Spectrum Blames Fusilev Sales Warning on Overstuffed Inventory

HENDERSON, Nev. ( TheStreet) -- Spectrum Pharmaceuticals ( SPPI) retreated to the cosy confines of a private conference call with Wall Street investors Wednesday morning to attempt damage control for last night's massive Fusilev sales warning.

Investor confidence in Spectrum and its CEO Raj Shrotriya -- already tenuous -- is now in tatters. Shrotriya has always been quick to promote the company through press releases and public conference calls when it suits him. But when a detailed explanation of bad news is warranted, Shrotriya shows disdain for his broader shareholder base by speaking only to a select group of investors on a call organized by the investment bank Credit Suisse.

Spectrum shares are down 36% to $7.90 in early Wednesday trading.

For those that may have missed the details of last night's Fusilev warning, Spectrum said it expects sales in the first quarter to be between $10 million and $15 million. That's down sharply from $44.6 million in sales recorded in the December quarter. For all of 2013, Spectrum expects Fusilev sales of just $80 million to $90 million, well off 2012 sales of $204 million.

Spectrum's walk back of Fusilev sales on Tuesday night came just three weeks after the company's year-end earnings call, on which Shrotriya promised sales growth for 2013. Shrotriya boasted about Fusilev growth despite flat revenue for the past three quarters.

"We expect with the trends we are seeing in January, and we are seeing the new accounts and the reorders from the old accounts, that we expect that 2013 revenues to continue to grow. And we expect our sales to be higher than we had in 2012," Shrotriya said on the Feb. 21 call.

What happened in the past three weeks to radically change the outlook for Fusilev?

On the Credit Suisse call, Spectrum COO Ken Keller offered two causes: 1) Three of the four largest wholesalers only recently informed Spectrum they would not be purchasing any Fusilev in the first quarter. These wholesalers had enough Fusilev on their shelves already to meet user demand, and they were "watching market dynamics" before buying additional supply. 2) Hospital use of Fusilev, already in decline due to switching back to generic leucovorin, was decelerating faster than Spectrum had originally projected.

Spectrum says 75% of its Fusilev sales are derived from private oncology clinics, with the remaining 25% of sales coming from hospitals. Looking ahead, Keller explained demand for Fusilev from private oncology clinics was "stable" and could be reasonably projected to total approximately $25 million per quarter. The company is less confident about future hospital sales and Keller warned that sales there will continue to decline.

If Spectrum recorded $204 million in Fusilev sales last year, 75% coming from oncology clinics where demand is stable, why isn't the company able to forecast 2013 Fusilev sales of $150 million?

Because wholesalers current inventory is stuffed with Fusilev, making it impossible for Spectrum to know when new orders will start up again. Spectrum hopes to see wholesalers re-order Fusilev in the second quarter and into the second half of the year, but the company has no visibility into current wholesaler inventory level so it can't be sure, Keller said.

With the significant cuts in top-line revenue expected for 2013, Spectrum admitted on the Credit Suisse call that it will not be profitable unless expenses are cut. Spectrum net income for 2012 totaled $95 million, or $1.46 per share. In order to maintain non-GAAP profitability, Spectrum is cutting R&D expenses, although the company refused to elaborate on the conference call.

Shrotriya also tried to make the case that investors shouldn't abandon Spectrum. The company was undervalued when everyone thought Fusilev sales were great. Now that Fusilev sales have been whacked, the company is an even better buy, he insisted.

On Wednesday, few investors are buying what Shrotriya is selling.

-- Reported by Adam Feuerstein in Boston.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.