3 Reasons to Buy Spectrum Pharmaceuticals

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Spectrum Pharmaceuticals (Nasdaq: SPPI  ) has been on fire lately, up 57% over the past year. The reasons for the solid price appreciation are the same reasons investors should be interested in buying the drugmaker today.

Shortages = revenue
Spectrum is benefiting from a shortage of a generic called leucovorin, a less pure version of its Fusilev. In the first quarter, revenue increased 160% year over year.

This would seem to be a temporary one-time benefit, but the shortages are continuing. The Food and Drug Administration still says Teva Pharmaceuticals (NYSE: TEVA  ) and APP Pharmaceuticals have limited supplies available. And the situation doesn't look like it's going to improve. Just last week, Bedford Laboratories had to recall some lots of its leucovorin because there were crystals in the vials.

In addition to gaining an immediate market share, the longer the shortages go on, the better it is for Spectrum. The more experience doctors have with Fusilev, the more likely they are to stick with the drug after full leucovorin availability resumes.

Once a patient starts on Fusilev, doctors aren't likely to switch patients mid-treatment even if leucovorin is available. In addition to the old adage "if it aint broke, don't fix it," which goes double when you're treating cancer, the drugs are used at different doses -- Fusilev is more purified than leucovorin -- so switching between the two increases the likelihood of a dosing error.

Fusilev is more expensive than leucovorin, but since the drugs treat cancer, patients and doctors are likely to be less concerned with the cost than they would for a chronic condition where the prescription had to be refilled monthly.

Bioscan no more
Spectrum's other drug, Zevalin, has struggled to gain traction despite good efficacy data in part because it was difficult to prescribe. Doctors had to give an initial test dose of the drug and run a bioscan to see where it went before the therapeutic dose could be delivered.

Spectrum recently gained FDA approval to remove the bioscan requirement, which should make it more appealing to prescribe. Spectrum has work to do to get out the message to lymphoma doctors, but there seems to be upside with Zevalin if Spectrum can do it.

Not sexy
I admit this is one of those negatives that's actually a positive. I can't fault someone for looking at this article and deciding Spectrum isn't worth investing in: The specialty pharma business is rather boring.

Spectrum essentially buys drugs that no one else is interested in, trying to reap revenues that justify their bargain-basement prices. The obvious benefit is that it can keep R&D costs relatively low.

Zevalin, for instance, was originally developed by Biogen Idec because the drug is a radioactive molecule linked to the same antibody as Biogen's Rituxan. Cell Therapeutics (Nasdaq: CTIC  ) bought the drug, and then Spectum became partners and eventually bought the drug outright.

Fusilev arrived in a similar manner, purchased from Targent, and wasn't discovered internally.

There's risk investing in these types of drugs, but when a company gets a hit, it can be very lucrative. ViroPharma (Nasdaq: VPHM  ) , for instance, licensed an antibiotic from Eli Lilly (NYSE: LLY  ) in 2004 for $120 million, and in 2011, the drug was still going strong, with sales of $300 million.

 Spectrum's management has been doing it long enough that their skills shouldn't be underestimated.

Buy? Not so fast.
There's always a flip side to the story that shareholders should hear so they understand the risks. Check back next week, when I'll present three reasons you might want to sell Spectrum.

Looking for stocks you can buy right now? Following the lead of Warren Buffett and other investing gurus might be a good idea. You can get a list of stocks the smart investors are buying in the Fool's free report appropriately titled "The Stocks Only the Smartest Investors Are Buying."

Fool contributor Brian Orelli holds no position in any company mentioned. Check out his holdings and a short bio. 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. The Motley Fool has a disclosure policy.

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