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) . 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.

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.

But something much bigger could happen soon for Spectrum, and that is Melphalan. Melphalan is a type of chemotherapy that has been around since 1984. It's nothing new. Its annual global sales are $130 million. The problem is, in order to administer Melphalan, a chemical called propylene glycol is needed, and this chemical is known to poison the kidneys and cause cardiac trouble. It severely limits the dosage of Melphalan a cancer patient can take.

What Spectrum has is a new form of Melphalan that no longer needs propylene glycol as a delivery mechanism, upping the dosage patients can take in a sitting with less toxicity. In this case, you have a drug with an established sales record since the mid 1980s, reformulated and tested for bioequivalence already established; Orphan status granted; and a New Drug Application (NDA) to be submitted by the company next month.

Will Spectrum's new Melphalan be a blockbuster? No, but there is little reason that its new, less-toxic formulation of the same drug can't simply supplant most, or perhaps even all Melphalan sales. The bottom-line numbers here are significant, and they are much more certain. This approval, unlike Beleodaq, will more likely lead to significant revenue increases.

How much?

Spectrum's license agreement on the new Melphalan is with CyDex Pharmaceuticals (now a unit of Ligand Pharmaceuticals (LGND) for a 15%-25% royalty on sales. Assuming a 25% royalty, net revenue for Spectrum on this new Melphalan alone could be in the ballpark of $100 million, considering current Melphalan sales. That's 65% of all of Spectrum's fiscal 2013 revenue.

The Beleodaq approval was a good thing, but in terms of bottom-line revenue, it is hard to quantify, uncertain and untested. A Melphalan approval would be something different entirely. We know what the sales potential is with much more accuracy because the drug is already out there. We know how it could impact Spectrum with a much higher degree of certainty. Such an FDA approval would have strong, long lasting effects on the stock. With a New Drug Application by September, we could see the FDA respond sometime in mid 2015.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


Now let's look at TheStreet Ratings' take on this stock.

TheStreet Ratings team rates SPECTRUM PHARMACEUTICALS INC as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

"We rate SPECTRUM PHARMACEUTICALS INC (SPPI) a SELL. This is driven by multiple weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its disappointing return on equity and generally disappointing historical performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Biotechnology industry and the overall market, SPECTRUM PHARMACEUTICALS INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • SPPI has underperformed the S&P 500 Index, declining 11.93% from its price level of one year ago. Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly underperformed compared to the Biotechnology industry average, but is greater than that of the S&P 500. The net income increased by 63.4% when compared to the same quarter one year prior, rising from -$9.72 million to -$3.56 million.
  • The gross profit margin for SPECTRUM PHARMACEUTICALS INC is currently very high, coming in at 75.42%. Regardless of SPPI's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, SPPI's net profit margin of -7.60% significantly underperformed when compared to the industry average.
  • SPECTRUM PHARMACEUTICALS INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, SPECTRUM PHARMACEUTICALS INC swung to a loss, reporting -$1.01 versus $1.46 in the prior year. This year, the market expects an improvement in earnings (-$0.72 versus -$1.01).

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