Shorts Run for Cover as Spectrum CEO Predicts 2013 Revenue Growth

Indie Research

The chairman and CEO of Recommended List selection Spectrum Pharmaceuticals (SPPI) appeared at a healthcare investor event sponsored by JPMorgan yesterday, which we believe helped to spark some of the run in the stock yesterday and today.

The company also released some positive trial data on Monday for a developmental cancer drug called RenaZorb. CEO Rajesh Shrotriya talked about the drug briefly in his remarks yesterday. The compound is being developed as a potential treatment of high phosphate blood levels in patients with Stage 5 chronic kidney disease.

Shrotiya said the current market is worth over $1 billion and the market leaders are Renagel, marketed by Sanofi-Aventis, and FOSRENOL from Shire. FOSRENOL is a large pill that patients have to chew and it has a chalky taste. Patients with chronic kidney disease already have nausea and vomiting and many find chewing a chalky tablet unappealing, so compliance can be poor, Shrotriya observed

"We have been able to design small easy to swallow tablets. A Phase 1 study has demonstrated good tolerability and impressive dose response curves with regard to phosphate-binding capacity. We expect it to offer lower pill burden and potentially better compliance, which are two very important aspects in chronic kidney disease," he said yesterday.

It was Phase 1 trial, however, in which the primary end-point is mainly to determine if the compound can be tolerated by otherwise healthy people. It met that endpoint but the next step is to investigate whether the drug is an effective treatment. The company will start to investigate that in a Phase 2 trial that it is currently planning. It is also looking for a licensing partner overseas to help develop the compound.

Shrotriya's main objective yesterday was to introduce Spectrum to a wider audience by emphasizing the strengths that prompted us to recommend the stock.

"We have three marketed drugs bringing in revenue and profits. We have been authorized by our board to buy back our shares to add shareholder value. We were able to issue a dividend to our shareholders for the first time in the last month, in December. We have a promising pipeline with near-term catalysts. Recently, we have strengthened our commercial capabilities. We have streamlined. All the three drugs will be marketed by one sales force. We've divided the whole country into six different regions. Each one will be headed by a head of the business unit, is like the CEO of his region. We have strong financials and we have proven track record of delivering value to our shareholders . . . So, I'm very proud to stand here in front of you and say that you are listening to a company that is on its way to great success and we need your help," Shrotriya told yesterday's audience.

Shrotriya noted that unlike other small drug development companies, Spectrum has products that bring in revenue and it is a profitable company. It has generated a profit for eight consecutive quarters and Q3 2012 was its most successful three-month period to date.

"Until 2008, our company was primarily a development-stage company. We had no revenue. We were raising revenue almost every quarter like most biotech companies do. However, today, it's a very different story. We have three FDA-approved proprietary anticancer drugs in the market bringing revenue, revenue that will be over $300 million this year. We have a pipeline of about 10 drugs in development," he said.

The three approved drugs, as we've noted previously, are Fusilev, Zevalin and Folotyn, with the latter coming via Spectrum's acquisition of Allos Therapeutics last fall. Zevalin is used in the treatment of low-grade, or fllicular, non-Hodgkin's lymphoma, while Fusilev is used to treat metastatic colorectal cancer. Folotyn is approved in the U.S. for the treatment relapsed or refractory peripheral T-cell lymphoma. The drug is under review in the E.U. for the same indication.

Fusilev is the company's primary revenue generator. Spectrum reported Fusilev sales of approximately $52 million for the third quarter. Zevalin sales were approximately $8 million, while Folotyn added about $6 million to the top line, including net product sales of approximately $3 million from an unrelated party using it in a clinical trial.

Fusilev is also the drug investors that are bearish on Spectrum love to hate. They believe Fusilev sales will dry up because of a similar generic drug called leucovorin. But leucovorin isn't a generic form of Fusilev, it's a different drug, and health insurers don't question Fusilev's on-label usage. It has its own unique reimbursement code. Shrotriya took the doubters head on yesterday.

"A question is always asked, can Fusilev continue to grow? Our absolute answer is, absolutely yes. What is the opportunity with Fusilev? Today, approximately 50% of [our] key accounts have purchased Fusilev and many key physicians have been reached [but] there is obviously [a] lot of green open pasture we haven't touched yet. When we conducted a survey, more than 50% doctors said that they've never, ever been called on by a Spectrum oncology specialist yet and that's where we see the opportunity," he said.

"Our sales organization, for the first time, is focusing on promoting all three drugs at the same time. There is not a single salesperson of any company that talks about the 'racemic mixture.' We have a full dedicated 60-people sales force talking about all three of our drugs," Shrotriya added.

Looking at the pipeline, Spectrum's late-stage drug candidates include belinostat, an HDAC inhibitor in late-stage clinical development for peripheral T-cell lymphoma (PTCL) and other solid tumors, and apaziquone, a synthetic bio-reductive agent being investigated in the treatment of non-muscle-invasive bladder cancer.

The company announced in late December that belinostat had achieved its primary endpoint in a Phase 2 clinical trial dubbed BELIEF. The goal was to show an objective response rate (ORR) of at least 20% in PTCL patients that had failed to respond to at least one other therapy. Belinostat has been granted Orphan Drug and Fast Track designations by the FDA, and Spectrum expects to make a New Drug Application (NDA) filing by mid-2013, with an FDA decision anticipated in 2014.

"We expect our growth to continue in 2013 [for] both revenues and operating income. [It is] very important for a small biotech companies to have operating income. We're self-sufficient. We don't need to raise cash for our day-to-day operations," Shrotriya said.

"Looking forward, our aspiration is to build a hematology and oncology company that delivers value for our shareholders, exceptional growth opportunities for our employees, and is grounded in the understanding that we will only be successful when we deliver better solutions for our patients.

"Our growth strategy can be summarized in three points: grow organically, advance our pipeline at an accelerated rate, [and] leverage the strong financial and organizational foundation that we have built here to broaden our product portfolio. The thesis of our growth strategy is to deliver growth through a disciplined approach," he added.

BMR Take: Shrotriya really didn't break any new ground yesterday in his presentation. However, him coming out and saying that he expects both revenue and operating income to grow this year puts a major hole in the bear case if achieved. The bears have long argued that once leucovorin is no longer in short supply that Fusilev sales will plummet. With Sagent (SGNT) now manufacturing the generic drug, leucovorin has been more widely available since November, and if Fusilev sales hold up, then the entire short thesis basically gets invalidated.

We think there likely has been some short covering the last two days, as we don't think Shrotriya would be predicting increased 2013 revenue and operating profits if the company has been seeing sales of Fusilev, which represents nearly 80% of its revenue, taking a major hit the past two months. Even bullish analysts see Fusilev sales declining next year with leucovorin becoming more plentiful, so if sales of the drug just stay steady in 2013, the stock has the potential to rocket higher.

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