Spectrum as an Investment (and some thoughts on TopoTarget)

This is a short (sort of ) article about Investment in Spectrum, and an update on TopoTarget

First and foremost, let me (investor89) say that I feel sorry for the numerous investors who have lost a lot of money on Friday’s CUP-data release. One of the wellrespected bloggers in Denmark, Renminbi, who has advocating buying shares in Spectrum, decided to sell on the disappointing news from TopoTarget.

I will try to give you a detailed review from my personal viewpoint,  and describe why Spectrum shares could rise 1.5% friday  – in spite of the disappointing CUP data, and later outline why I think it still makes sense be “long “in SPPI.

I’ve written on EI (Euroinvestor an insignificant danish chatboard – editors note), that I had purchased, what you can call a small lottery ticket in TopoTarget. I doubled my position early friday when I thought the dramatic fall was just unjustified panic. Later the same morning I sold around 80% of the shares just as the CC presentation came out and I saw the PFS data. Unfortunately that manouver resulted in a loss for the day at approx. DKK 5,000 .  I know that I can not pity myself, when I hear what others have lost,  especially when I made more than twice that amount on Spectrum later that Friday.

My interpretation of the CUP data is this:  I think they are lousy. I am aware that many wants to see them as magnificent etc., however before we get supportive data from subgroups I can not see any reason for that. But when looking at the CUP-data one should of course note that CUP is an extremely difficult indication.  TopoTarget  mentions that the OS curve seem to be much improved, I think we should take a good hard look at the graph they present. Looking first at the PFS graph it is clear that BelCaP has zero effect in improving PFS.  This is of course a real bummer since improvemnet in PFS is clearly an important endpoint in modern studies, and specifically in this study where its the primary endpoint.  But – when you look at the second curve it can be seen that BelCaP have a major impact on patients from 8 months onwards to approx 30 months,   there are over twice as many patients alive in the BelCaP group. This is actually quite nice.  It can clearly be seen on the steep curves. 30-50% of patients die within just a few months, no matter what treatment they get. It is therfore clear that a large portion of the patients were very sick to begin with, or that some of the subgroups simply do not respond to treatment. It is however, also likely that the patients at the OS who really respond to BelCaP between 8 months and 25-30 months are a particular subgroup, possibly such as  NSCLC patients. If so, a curve with pure NSCLC patients could prove very advantageous for BelCaP,  and it is this area I expect TopoTarget will want to investigate further.

Nonetheles – it is still worrisome that no BELCap showed no effect on PFS, not even a little bit.

However, there is something I think is VERY frustrating   Maybe I’m just stupid or maybe I’m just overlooking something;  but it looks to me, as if TopoTarget  has been withholding the data for a very very long time.

TopoTarget have mentioned that they needed 68 events (PFS events) to break the randomization code, in order to be able to look at the data. At the start virtually all patients are evaluable PFS patients in the trial. TopoTarget hadto have 68 PFS events (or 75% of patients PFS event) in order to break the code. Looking at the graph of PFS events, it is clear that they have 68 events after only 7-8 months in both arms. When the recruiting for the study was completed in december 2010, it was  most likely only be a few months away from when the 68 events occurred. It looks to me as if TopoTarget has withheld PFS data very long because they wanted to wait for OS data because they have had a hope that these would be good. I own’t accuse Topo for something when I don’t have a deeper knowledge on the subject, but I will mail TopoTarget and ask for an explanation, because it looks to me as if  TopoTraget hid the PFS data for over 12 months. The long time before the data was released is partially (or precisely) what lured many investors to purchase TopoTarget, based on the assumption that the long time spent indicated that the study was extremely succesfull

Well, enough written about Topo and Belinostat.

Let me proceed to the Company that this post is supposed to be focused on, Spectrum Pharmaceuticals.

But first – I will start by saying  that I have sold 1,000 SPPI shares on Friday, so my holdings are now down to 10,000 shares. With the recent clinical failures currently in SPPI,  some proactive Profit Protection makes sense, especially considering that the stock has risen a lot recently. I use TA, including much of the parabolic SAR on the daily chart, which I expect will trigger a few more sales over the summer.

