelled until insurers cut real checks, doctors deposit the money into their accounts, then use it to buy their wives or mistresses more plastic surgery. OK, maybe that last part isn't necessarily true, but you get the idea.

Dendreon launched Provenge under supply constraints, telling investors that limited manufacturing capacity will only allow about 2,000 patients to be treated in the first 12 months of the launch. Moreover, Dendreon has said that the Provenge launch will be back-end loaded, meaning more patients will be treated in the first and second quarters of next year than will be treated initially in the third and fourth quarters of this year.

If you do the rough math, Dendreon should post $186 million in Provenge sales in the first 12 months (assuming a price tag of $93,000 per treatment). Wall Street takes a more short-term view, of course, which is why all eyes are on Provenge sales for the next couple of quarters.

Analysts don't seem to be easing into their Provenge sales forecasts much. Consensus revenue for the third quarter is around $29 million; for the fourth quarter it's about $50 million. If you stand around Wall Street's biotech water cooler, you'll hear grumblings about Dendreon likely to fall short of these high Provenge sales expectations.

Dendreon has not provided quarterly sales guidance, but the company is trying to temper expectations, explaining that Provenge is only being made available to a limited number of doctors and treatment centers, and even at these centers, not all eligible patients will gain access to Provenge. (Dendreon is not taking an active role in choosing patients for Provenge treatment, allowing doctors to make that call.)

Like it or not, justified or not, Wall Street doesn't seem to be heeding Dendreon's warnings, placing the company in a no-win situation for the early quarters of the Provenge launch. Even if Provenge sales are on track, Wall Street appears to expect even more.

Onward. An email from Nick C: "I know you have been very bearish on

Discovery Labs


in the past. Now that the company has gotten rid of

former CEO Robert Capetola, and appears to be working hand in hand with the FDA towards Surfaxin approval, has your opinion changed?"

No. Time and time again, investors have tried to buy the bottom in Discovery, only to lose money when some setback sent the shares lower -- again.

Last week, Discovery shares fell after the company released disappointing study results showing that its experimental drug Surfaxin failed to benefit children in acute respiratory failure.

Within days of that bad news, Discovery entered in a $35 million equity financing facility followed quickly by a $10 million stock offering at a steeply discounted price.

If you're unlucky enough to be a Discovery shareholder, you must be wondering what the hell is going on here? The "new" management team looks to be as incompetent and insensitive to shareholders as the old managers.

Discovery claims to be making progress with the FDA towards a first-quarter 2011 approval filing for the long-delayed Surfaxin as a treatment to prevent Respiratory Distress Syndrome in premature infants. What about Discovery inspires confidence that this goal can be achieved, especially considering the events of the past two weeks?

If and when Surfaxin is approved, I'd reconsider my bearish thesis in Discovery. Not one second sooner. If that means not catching the bottom, so be it. Too many investors have lost money thinking otherwise.

Joe A. writes, "Adam, what is your take on the recent delay from

AspenBio Pharma


? How long of a setback do you think this could be?"

One benefit of being a stock commentator and not an investor is that I get to read and laugh at disastrous news updates like the one posted by AspenBio last week without wincing in pain as my stock portfolio takes a hit. I'm sorry if that's what happened to you, Joe, but Aspen is ripe for mocking.

Aspen is being forced to delay a re-filing of its FDA approval application for the AppyScore appendicitis test because of "unexplained variability in results from site to site in the initial draft of the statistical analysis report," the company announced on June 7. The results come from a just-completed AppyScore phase III study.

"Unexplained variability" isn't explained in great detail but let's assume that Aspen has discovered an unacceptable level of variability in the accuracy of the AppyScore appendicitis test across the hospitals where the study was conducted.

What makes this setback funny is that Aspen assured investors that it had designed the AppyScore clinical trial to specifically avoid such data collection problems. Remember, Aspen blamed disappointing results from a previous AppyScore study in part on poor data collection and patients lost to follow up.

Perhaps, AspenBio needs to come up with a new excuse for why AppyScore under-performs.

Unfortunately, Joe, I don't have a good guess for the length of this delay. My gut tells me that the AppyScore results, when they do emerge, will not be strong enough to turn AppyScore into a compelling commercial diagnostic product. That's been my

stance on AspenBio

for awhile now and last week's news only reinforces my bearish sentiment.

I'm on vacation all next week. Mailbag will return on July 2.

-- Reported by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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