BOSTON (TheStreet) -- This week's Biotech Stock Mailbag opens with an email from Mike A. regarding Spectrum Pharmaceuticals (SPPI) .
"Will you do a piece on Spectrum Pharmaceuticals' Captisol-enabled melphalan when it files and eventually garners approval, vaulting the company into significant profitability? EVERYBODY knows you and your hedge fund friends continually short Spectrum and you will do anything to tweet misinformation."
Mike's apparently having a bad day at the races, but I'll try to rise above it and answer his question.
First the basics on this one: Spectrum licensed Captisol-enabled (CE) melphalan from Ligand Pharmaceuticals (LGND) . "Regular" melphalan is a chemotherapy drug used prior to stem-cell transplants in multiple myeloma patients. CE melphalan is an improved formulation which Spectrum believes, if approved, should become the new standard of care. The company is expected to seek FDA approval for CE melphalan before the end of the year.
I have no reason to throw cold water on Spectrum's enthusiasm for CE melphalan. Ligand's "Captisol-enabled" technology has already been validated in other approved medicines and there's no reason believe it won't also be successful with melphalan.
If approved and used widely, CE melphalan is probably a $100 million product at peak. From this amount, Spectrum must pay 15-25% royalties on sales back to Ligand. Will another $75 million in revenue help Spectrum reach "significant profitability?" Perhaps, I don't build financial models. CE melphalan looks to be a nice product but it's no blockbuster.
And therein lies Spectrum's biggest problem. Spectrum sells five cancer drugs, none of which are particularly ground-breaking. None of Spectrum's cancer drugs generate significant revenue on their own. The big buzz in cancer drug circles these days is immunotherapy and genetically targeted drugs -- qualities Spectrum's portfolio lacks. Equally concerning, the company's pipeline has no "wow" factor, consisting mostly of improved versions of older drugs.
Spectrum is boring. That doesn't mean Spectrum can't grow "boring" into profitability. It can and probably will, but investors don't typically pay a lot for boring drug companies. Spectrum is trading about 2.5 times the consensus estimate of $200 million in 2015 revenue. That's relatively cheap but underscores my point about investors not willing to pay a premium for Spectrum's valuation. Wall Street still has little love for Spectrum's CEO Raj Shrotriya -- another reason for the company's smallish trading multiple.