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Why This Little-Known Biotech Is An Enticing Takeover And New-Products Play

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Not many small-cap biotechnology companies possess the fundamental attributes that long-term growth investors hunger for unless they opt for the large-cap plays in this sector, such as Amgen (AMGEN), Gilead (GILD), or Celgene (CELG). Apart from being the leaders of the pack, these biotech biggies have become a part of the actively traded “momentum” stocks.

That’s probably one reason why biotech stocks have been out-of-favor on Wall Street of late, even as the Dow and S&P 500 continue smash record levels and  leap to new all-time highs.

Still, the complex universe of biotechs is where potential giant winners are bred, as young companies with new promising medical ideas and technology undertake extensive research in search of undiscovered wonder drugs. After all, that’s where the Amgens and Gileads started before they rocketed to where  they are today.

One small-cap biotech enterprise which has that kind of potential is Spectrum Pharmaceuticals (SPPI), which already has five FDA-approved new products, plus an array of  promising drugs in its pipeline. Several analysts assert that this cancer-focused company, which develops therapeutics for areas and ailments where there are few other treatment options, is one of the most enticing undervalued stocks in the industry.Currently trading at $7.50 a share with a market capitalization of about $500 million, some bulls figure the stock could double in price in a year. Not only is the young company’s products starting to pick up speed but it could be driven up by one other factor: Takeover appeal.

The stock is down from a high of $17.46 a share reached in 2012, partly because of disappointing revenues in 2013. But the drop in price could be an opportunity for long-term investors as sales have stabilized, says Dr. Rajesh C. Shrotriya, Spectrum’s Chairman and CEO because of "positive developments at the company."

“We expect Spectrum, with its broad portfolio of oncology-focused drugs and new hires of ex-Amgen executives to fill top-level positions, will build significant value over the next six months,” says Dr. Shrotriya. The company’s marketed products include Fusilev, which the FDA approved in 2011 for palliative treatment of advanced metastatic colorectal cancer;  Zevalin, a monoclonal antibody for the FDA-approved treatment of relapsed or refractory follicular B-cell non-Hodgkins lymphoma (NHL); Folotyn, approved in 2009 for relapsed peripheral T-cell Lymphoma (PTCL); and Marquibo, which received accelerated  approval in 2012 for third-line adult acute lymphoblastic leukemia (ALL).

Spectrum has also licensed from Ligand Pharmaceuticals (LGND) captisol-enabled Melphalan for multiple myeloma patients receiving autologous stem cell transplants. And Spectrum also is developing Belinostat, which has received “priority review” from the FDA. Spectrum expects the drug will be approved this year.   Spectrum could well become an acquisition target, according to some biotech analysts, including Reni Benjamin, analyst at investment research firm W.C.Wainright, who rates the stock a buy. He puts the stock’s worth at $15 a share.

Noting that biotech acquisitions continue to rise, Benjamin says other companies in the industry that have been recently acquired, such as Santarius which Salix Pharmaceuticals (SLXP) bought in January 2014 for $2.6 billion, have been acquired at 6 to 10 times their 2014 projected revenues. Applying the low end of that valuation range, Benjamin says Spectrum’s acquisition value is $1 billion. That’s chump change for the large-cap pharmaceuticals that are shopping for companies that have promising new medical cures or treatments for cancer.On the stock’s fundamentals, Benjamin applies an 8-times multiple to his projected 2015 revenues of about $188 million and a 28 times multiple to his projected 2015 non-GAAP earnings per share of approximately 4 cents a share. That supports his 12-month price target of $15 a share.

There are three legs to Spectrum’s valuation, according to the Wainright analyst: Revenues generated by existing products, revenues from products close to approval or product launch, and a pipeline of new products and business development. Revenues from existing five products, which are all protected by patents, are stabilizing and providing a base value. And Spectrum’s future value is supported by revenues generated by the company’s five products, says Benjamin.“With a solid portfolio of diverse oncology assets and a strong cash position of $160 million, we believe Spectrum represents an undervalued player with significant upside for the long-term investor,” argues Benjamin.

Wall Street has somewhat soured on Spectrum because of its lower-than-expected revenues in 2013. But there are several catalysts that could spark badly-needed energy into its stock. “Despite the Street’s reservations, business is proving resilient with revenues steady at around $40 million-$45 million per quarter so far, and with potential growth coming,” says Adrian Butt, analyst at RBC Capital Markets. Rating the stock as outperform, he believes the stock will rise to $15 a share.

Importantly, Fusilev sales are holding, he notes, which he believes should restore confidence with every passing quarter. “Although outperformance could require another quarter or so of steady sales, shares should begin moving up into the second half of 2014,” says Butt.

Joseph Pantginis, analyst at Roth Capital Partners, who is also a bull on Spectrum, says he is maintaining his buy recommendation on the stock with a price target of $15 a share, based on a 10-year projected revenue stream from Spectrum’s lead products. He notes that Spectrum believes revenues from Fusilev, Folotyn, and Zevalin have all stabilized as  they have been within predictable ranges in the past  several quarters.

Pantginis expects Spectrum to get into the black this year, with earnings of 6 cents a share on projected revenues of $192.1 million, up from a loss in 2013 on sales of $156.9 milliion. For 2015, Pantginis sees ewrnings rising to 18 cents a share on estimated revenues of $247.5 million.

But the next big news that should electrify Spectrum’s stock will come from the M&A front, with some takeover interest emerging from a large pharmaceutical company that’s focused on acquiring oncology products and assets. Indeed, Spectrum’s valuation in a merger or acquisition scenario should be attractive to potential buyers based on biotech acquisition deals in the past, according to H.C. Wainright analyst Benjamin’s calculations.

Spectrum CEO Shrotriya wouldn’t comment on whether he has received any feelers from Big Pharma companies.