Is Spectrum Pharmaceuticals Wasting Your Money?

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Stock buybacks are generally considered a bullish signal on Wall Street. They return capital to shareholders, while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.

But don't forget -- a company isn't obligated to repurchase shares just because it announced its intention to do so. So don't use the announcement as a reason to buy by itself, rather use it as a launching pad for additional research.

Gray clouds forming
Spectrum Pharmaceuticals (Nasdaq: SPPI  ) seems to be caught in a torrential downpour these days. Its stock is down 28% from recent highs and management has approved a $100 million share buyback program -- an increase from the previous $25 million repurchase agreement it already had in place -- to take advantage of the new lower price. But there have been a series of flash floods that have swamped the biopharma that should cause investors to pause.

When it rains it pours
Spectrum is trying to acquire Allos Therapeutics (Nasdaq: ALTH  ) and has been at it for some time after AMAG Pharmaceuticals (Nasdaq: AMAG  ) failed to get enough support of its own to buy it. Spectrum's hoping to gain access to the one drug Allos has on the market, the lymphoma drug Folotyn, as well as the pipeline of drug candidates in its development portfolio. But sales of Folotyn are less than stellar and some question why Spectrum wants to tread where AMAG failed to go.

Spectrum offered Allos $1.82 a share, along with the prospects of an $0.11-per-share cash boost if it got approval in Europe, but European regulators just killed off that option so there's no chance there will be a milestone payment being made. Spectrum has had to extend its tender offer for Allos' shares four times since the bidding began, but the number of shares tendered have actually fallen since the original tender date expired on May 24. Back then, more than 85 million shares were tendered, or 80% of those outstanding; the current amount tendered after the latest extension stood at more than 63.5 million shares, or 59% of the total.

Raining cats and dogs
Then last week it announced second-quarter results that showed a 51.5% increase in revenue to $68.7 million, as strong sales of colorectal cancer treatment Fusilev surged, generating profits that were 48% ahead of last year's efforts.

Its other drug on the market, Zevalin, a treatment for B-cell non-Hodgkin lymphoma, has not been selling well and earlier this year it cost Spectrum $26 million to acquire the rights from Bayer to sell it outside of the U.S. In the quarter, revenues related to Zevalin were $9 million, up slightly from $8.4 million last year. Part of the problem is that it competes for doctor attention against Rituxan, which is manufactured by Roche and Biogen Idec (Nasdaq: BIIB  ) , and as the Fool's Brian Orelli points out, that's been a tough sell so far.

With Teva Pharmaceutical (NYSE: TEVA  ) and other generic-drug makers diligently working to overcome manufacturing issues with a generic version of Fusilev, the market has started a countdown to when the drug's sales begin to falter.

Singing in the rain?
At just eight times trailing earnings and estimates, Spectrum seems cheap. Even more importantly, its enterprise value trades at a very cheap 7.5 times its free cash flow. Now there are risks to its business on the horizon, in addition to it being reliant on just two drugs for its sustenance, and its acquisition of Allos Therapeutics has been anything but smooth, however, management's willingness to step in and buy its stock doesn't seem misplaced.

CAPS member Zhraath doubts cancer patients will want to opt for a generic version even when it becomes available again. I've also had a rather successful long-term outperform rating on Spectrum Pharmaceuticals, but tell me in the comments box below whether you agree the new, lower prices the biopharmaceutical trades at are worth a significant investment on the part of management.

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Fool contributor Rich Duprey 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.

Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On August 16, 2012, at 5:12 PM, prginww wrote:

    Rich, I am adding to my positions with the lower prices. I have set a price target of $50 on SPPI. I think the buyback is good for all investors. I am very bullish on Spectrum.

  • Report this Comment On August 17, 2012, at 12:17 AM, prginww wrote:

    The Allos delays are very worrisome. In addition a law firm has initiated a class action suit opposing the acquisition. Without Allos, there is no pipeline and I would peg appropriate valuation at $6-7 a share.

