On Monday, Spectrum Pharmaceuticals (Nasdaq: SPPI) asked its shareholders to increase the number of authorized shares from 100 million to 175 million, and the shareholders agreed. Two days later, the company announced that the board of directors authorized the repurchase of $25 million in shares.


The simple explanation is that the authorizations don't require the company to do anything -- Spectrum doesn't have to sell more shares just because it has them, nor does it have to buy back shares just because the board authorized it to do so.

But the authorizations are still polar opposites. Which way will Spectrum head? It probably depends on what opportunities come Spectrum's way.

The company doesn't need to raise any cash to fund daily operations and current research-and-development programs, so the default path is to buy back shares assuming the company is cash-flow-positive. The authorization is only about 5% of the outstanding shares, and some of the repurchased shares will just cancel out shares issued for warrants and employee options.

Alternatively, if something interesting comes along, the authorized shares give Spectrum the ability to use its shares to buy or license a new product. The company's mode of operation is to look for new compounds outside its walls. Spectrum entered into a joint venture with Cell Therapeutics (Nasdaq: CTIC) to sell Zevalin, which Biogen Idec (Nasdaq: BIIB) originally developed, and eventually acquired all the rights to the cancer drug. Its other marketed product, Fusilev, was acquired from Targent.

In that regard, Spectrum is a lot like PDL Biopharma (Nasdaq: PDLI). Investors will need to trust management to invest their equity wisely -- be it through share repurchases or acquisitions. If the uncertainty keeps you up at night, perhaps it's best to pass on Spectrum.

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