HENDERSON, Nev. (
recently announced the purchase of
and its drug Marqibo, a liposomal formulation of vincristine approved last year for the treatment of a rare type of leukemia. Marqibo's commercial potential is nowhere close to a cancer drug like
ibrutinib, but for Spectrum, the acquisition could still be quite profitable.
None of the currently marketed cancer drugs owned by Spectrum -- Fusilev, Folotyn and Zevalin -- are impressive individually. In this way, Marqibo is a similar misfit. Spectrum's advantage, however, is being able to sell its cancer drugs with a single salesforce. The company can bring in the additional revenue of Marqibo without adding significantly to its costs. If Talon tried to sell Marqibo on its own, the drug would never be profitable. For Spectrum, however, even a modest-selling drug like Marqibo can be accretive to earnings.
Let's do some number crunching on Spectrum's decision to acquire Talon. I'm going to be conservative with my Marqibo sales estimates. Let's say the drug does $5 million in 2014 and peaks at $40 million in 2020 with a five percent annual decline until 2024.
On the cost side of the ledger, Spectrum would owe a one-time, $5 million CVR payment in 2018 when the drug reaches sales of $30 million in sales in my model. I'll also assume 85% gross margins, a $1 million increase in the company's SG&A that grows five percent annually and R&D expenses of $5 million in 2013, $10 million in 2014, $5 million in 2016 and zero in all other years.
Finally, I use a 12.5 percent yearly discount rate with a tax rate of 10 percent in 2016 (first profit) and 20 percent thereafter.
Using these fairly conservative assumptions, the discounted cash flow to Spectrum from the Talon deal is about $54 million. This is roughly a 12.7 percent compound annual return on their $11.3 million investment (the Talon acquisition price.) That's not great but keep in mind this is a base-case scenario with a lot of upside. If Marqibo sales peak at $50 million -- still relatively modest -- the discounted cash flow increases to $63 million.
The key point I'm making is less about the individual numbers and more about Spectrum's ability to generate profits from a so-so cancer drug. Spectrum proves making money doesn't always require "blockbuster" drugs. Buying modest drugs at a discount and leveraging the relatively fixed costs of a single salesforce is another way to generate profits. The Spectrum approach may not grab headlines but if the objective is to make money, its approach can work just as well.
What are the risks? Spectrum might believe Marqibo has blockbuster potential and start spending a lot more on R&D to push the drug into new indications. If this decision turns out badly, the added costs will destroy the drug's value potential. For this reason, it's important to watch Spectrum's Marqibo-related spending.
There are currently two ongoing phase III trials involving Marqibo. I expect Spectrum to finish those trials and I've included the cost in my modeling assumptions. The real question is what happens after those trials are completed. This is when Spectrum will really show its hand.
Sobek has no position in Spectrum.
David Sobek has been writing on biotech for a number of years through various outlets with a general focus on small cap oncology and antibiotics companies. He received his PhD in political science from Pennsylvnia State Univeristy in 2003 and a BA in international relations from The College of William and Mary in 1997.