The Spectrum of Biotech Valuations

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Two oncology drugs on the market and a market cap of a little more than $500 million aren't usually synonymous with each other, but Spectrum Pharmaceuticals (Nasdaq: SPPI  ) isn't a usual company.

On the surface, Spectrum seems awfully cheap. By comparison, Dendreon (Nasdaq: DNDN  ) and Onyx Pharmaceuticals (Nasdaq: ONXX  ) each have a cancer drug on the market and sport market caps of $6.2 billion and $2.4 billion, respectively. Even Exelixis (Nasdaq: EXEL  ) , with no drugs on the market, is valued at twice the value of Spectrum.

The problem for Spectrum is that its drugs aren't something that many patients want or need. Zevalin is approved for non-Hodgkin's lymphoma, but so are a lot of other drugs; sales in the fourth quarter were only $8 million. Fusilev is used after a chemotherapy drug to avoid side effects from the chemotherapy, but there is a similar drug, leucovorin, that is available as a generic.

The company preannounced revenue for the first quarter last week of about $40 million. Annualize that out, and you have $160 million for both drugs, a far cry from the blockbuster levels that Dendreon's and Onyx's drugs can achieve. Fusilev is also benefiting from shortages of leucovorin. When the products make it back to the market -- Teva Pharmaceuticals (Nasdaq: TEVA  ) announced the reopening of a plant that makes the drug last week -- doctors may just retreat back to the generic.

An expanded FDA approval for Fusilev on Friday into colon cancer should help Spectrum slow the exodus. The drug is already widely used in the indication, but the approval will allow Spectrum to talk to doctors about the drug's benefits in colon cancer. Previously the company was limited to talking about its benefits in osteosarcoma, which made up less than 10% of Fusilev sales.

It's very difficult to value Spectrum during this transition period. If Spectrum can keep the momentum going, it's likely undervalued at this level. But it's still quite risky; if Spectrum can't execute, it could be a sub-$500 million company with two drugs on the market. Investors sitting on the sidelines should probably stay there at least until management talks about its plans for Fusilev on its conference call Wednesday.

Interested in keeping track of Spectrum as it tries to expand sales of its drugs? Click here to add it to My Watchlist, which will help you keep track of all our Foolish analysis on Spectrum.

Exelixis is a Motley Fool Rule Breakers selection. Teva is a Motley Fool Global Gains pick. The Fool owns shares of Exelixis and Teva. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Motley Fool has a disclosure policy.

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