A Spectrum of Valuations

I don't get Spectrum Pharmaceuticals (Nasdaq: SPPI  ) , which was the main reason I suggested investors stay away from the stock. After falling 14% yesterday on what seemed like a solid earnings report, investors don't seem to be able to figure it out either.

Revenue increased 51% year over year on the back of its top-selling drug, Fusilev. More doctors are using the cancer drug while manufacturing constraints for a related generic continue. The number of accounts buying the drug increased from over 1,200 in the first quarter to over 1,500 in the second quarter.

Spectrum's other marketed drug, Zevalin, is still struggling; sales were around $9 million in the quarter. That number will grow with the acquisition of the ex-U.S. rights to the drug from Bayer, but what Spectrum really needs to do is convince doctors to prescribe Zevalin instead of Roche and Biogen Idec's (Nasdaq: BIIB  ) Rituxan. Thus far, that's been a tough sell, even with a label change that makes it easier to sell.

With another profitable quarter under its belt, but with the decline yesterday, Spectrum's P/E fell to 8.2, which is certainly in the bargain-basement level. It's really tempting to call the bottom here and as long as nothing changes, one has to think that'll be the case.

The risk, which presumably is the reason Spectrum is priced so cheaply, is that something will change, most notably that Teva Pharmaceuticals (NYSE: TEVA  ) , APP Pharmaceuticals, and Bedford Laboratories will get their act together and start producing leucovorin, the aforementioned related generic with manufacturing problems. If they don't, we can assume that Mylan (Nasdaq: MYL  ) , Novartis (NYSE: NVS  ) , or one of the other generic-drug makers will step in.

Will doctors stick with Fusilev, when generic leucovorin, which is cheaper and has been around for a lot longer, is readily available? Certainly, the longer the supply constraints go on, the better it is for Spectrum to try and retain the doctors, but there aren't really any comparable situations that I can think of to give us historical context of what will happen.

No one really knows what's going to happen to Fusilev sales going forward, which of course is why the stock chart has looked like a roller coaster over the last two years. Jump on board if you want, but be prepared for a bumpy ride.

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Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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  • Report this Comment On August 13, 2012, at 11:13 AM, Emperor2 wrote:

    Brian, what you and every other analyst fails to consider is the wonderful human quality of greed. As Gordon Geeko immortally stated, "GREED IS GOOD". How does that relate to SPPI? Let me explain. There is a separate and much higher reimbursement schedule, from both Medicare and insurance companies, for Fusilev versus generic leucovorin. DOCTORS MAKE MORE MONEY FROM PRESCRIBING FUSILEV THAN THEY DO PRESCRIBING GENERIC LEUCOVORIN. Why would doctor's prescribe something where they make less money? Do you really think doctor's are in business to save money for Medicare and insurance companies? Not in this lifetime! GREED IS GOOD.

    Conversely, generic drug manufacturers make less money from generic leucovorin than they do from other generics. Why should they produce more generic leucovorin when they can make more money with other products? Do you really think generic drug manufacturers are in business to save money for Medicare and insurance companies? Not in this lifetime! GREED IS GOOD.

    GREED, my friends, is what is driving and will continue to drive the use of Fusilev. The shorts may pound down the price of SPPI but the doctors will drive up the sales of Fusilev.

    One other thing. In the short term, what does it matter about the sales of Zevalin? Fusilev is the main profit driver. The amount of profit Zevalin contributes is miniscule compared to Fusilev. It's like analysts obsessing about the sales of iPods when the real profit driver of Apple is the iPhone. Zevalin and the iPod both contribute incremental profit. Not much, compared to the main profit generator. Until the sales of Zevalin get really bigger, just enjoy the incremental profit.

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