Better Buy: Spectrum Pharmaceuticals or Dendreon?

In today's matchup, we have Spectrum Pharmaceuticals (Nasdaq: SPPI) versus Dendreon (Nasdaq: DNDN). It's an odd matchup on some levels, but they both have cancer drugs that they're trying to ramp up sales of and have fairly close product revenue -- at least for now.

Source: Company releases.

A tale of two peak sales
Sales of Dendreon's Provenge are low because the drugmaker needs to ramp up its production lines to be able to produce more of the prostate cancer treatment. Once Dendreon isn't supply constrained -- sometime next year -- it's reasonable to expect the company can ramp up sales in excess of $1 billion a year. Prostate cancer is a large market, and Provenge seems to be working better than the only other first-line treatment option for advanced prostate cancer patients, sanofi-aventis' (NYSE: SNY) Taxotere.

Spectrum has two drugs: Zevalin, which treats non-Hodgkin's lymphoma; and Fusilev, a drug that allows doctors to treat patients with high levels of methotrexate for a type of bone cancer. Zevalin is the real key to Spectrum's success; sales more than doubled in the first half of 2010 compared to the year-ago period, but as you can see, they're still pretty low.

The problem for Zevalin is the sheer number of competitors in the non-Hodgkin's lymphoma space. The drug is approved as a first-line therapy, but in the complex treatment world of non-Hodgkin's lymphoma that includes Biogen Idec's (Nasdaq: BIIB) Rituxan, GlaxoSmithKline's Bexxar, and Cephalon's (Nasdaq: CEPH) Treanda, Zevalin seems to be getting the short end of the stick.

In the pipeline
Spectrum definitely has this category won. The company has two drugs being tested in pivotal trials and has two others farther back in the clinic. There are also two drugs in preclinical development, but let's not get ahead of ourselves. The preclinical compounds won't be bringing in revenue for years, if they even make it through the clinical trial marathon.

Dendreon's pipeline is a lot sparser. Positive trials with Provenge make developing immunotherapy a little less risky -- but only a little bit. Dendreon just needs to find targets to train patients' immune cells to home in on, which is easier said than done. The company lists one program testing a target seen in bladder, breast, ovarian, and colon tumors, but the therapy hasn't gotten past phase 1 trial. Research and development has taken a back seat to ramping up sales of Provenge.

Valuation
This is where things get tricky. In one corner, you have Dendreon with a market cap of $6 billion. Clearly, much of the sales of Provenge are already built into the stock price. By contrast, Onyx Pharmaceuticals (Nasdaq: ONXX), which owns only half of its cancer drug Nexavar, has a market cap of only $1.6 billion, but is on pace to see Nexavar sales close to $1 billion this year.

At the other -- dare I say it -- spectrum, Spectrum has a market cap of only $200 million. There's development-stage drugmakers without any revenue at all that have larger market caps.

Which one is the better buy? It's a tough call.

In the short run, Spectrum has a better chance at fundamental growth. If the company can grow sales of Zevalin beyond the paltry $27 million to $29 million that management has guided for this year, shares could take off in the second half of the year.

But in the long term, Dendreon has the better growth prospects. There are a lot of sales baked in, but the drug has a cult-like following among patients. Patient-driven sales are what made Intuitive Surgical's (Nasdaq: ISRG) da Vinci Surgical Systems so popular, and they could drive sales of Provenge -- as long as the company can get Medicare to pay for it.

What do you think? Which company has the better near-term and long-term prospects? Sound off in the comment box below.