Bad Clinical Trial Trumps Good Acquisition

Spectrum Pharmaceuticals (Nasdaq: SPPI  ) is down 10% today. Apparently a pair of failed phase 3 trials trumps a smart synergistic purchase.

The spec pharma said two phase 3 trials testing apaziquone's use in bladder cancer after surgery failed to show a statistically significant improvement in tumor recurrence after two years. There must have been a trend in the right direction, however, because when the data from the two trials were pooled, the endpoint reached statistical significance. It's the same concept as how getting seven out of 10 heads isn't that weird, but getting 70 out of 100 might make you think the coin was rigged.

Spectrum and partner Allergan (NYSE: AGN  ) plan to ask the Food and Drug Administration what they think of the data, but I seriously doubt the FDA will approve the drug with pooled data. InterMune (Nasdaq: ITMN  ) had one trial that worked, one that failed, and pooled data that showed an effect, but the FDA rejected Esbriet.

The data should give the companies confidence that running larger phase 3 trials would should show a statistically significant improvement, but the endpoint requires following patients for two years, so we're years away from an approval if they went that route.

While apaziquone doesn't look as if it'll be contributing to the bottom line anytime in the near future, Allos Therapeutics' (Nasdaq: ALTH  ) Folotyn will. Spectrum is buying the company for $108 million upfront, net of Allos' cash at the end of last year, and potentially another $12 million if the drug is approved in Europe and sales begin there.

Allos' fit with Spectrum is perfect, and it's certainly better than AMAG Pharmaceuticals (Nasdaq: AMAG  ) that was previously courting Allos. Spectrum's Zevalin is used by hematologist-oncologists, the same doctors that prescribe Folotyn, but the drugs treat different types of blood cancers, so they don't compete with each other. Spectrum expects to achieve $40 million to $50 million in synergies from combining the companies in the first year, which should allow the deal be cash flow-positive in the fourth quarter of this year.

And the synergies should keep coming, since Folotyn is headed for approval in the EU. Spectrum's move to acquire the rights to Zevalin outside the U.S. doesn't look nearly as risky.

Was Spectrum's haircut today justified? Probably. Apaziquone would have tackled an indication that hasn't seen a new drug approved for it in more than 20 years. Even as good as the fit with Allos looks, sales of Folotyn totaled only $50 million last year; it's not going to be a major money maker for the company.

Fool contributor Brian Orelli holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools don't 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.


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  • Report this Comment On April 07, 2012, at 5:03 PM, FactPlz wrote:

    You offer no analysis to support, "...sales of Folotyn totaled only $50 million last year; it's not going to be a major money maker for the company."

    SPPI had sales of $193 million, gross profit of $159 million (82%), and net income of $48 million (25%).

    Yet, you state, "Spectrum expects to achieve $40 million to $50 million in synergies from combining the companies in the first year, which should allow the deal be cash flow-positive in the fourth quarter of this year."

    Allos projects 2012 revenue of $59-$64 million, and $48 million of SG&A (down from $67 million).

    Some back of the napkin analysis, let's assume sales are as projected (unlikely), and $40 million in savings (absorbed into existing SG&A), and assume R&D continues as estimated.

    That would add, roughly, $10 million to net income, or $0.17 per share -- a 20% increase. So, it seems, in the second year, this could add $0.30 per share.

    I realize with the excellent growth prospects for Zevalin, and continuing growth of Fusilev, earnings per share could easily grow 50% this year -- yet this is an attractive strategic acquisition, especially since it will be absorbed into the existing SG&A.

    And, the studies progressing for other cancers, may add to profits.

    I am long SPPI.

  • Report this Comment On April 08, 2012, at 10:43 AM, steven107 wrote:

    Include the company that you are referring to in the Headlines.

    That way the people likely to be interested in reading the article will come read it and those that wouldn't, won't come here wondering who you are referring to. That goes for every article ya'll right. All Fool headlines are written to draw (random) people in without giving a proper summary of the article.

  • Report this Comment On April 09, 2012, at 6:45 AM, retiredpharma wrote:

    Brian,

    Tell us again why the deal AMAG offered at 2.68/share was NOT synergistic, since Folotyn and Feraheme are targeted to the same doc, the H/O in both cases....Feraheme is prescribed by the H/O 3:1 over the Renal doc who typically does not TREAT in the office w/ Feraheme, but may advocate to the Hospital or outpatient facility the use of Feraheme! Still an important call to make, an advocate you want on your side, an early adopter, but they use very little of the IV Fe in clinical practice, and it matters not what they do in Dialysis since the bundle and PPS destroyed that market, and Feraheme does NOT even compete there!

    The deal offered to ALTH is extremely rich to the SPPI bottom line...in other words they are STEALING ALTH at 1.82/share + the CVR of .11 on milestones of 12M paid and EU approval, etc...the cash alone is >$100M and new indications and EU approval will double sales by 2013 to >$110M!

    I voted for the AMAG/ALTH merger last summer, not against and nothing has changed other than Martin Schkreli, MSMB Capital has made a small fortune on the demise of the AMAG/ALTH deal, having played AMAG long, and shorting ALTH down to 1.25/share(where he covered!), thank God thats where I trebled down and saved my ALTH position!

    His involvement and BOGUS offer of $18 should be FEDERALLY INVESTIGATED for FRAUD by the SEC!

    retiredpharma

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