  • Report this Comment On August 17, 2012, at 11:45 AM, prginww wrote:

    Rich, what you, and every analyst, fail to take into consideration is the wonderful quality of human GREED. 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, Teva Pharmaceutical is NOT, "diligently working to overcome manufacturing issues with a generic version of Fusilev… Their plant that makes generic leucovorin has been back in production for over a year. Why haven't they really poured generic leucovorin on to the market. Simple, because 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 generics? 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 continue to 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 much bigger, just enjoy the incremental profit.

    As far as their purchase of Allos, the reason it has been held up is the wonderful federal government requiring more information, and more, and more. If the sale goes through, it will be accretive to SPPI's profit. If it doesn't, it won't. The incremental profit that would be contributed by Allos isn't baked into the price of SPPI so why worrry about it.

    I am a buyer of more shares of SPPI and will continue to accumulate shares while the shorts, and clueless analysts, drive the price down.

  • Report this Comment On August 17, 2012, at 11:57 AM, prginww wrote:

    Your veneer of sophistication was stripped away when you assert that the Allos acquisition hasn't been baked into the stock price.

  • Report this Comment On August 17, 2012, at 6:12 PM, prginww wrote:

    I do not feel that Allos is baked into the price. In fact, however the situation with Allos is resolved, I think it will be a positve for SPPI. If the Allos deal falls through, it would not surprise me if that wasn't a positive for the stock. The cloud of doubt would be removed and SPPI could move on. On the other hand, if the deal is consummated, the doctors that prescribe Zevalin are the same doctors that prescribe Fotolyn. SPPI's drug sales reps could be trying to get doctor's to use two of their drugs, not just one. I think this would be a positive for SPPI also. Currently, there is just too much uncertainty about the Allos deal for it to be anything but a negative. Once that uncertainly is removed, one way or the other, I think this will be a positive for SPPI.

    I also understand that, whether I like it or not, SPPI is currently a one profitable drug company. But the profit from that drug will continue for a minimum of 2 additional quarters, probably more. They do have additional drugs in the pipeline that might possibly be successful and add to their profits. For now, however, we must enjoy the profit they are making. I just wish all my stocks went up around 50% in revenues and profit YOY.

    One other point on Teva Pharmaceuticals, APP Pharmaceuticals, and Bedford Laboratories. All 3 of these companies have had over 2 years to ramp up production of generic leucovorin. They have not done so. I read multiple "experts" and "analysts" touting how when they ramp up production they are going to crush SPPI's sales of Fusilev like a shoe squishes a bug. Considering I have been hearing this same argument for over 2 years I must ask, "Why haven't they ramped up production in 2 years?" The answer is two fold. One, it's just not as profitable a generic as other generics and two, they can't sell more as the doctor's aren't prescribing it. However, once doctor's stop wanting to make as much money as they can, and once generic drug producers stop wanting to make as much money as they can, then generic leucovorin will flow like a river and will relegate Fusilev into a footnote of history. Don't hold your breath.

    One other thing that supposedly is true is that Fusilev works better than generic leucovorin. I have no clue whether this is true or not. I have read doctor's comments that it is true but I have to question whether this is really true or just a doctor's justification for making more money prescribing Fusilev than they would prescribing generic leucovorin. I don't know the answer to that and never will. I don't want a doctor to ever lie but would they "bend" the truth just slightly to justify their actions? I'll never know.

    To me, this is a great buying opportunity. You may not agree with me and that is fine. I hope the price continues to drop as I will keep buying. I hate to sell some of my other biotechs to put so much in SPPI but I think this is just too great a buying opportunity to pass up.

  • Report this Comment On August 17, 2012, at 7:37 PM, prginww wrote:

    Spectrum has no debt, cash, earnings, two products selling profitably, experienced, efficient, and patient management, share repurchase, a stimulating mission to beat several cancers, and an enormous short position. On the other hand they have to fight detractor innuendo, analyst inattention, and government "helpfulness." The world admires courage and diligence so I think Spectrum will win, as it has been winning for at least two years (some might say ten).

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