Are Short-Sellers Onto Something at Spectrum Pharmaceuticals?

Since everyone loves a winner, it's reasonable to assume that everyone hates a loser -- everyone but short-sellers, at least. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into profits.

Below we take a look at drug developer Spectrum Pharmaceuticals (Nasdaq: SPPI  ) , which has nearly 60% of its float sold short with its short interest ratio hitting more than 33 days to cover. Sales of its top two drugs fell in the latest quarter, while its acquisition of Folotyn had raised concerns before the deal was completed in September, so let's see if this tiny pharmaceutical has the power to make short work of short-sellers.

Spectrum Pharmaceuticals snapshot

Market Cap

$634 million

Revenues (TTM)

$251 million

1-Year Stock Return

(15.6%)

Estimated 5-Year EPS Growth

N/A

Return on Investment

33.3%

Dividend and Yield

N/A

Recent Price

$10.64

Shares Short Oct. 31

29.4 million

Shares Short Oct. 15

29.7 million 

% Change

(1%)

CAPS Rating (out of 5)

****

Sources: Nasdaq.com, FinViz.com. N/A = not available; Spectrum Pharmaceuticals doesn't pay a dividend.

Just because the shorts are piling in doesn't mean you should too. Such stocks could have serious problems that warrant their short interest, but they might also just be stricken by short-term troubles. Only Foolish due diligence will tell you for certain.

The short story
Sales of colorectal cancer treatment Fusilev sales were up 27% year over year but fell 8% sequentially , while its other home-grown drug Zevalin -- which is used to treat B-cell non-Hodgkin lymphoma -- rose 14% from the year ago period, but slipped 11% sequentially. It's in a tough market fighting competing therapy Rituxan, which is manufactured by Roche and Biogen Idec (Nasdaq: BIIB  ) , who saw an 8% rise in sales last quarter to $288 million.

While there's a shortage of Fusilev's generic leucovorin that was fueling the rise in the more expensive branded version, it's likely going to come to an end sooner or later meaning that Teva Pharmaceuticals (NYSE: TEVA  ) , Sagent Pharmaceuticals (Nasdaq: SGNT  ) , and Bedford Labs will profit at Spectrum's expense as generic sales perk up again. Spectrum's still convinced it will come out ahead regardless because international sales, where there is no shortage, have held up well and it's increased market penetration to 31% from 29% last quarter.

Three's a crowd
Yet it still explains why it was in such hot pursuit of Folotyn, the drug it acquired from Allos Therapeutics, as sales jumped 18% sequentially even when one-time purchase for a clinical trial is backed out of the equation. Many had questioned why Spectrum would want a drug that AMAG Pharmaceuticals (Nasdaq: AMAG  ) gave up on acquiring, but sales seem to have perked up and it's expecting the synergistic savings from the tie up to come in at the high end of its guidance of $40 million to $50 million, if not more.

Obviously, short-sellers think the weight of competition and slack organic growth will cause Spectrum's stock to collapse further. It's down 27% in 2012 and sits 38% off its 52-week highs. But it's going to have to put together more than one quarter of strong growth from Folotyn and it needs to show that Fusilev and Zevalin can bulk up sales more than they are. At $10 a share, though, I'm rating Spectrum Pharmaceuticals to outperform the market indexes on Motley Fool CAPS, the 180,000 member-driven investor community that translates informed opinion into stock ratings of one to five stars.

With three drugs available to it now to fuel revenue growth, it should be able to exceed expectations, which have been set awfully low.

Don't sell yourself short
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Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 20, 2012, at 8:57 AM, kirovs wrote:

    Shallow. Where is the cash flow analysis, cash position, pipeline? Very shallow.

  • Report this Comment On November 20, 2012, at 9:00 AM, mdriver78 wrote:

    OK, I have seen it written several times the sales are down for Fusilev, yet the following is aquote from the earning release: "Strong FUSILEV® (levoleucovorin) for Injection revenues recorded in Q3. Accounts ordering FUSILEV increased by 13% over last quarter. FUSILEV market penetration at approximately 31% up from 29% in the prior quarter." So either this and other authors are lying or this headline is misleading.

  • Report this Comment On November 20, 2012, at 11:13 AM, Emperor2 wrote:

    A few comments about your post on SPPI.

    1. "Fusilev sales were up 27% year over year but fell 8% sequentially..." Sales of any product will have vacillations on a quarter to quarter bases. The year over year results are a better indicator of how the product will do. If a product has multiple quarters of reduced sales, then a red flag must be raised but a one quarter drop, of and by itself, is not something to worry about.

    2. "While there is a shortage of Fusilev's generic leucovorin..." Fusilev's IS NOT generic leucovorin. Fusilev does not have the same chemical composition as generic leucovorin. It is an entirely different, albeit siimilar, product. It has it's own "J" code from Medicare. Doctors and hospitals are paid more for Fusilev than they are for generic leucovorin. Doctors and hospitals MAKE MORE MONEY prescribing Fusilev than they do selling generic leucovorin. Will doctors begin to prescribe generic leucovorin just to they can feel good about saving Medicare money? Will they suddenly decide that Obama was right and they are making too much money, so they willingly cut their pay? Will monkeys grow wings and fly? Ain't gonna happen. Doctors are going to do what is best for them, as long as it is also in the best interest of their patients. That's called win-win.

    3. There have been multiple problems with generic leucovorin. There have been manufacturing problems. There have been quality problems. There have been multiple re-calls. None of these problems have occurred with Fusilev. Many doctors that have started a patient on generic leucovorin, have had to switch to Fusiev due to these types of problems. Once burned, why would a doctor not go with a known product without these problems for future patients?

    4. For over 3 years now I have been reading how Fusilev sales will fall drastically once generic leucovorin is readily available. Tell a lie long enough and repeat it enough and people will begin to believe it's true. This lie has been told so much that people believe it's true. In Europe, generic leucovorin has been readily available for years yet Fusilev sales continue to rise. Do you think the buying pattern of US doctors is so different from European doctors? I don't think so.

    5. SPPI now has a 60 person in-house sales force to try to influence the buying decision makers. This is new. And they have 3 SPPI cancer products they can promote. It will be a synergistic effect. ALOS never had a sales force of comparable size to promote their products. And more sales people usually mean more sales.

    6. You neglected to mention anything about the multiple products in their pipeline.

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