) --

Spectrum Pharmaceuticals

(SPPI) - Get Report

slashed the price of its colon cancer drug Fusilev significantly in the second quarter, which explains why reported sales fell well short of investor expectations and caused the company's stock price to fall.

Fusilev net sales rose 67% to a record $56.6 million in the second quarter, as reported by Spectrum on Aug. 8. However,

Fusilev gross sales in the quarter could have been as high as $97 million

, according to monthly sales data compiled by Wolters Kluwer.

In June, alone, Fusilev gross sales totaled $49.7 million, according to Wolters Kluwer, which sells its prescription sales data to institutional investors, among other customers.

In previous quarters, the Wolters Kluwer gross sales estimates for Fusilev tracked very closely with net sales reported later by Spectrum.

Net sales deduct customer discounts or rebates and product returns. But this tight correlation between gross and net sales ended dramatically in the June quarter. The implied gross-to-net discount for Fusilev jumped to 41% -- a surprising and unwelcome red flag that overshadowed what seemed like, on the surface, to be a strong sales performance by Spectrum.

Spectrum shares at Monday's close of $12.06 are down 12% since the company reported second quarter earnings on Aug 8. Spectrum shares are down 1% to $11.95 in Tuesday mid-day trading.

Spectrum does not report gross sales of Fusilev. Company management, on its quarterly conference call, did not discuss Fusilev pricing or reasons why the company appears to be offering far larger discounts to doctors than it has in the past. A Spectrum spokesperson did not respond to a request for comment.

Evidence that Spectrum instituted new and deep cuts to Fusilev's price does show up in the company's most recent quarterly report filed with the Securities and Exchange Commission. In its latest 10-Q, Spectrum reports a $32 million increase in accounts payable in the June quarter compared to the March quarter, with allowances for drug chargebacks and rebates accounting for a majority of the new accrued obligations.

The decision by Spectrum to offer deeper Fusilev price discounts in the second quarter suggests company executives are more concerned about competition from generic leucovorin than they state publicly. Fusilev sales have soared due to chronic supply shortages of the less expensive but clinically equivalent leucovorin. But if leucovorin supply returns to more normal levels, doctors treating their colon cancer patients might stop using the more expensive Fusilev and switch back to the cheaper generic alternative.

By offering deep discounts on Fusilev, Spectrum is trying to woo oncologists with the prospect of higher profits. Oncologists pocket the difference between the dollar amount that Medicare reimburses for Fusilev and discounted selling price that Spectrum charges. When Spectrum drops the Fusilev price but Medicare reimbursement stays the same, the profit margin for oncologists increases.

But this price-cutting strategy can't go on forever. Under Medicare rules, cancer drugs are reimbursed based on the actual (discounted) selling price plus a 6% premium, calculated with a six-month lag. That means Spectrum's discounted Fusilev price, if it continues, will eventually result in lower Medicare reimbursement and smaller profit margins for oncologists as early as the first quarter 2013.

Whether or not oncologists choose to stick with Fusilev and lower profit margins or switch to generic leucovorin remains to be seen. Either way, investors are concerned with Spectrum's surprise decision to slash Fusilev pricing in the second quarter because the colon cancer drug doesn't appear to be as profitable to Spectrum as previously believed.

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--Written by Adam Feuerstein in Boston.

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