The Danish investors can not understand why Spectrum has managed to rise in spite of the missed CUP trial. I’ll try to tell you about here:

Spectrum currently has the  following drugs with market potential in parentesis

Approved drugs: – Fusilev ($500-1000 million.) – To Zevalin FL ($1-2,5 billion) – FOLOTYN – next week – against PTCL (100-150 million)

In addition,  in late stage phase III: – Belinostat against PTCL ($100-150 million.) – Zevalin DLBCL (about $1 billion) – Apaziquone against NMIBC (about $1 billion)

In phase II: – Belinostat against CUP ($500-1000 million) – FOLOTYN CTCL ($200 million) –

Phase I / II – FOLOTYN against NSCLC ($1 billion) – FOLOTYN for Advanced Esophagogastric Cancer ($100 million) – Ozarelix on Lower Urinary Tract Symptoms Due two Enlargement of the Prostate ($100 million) – Ozarelix against benign prostatic hyperplasia (BPH) ($200 million) – Ozarelix against prostate cancer ($1 billion) – Lucanthone against glioblastoma multiforme (GBM) ($800 million) – SPI-2012 from patient with Chemotherapy induced neutropenia ($3 billion)

In phase I: – Belinostat phase I / II against Ovarian ($300 million) – Belinostat phase I / II against AML ($200 million) – Belinostat phase I / II against NSCLC ($1 billion) – SPI-205 – RenaZorb – SPI-205 – Ortataxel

(editors note – I assume the numbers are yearly turnover – however I have no way of validating these numbers – and personally I find it extraordinarily unlikely that all these drugs will get approval)

Based on the above analysis  one can easily understand why I’m so much in love with Spectrum.  Fusilev is a big money-making-machine for Spectrum. Presently Spectrum uses the revenue to develop and enhance their late-stage and early-stage pipeline.  Bearing in mind the market potential the various drugs have, you can perhaps understand why Spectrum did not fall on the bad CUP data (or semi-bad as some would probably prefer to call them). Belinostat against CUP indication is insignificant when looking at Spectrum’s entire pipeline.

Actually Spectrum did not even found the results important enough to issue a press release (which I  personally think they should have done).

My own position on Spectrum. In 2012 so far, we have seen that sales of Zevalins has not yet risen, Apaziquone is set back at least 3 years and Belinostat against CUP failed. It has therefore not only been  good news.  I am very pleased that the Allos transaction will close within 14 days time, so Spectrum will have 3 FDA Approved drugs.

I follow the monthly Wolter Kluwers data on Fusilev. The data gives me a hint on developments in sales of Fusilev and until today the data tells me that sales are increasing  month-over-month. Personally I see no risk in Spectrum because I think that the valuation of the stock is still very low  nd only based on Fusilev. I am certain that sales of Fusilev will maintain a high level for the rest of 2012.

I think it may be prudent at least to keep the shares for all of 2012 as you get clarification on the Allos trade,  the Zevalin /Apaziquone meetings with FDA, Belinostat PTCL data and much more.  Currently Fusilev bags $75 million each quarter (based on the most recent WK data)  additional sales include $15 million Folotyn, $7 million in Zevalin sales and 3 million in repayments.

Spectrum’s sales in Q4 will hit $100 million, as a minimum. With a Gross margin of 85%, Spectrum will have a gross profit of 85 million. With R&D of $15 million and SG & A of $24 million and repayments of $1 million  will have an EBIT of $45 million. With the current  tax rate approx. 10% (I know this will increase somewhat in 2014 and forward – but Spectrum will also benefit from Allos’s tax deficit) we end up roughly $40 million in profit per quarter or $ 160 million  annually. With a market capitalization of just over $920 million,  Spectrum has a P/E of 5.75.

I expect the pricetag will  hit $20 (representing an increase of just over 25%) without too much effort  And in my book $20 is still grossly underrated. The stock is still traded by about 50% discount because other drugs that compete with Fusilev. I do not think there really is all that much competition, so I find the discount unfair. Check up with the WK data every month and follow the trend of the share.

Next year,  Zevalin FOLOTYN and Belinostat will help turnover-growth to a greater extent, so eventually investors will pay less and less emphasis on Fusilev and thus attribute the Spectrum for their real earnings.

When looking at Spectrum, one must consider all the  performance and progress made by Spectrum who continually develops and enhances their pipeline.  The PTCL Belinostat study,  to me looks  like a much larger event for SPPI than the CUP Data was.

Investor1989