Why Bears Are Devouring Spectrum

Just 10 days ago, I examined the bear thesis on Spectrum Pharmaceuticals (NASDAQ: SPPI  )  as, amazingly, over half of its float was sold short. It looks like those short sellers were on to something after all. 

Spectrum tonight announced a crushing 40% guidance reduction for 2013, setting a revenue target between $160 million to $180 million, compared to Wall Street's roughly $300 million estimate. The stock is currently down nearly 40% in after-hours trading. The culprit is steeply lower Fusilev sales, a branded drug that took full advantage of generic leucovorin's unavailability to rack up $204 million in 2012 sales. Short sellers saw this as just a temporary bonanza while bullish investors believed that Spectrum could hold on to those market share gains.

The announcement is a dramatic change of tune from Feb. 21, when during Spectrum's fourth-quarter conference call CEO Rajesh Shrotriya confidently declared, "We expect 2013 revenues to grow" on the back of strong January trends. I'm guessing February and March were trending worse than Seth MacFarlane's Oscar performance. 

Perhaps putting too much faith in management's comments from the conference call, I concluded my video from earlier this month that while the growth days of Fusilev were over, generics weren't poised to immediately decimate its market share. Oops. However, I did at least argue that, over the longer haul, short sellers would be vindicated, potentially sooner if insurance reimbursement pressure hastened the switch to lower-cost generics from companies such as Sagent Pharmaceuticals (NASDAQ: SGNT  ) . 

Spectrum's valuation may be shattered, but it doesn't mean the stock is finished. Fusilev is still expected to bring in $85 million in 2013. Spectrum also has two other drugs on the market, albeit neither are great sellers, a handful of phase 2 and phase 3 cancer assets, and about $60 million in net cash to help develop them. 

Even for investors who believe in those late-stage assets, the valuation of this company is still murky given that Fusilev sales could decline worse than estimated. I recommend staying away from falling knife stocks, unless you like getting cut.

 

Before investing in a stock like Spectrum, I urge you to read this brand-new Motley Fool special free report, "What's Really Eating at America's Competitiveness." Find out what has Warren Buffett concerned for the future of the U.S. and discover a little-known stock poised to profit from a major government initiative to combat this looming crisis. Grab your free copy today by clicking here.


Read/Post Comments (2) | Recommend This Article (3)

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 March 12, 2013, at 9:40 PM, vireoman wrote:

    I was one of those foolish enough to believe what Raj et al. said on that conference call less than three weeks ago. A complete deception. This is one class-action lawsuit I would happily join.

  • Report this Comment On March 12, 2013, at 10:16 PM, HWY216 wrote:

    Like "Vireoman", above, I too, had believed what Raj had declared on that CC. Tomorrow morning I am going to be absolutely destroyed by this bear mauling!!

    So, the short sellers win after all!!

    Thanks, Raj!! I'll NEVER believe another statement that you say!!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2309096, ~/Articles/ArticleHandler.aspx, 11/22/2014 9:19:13 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement