Has Spectrum Pharmaceuticals Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Spectrum Pharmaceuticals (Nasdaq: SPPI  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Spectrum Pharmaceuticals.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 106.9% Pass
  1-Year Revenue Growth > 12% 160.4% Pass
Margins Gross Margin > 35% 82.5% Pass
  Net Margin > 15% 25.1% Pass
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 2.88 Pass
Opportunities Return on Equity > 15% 37.0% Pass
Valuation Normalized P/E < 20 22.78 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Spectrum Pharmaceuticals last year, the company has jumped two points. Becoming profitable has been a big boost for the biotech.

Spectrum had a huge 2011, as the company was profitable for the entire year. Shareholders have reaped the rewards: The stock has almost doubled in the past 12 months.

The reason: strength in Spectrum's drug lineup. For instance, the company has managed to make it easier for doctors to use its Zevalin non-Hodgkin lymphoma treatment, something former owners Cell Therapeutics (Nasdaq: CTIC  ) and Biogen Idec (Nasdaq: BIIB  ) were never able to accomplish. By getting the FDA to allow doctors to administer Zevalin without having to do a bioscan, Spectrum hopes that sales will pick up.

More critically, top-selling drug Fusilev has benefited because supplies of leucovorin, a related generic drug, have been extremely limited. As long as that situation persists, then Spectrum will reap the benefits -- but it likely won't last forever.

Still, the future looks bright for Spectrum. With bladder-cancer drug apaziquone expected to release phase 3 trial data soon, both Spectrum and partner Allergan (NYSE: AGN  ) are hoping for positive results. And although similar study results for peripheral T-cell lymphoma treatment belinostat won't be available until late in 2012, success there could boost Zevalin sales even as it faces competition from Celgene (Nasdaq: CELG  ) and Allos Therapeutics.

For Spectrum to reach perfection, it will eventually need to start returning capital to shareholders in the form of dividends. That step shouldn't come, however, until its current stable of drug candidates gets approved and starts to ramp up sales.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Spectrum Pharmaceuticals isn't perfect yet, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Spectrum Pharmaceuticals to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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  • Report this Comment On March 09, 2012, at 10:30 AM, biotech101invest wrote:

    No - another stock you mentioned is the perfect stock right here - CELG. It has the number one gross margin % and EPS growth in THE ENTIRE S&P 500 (not just healthcare ahead of all of the other 499 stocks)

    Those who have done detailed due diligence on CELG are feeling very good right now, others are missing the opportunity of a lifetime....yes CELG right now is entering a period that will result in a machine gun of catalysts starting with Pomalidomide FDA filing in a matter of days and in EU in Q2,EU front line and maintenance approval for Revlimid in Q2, a series of Ph 3 Apremilast data sets, Abraxane Pancreatic Cancer and Melanoma data, Stem Cell crohns data, Abraxane lung cancer approval this yr, Apremilast and Revlimid NHL filings with FDA early next yr, ....

    Some institutions who have not taken the time to understand the FULL Celgene story, sit on the sidelines waiting on the EU decision. We basically have been told discussions are now down to mostly labeling issues – it appears highly certain that we get full maintenance approval and AT LEAST partial front line approval. This is the reason some may wait? A portion of EU front line patients not available when CFO and CEO have told us publically any front line approval provides great upside potential to get share of a market CELG has none in. So if we don’t get a part of front line first few cycles (the “fear”) – but get maintenance in ALL indications which could lead to 3-5 yr maintenance duration – are you really worried about the small part of front line we need to wait for MM020 halt or MM015 OS benefit achievement in? (which by the way both could be here in a matter of months anyway IMO). Those analysts and investors missing the MAJOR maintenance opportunity because of fear of a partial front line approval must have not done nearly enough due diligence or have too many other companies to follow and haven’t taken enough time to understand THE REST OF THE CELGENE STORY. I think to Jackie and IR team’s GREAT efforts, some are finally starting to realize it’s crazy to wait. I think the buying today accelerates once Pomalidomide filing is confirmed in a matter of days or weeks.

    Of course, those investors and analysts who spend the time to DIG DEEP (instead of worrying about a small part of the front line market in EU we may need to wait on MM020 or MM015 updates on) and into the potential sales in EACH of these countries will buy immediately:

    o Japan (especially where the yen is and where CELG likely hedged)

    o China

    o Brazil

    o Mexico

    o So Korea

    o Turkey

    o Russia

    International sales will probably double US at some point. Way underestimated by analysts and institutions IMO.

    In addition, the majority of analysts and institutions are VERY low on the EU and US maintenance sales and overall duration imo. And remember duration of therapy is the single most important variable to incremental EPS.

    And of course the first NHL and Apremilast filings will come next yr. Loved the great addition of the patient population slides in these two indications (Thanks Jackie,Brian and Patrick!)

    Wonder if even the majority of those CELG investors who read this board realize that Revlimid NHL sales could be THREE TIMES Revlimid Myeloma sales??? Staggering lack of due diligence on the Street’s part given first NHL filing could come in 2013.

    With Apremilast we have a staggering amount of data coming with important Ph 2 Rheumatoid Arthritis data in Q2 and important Ph 3 Psoriatic Arthritis data coming in June that will lead to filing for approval early 2013. The buzz is that Apremilast results in PsA could be very very good. Dermatologists and Clinicians appear very excited about this indication. And then later in the yr we get the Psoriasis Ph 3 data and then Ankylosing Spondylitis in Q113. The company keeps using words like “Transformational” when mentioning Apremilast. I have to agree.

    I was told by analysts that some funds are still questioning if we can get reasonable pricing in places like Brazil and China. The answer is YES. CFO mentioned this again THEY CAN ACHIEVE THE WORLDWIDE PRICING BAND in these markets. People really have not done enough due diligence in markets like Mexico, Brazil, So Korea and don’t understand this is indeed achievable. CELG is already profitable selling Abraxane in China. We know Merck is predicting 25% of their worldwide revenue will be in China in 2 yrs – WITH FULL PRICING. One of the top three most important national goals for China right now is enhanced healthcare. Down the road a few yrs they want to have a country wide Medicare type system. They do agree to pay fair pricing. And remember we will have approval one yr early this yr in China for Revlimid. Brazil and Mexico are very large and profitable markets – people have not done enough due diligence on international imo.

    In addition they are missing major EPS drivers including:

    · SIGNIFICANTLY IMPROVING OPERATING MARGINS (up to 45% last yr to 47-48% and this will continue with international expansion).

    · LEVERAGE – people are missing this – you build international markets, open offices, hire people in all of these countries BEFORE sales ramp up. The sales ramp is starting so you get HUGE economies of scale and operating expense leverage with a MUCH larger % of revenue going to increase income and not to additional SG&A. VERY important and underestimated.

    · IMPROVING TAX RATE – lowest in the industry thanks to the Swiss Plant and brilliant tax planning, will get lower with EU approvals coming in Q2.

    · Buyback – Thank God for Jackie – she has already bought back like 10% of the stock and imo is buying more. AND REMEMBER the amazing 30 cent on the high side guidance beat this yr INCLUDES STABLE SHARECOUNT – buyback all upside. Personally I hope they issue more debt and increase their buyback. With their huge cash balance and $2.2 billion operating cash flow this yr, $3 billion next yr and $5 billion by 2015 or sooner, our capital structure is WAY too conservative. Jackie is making an impact. There was some rumor of a debt offering on some institutional desks last month – man do I hope they are true. If I was CELG I would borrow $2 billion at these low rates before they go up. I would increase the buyback significantly. The ability to buy your EPS growth at a 40% discount is an amazing opportunity. This table for PEG - PE/growth rate says it all (industry standard is 1.0, peers are higher. CELG is cheap cheap cheap):

    Company 2012-2013-2014-2015

    AMGN 1.2x 1.1x 1.0x 0.9x

    CELG 0.6x 0.5x 0.5x 0.4x (Based on a growth rate that is 10% low and EPS that is $1.50+ low)

    BIIB 1.4x 1.2x 1.0x 0.8x

    So while those who have not done nearly enough due diligence and fret about a partial front line approval – they are missing the forest through the trees and give those of us who actually do detailed due diligence an opportunity to buy the dips caused by their ignorance. I took advantage of that ignorance this week. Don’t worry – Wall St will catch up.

    Thank you Celgene employees especially Jackie Fouse and her team and everyone on the science, commercial and operational side. Your time is coming very very soon.

  • Report this Comment On March 09, 2012, at 11:48 AM, TMFGalagan wrote:

    @biotech101invest -

    Thanks for your comment. Celgene did very well on this scale when I looked at it last year: http://www.fool.com/investing/high-growth/2011/04/06/is-celg...

    best,

    dan (TMFGalagan)

  • Report this Comment On March 09, 2012, at 12:57 PM, steveat wrote:

    Too bad I can only afford like 10 CELG stocks...unless I can buy at least 100, I don't think it's worth it.

    My question is that I see a whole lot of people really highly touting SPPI, but the stock has done nothing but fall. Was the stock inflated? I don't know, but people are still bullish on it and I am trying to figure out why.

  • Report this Comment On March 09, 2012, at 4:00 PM, biotech101invest wrote:

    The number of shares you can buy doesn't matter at all. Buy CELG and you will get a nice percentage rise imo. Likely split also coming after EU approval

  • Report this Comment On March 10, 2012, at 4:57 AM, rsinj wrote:

    Considering the FAILs indicated, I think this model is flawed.

    If a company doesn't pay dividends then automatically there are two strikes. Most tech companies and Berkshire are in that batch.

    As far as the PE metrics - also flawed in my mind by TMFs own pushing of PEG. Look at the G, clearly it overrides the PE.

    I continue to dislike these cookie cutter/template articles spewed out by TMF authors.

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