The bears have been all over
Previous to the stock’s recent sharp decline, Spectrum was on a roll partly because of high expectations from its three cancer drugs and speculation that the company was being eyeballed by Big Pharma because of the big potential of its three FDA-approved products already on the market, as well as the promise of its 10 drug candidates in its bulging pipeline.
So because of the big tumble that Spectrum took – down to $8 a share from a 52-week high of $17 – the company appears to have become more vulnerable as a takeover candidate. A number of the big pharmaceuticals, ever in need of new innovative drugs because of the expiration of the patent protection on their high-selling drugs, have been looking at Spectrum as a reasonably cheap buyout candidate, according to some close watchers of the stock.
Here’s why: In just over 10 years, Spectrum has come up with not just one but three cancer drugs that have enabled the company to turn profitable in 2011. So it was predictable that speculation swirled last year that several major pharmaceutical company were considering the young biotech company as a possible takeover target.
The stock’s recent fall followed Spectrum’s lowering of its 2013 revenue forecast because of disappointing sales of Fusilev, the company’s colorectal cancer drug. And sales expectations for the two other stocks were also uninspiring. They are Zevalin, an anti-CD20 monoclonal antibody used to treat refractory non-Hodgkin’s Lymphoma, and Folotyn, a methotrexate analog used in a number of cancers and in rheumatoid arthritis, and also approved as the first drug for the treatment of a fatal disease called PDCL.
Among the major pharmaceutical companies that some investors believe have reason to be interested in Spectrum include
Allergan, a technology driven global health care company, had signed an exclusive collaboration with Spectrum to develop and commercialize Apaziquone, an agent to treat non-muscle bladder cancer. The drug is one of Spectrum’s two drugs undergoing phase 3 clinical trials. Allergan paid Spectrum $41.5 million and will make additional payments of up to $304 million based on achieving certain milestones.
So far, Raj Shrotriya, Spectrum’s chairman, president and CEO, likes to be an acquirer, analysts say. To boost the value of Spectrum's stock, Shrotriya could enter into a merger agreement with a larger pharmaceutical company or acquire another drugmaker with an attractive product. He is confident that as a stand-alone company, Spectrum has the potential of becoming a larfger company with a bigger and diversified presence in the pharmaceutical industry.
Shrotriya says over the next 18 months, he expects Spectrum will be filing three new drug applications with the FDA -- for Belinostat, a pan-HDAC inhibitor that could have the potential of becoming a backbone of chemotherapy along with carplatin and paclitaxel; Melphalan, a unique formulation used as a conditioning regimen for bone marrow transplant in certain diseases; and Apaziquone.
“We expect to develop more exciting futuristic drugs that have billions of dollars of potential, in our judgment,” says the Spectrum chief executive. In sum, says Shrotriya, “we have a base business of revenue-producing products that are helping funding our development and acquisition of new drugs with blockbuster potential.”
Adnan Butt, analyst at RBC Capital Markets, continues to rate Spectrum as outperform, with a price target of $16 a share based on a valuation of its products. “Spectrum’s Zevalin and Fusilev represent potential upside opportunities and the lean cost structure makes these products meaningful even with modest forecast sales,” says the analyst. Specifically, he puts a value of $5 a share for Fusilev assuming sales of $100 million-$150 million a year; another $5 for Zevalin, projecting peak sales of $100 million a year; and $3 for Folotyn based on sales of $80 million a year. In addition, he assigns late-stage pipeline candidate Belinostat a value of $1 a share and Apaziquone, plus $1 a share in cash.
Spectrum’s value could even see an upside scenario, says Butt, where the stock gets up to $19 a share should sales exceed expectations for the three drugs. In such a case, he would assign a value of $7 a share for Zevalin, $6 for Fusilev and $3 for Folotyn. The total value of $3 a share he assigns to the pipeline products and cash would be unchanged.
Butt figures that demand for Fusilev continues but expectations will likely remain cautious until inventories settle. "But even without taking Fusilev into account, Spectrum appears undervalued based on other marketed products, pipeline, and cash,” he says.
So would Shrotriya opt for selling the company or acquiring another company with a promising drug or drugs to enhance the value of its stock? The betting among analysts is that he would choose to continue to expand Spectrum through further acquisitions – and think about a sale or merger later when the company is larger.
