Fusilev Unravels Spectrum’s Revenue Growth, Bears Descend on SPPI Print E-mail
By Brian Wilson, Lead Contributor   
Thursday, 14 March 2013 06:45
Yesterday, we saw the market shave off over 37% of Spectrum Pharmaceuticals’ (NASDAQ: SPPI) market capitalization in reaction to a corporate update in the form of a press release that drastically altered the company’s anticipated sales of FUSILEV for the rest of the year. The new estimate is in the $160 to $180 million range, which is significantly lower than the $204 million in revenues that Fusilev brought in 2012.

Although disappointing for anyone on the long side of the SPPI trade, I don’t think a drop in the Fusilev sales forecast should have been this shocking to the market. A massive shortage in leucovorin supply has been extremely beneficial for Fusilev sales, driving much of its success up to this point. Leucovorin, an isomer of Fusilev’s active ingredient “levoleucovorin”, is a generic agent that is used to prevent the harmful effects of methotrexate in cancer patients. The two isomers seem to have virtually identical levels of efficacy, which brings into question whether or not Fusilev will be able to compete with generic pricing for its indication.

SPPI short sellers seem quite confident that it won’t, and that SPPI will continue to get pummeled as Fusilev’s sales growth continues to decline.

Although it has eased a bit, Spectrum remains one of the most heavily shorted stocks on the NASDAQ with over 50% of shares short as of February 28th 2013. This short trade really began to pick up momentum after Spectrum rallied to a 52-week high of $17.48 in early July 2012 following strong financial performance of the company. Bears, noting that Fusilev’s sales were being driven higher by an unsustainable shortage of leucovorin, had great success with their bets throughout the next month and tacked on significant gains after yesterday’s corporate update from Spectrum.

But now that the damage has been done, are we going to see any interest from dip buyers or incentive for short covering?

Spectrum has now dropped to a valuation of $460 million, which is incredibly cheap for a company that posted record revenues of $267.7 million for the fiscal year of 2012. If we stray towards the conservative end of Spectrum’s new expectations for Fusilev sales in 2013, we still anticipate about $227 million in 2013 revenue. This is also assuming no growth from Fusilev’s other two commercialized products Folotyn and Zevalin.

I think bears would only want to stay in their trade if they expected Fusilev sales to decline significantly more than company (and the market) expects. Otherwise, it would make more sense to cover at least a portion of the short positions in the near future to limit the risk of a rebound in SPPI.

It’s also worth noting that Spectrum currently generates a profit, and a hefty one at that. For fiscal year 2012, Spectrum realized $79.8 million in income. While there is virtually no way for Spectrum to have that kind of performance in 2013 due to the guaranteed drop in Fusilev sales, any significant income by the company adds tremendously to shareholder value since it funds the development of 11 pipeline compounds that add huge revenue potential in the long term.

Of these compounds, investors should pay the most attention to the non-muscle invasive bladder cancer drug apaiquone and diffuse large B-cell lymphoma drug ibritumomab tiuxetan, which are the only ones that have reached phase III development and could provide additional top-line growth for Spectrum within a few years. Apaiquone should be the one to provide the earliest results, with expected completion of its current phase III trial in December 2014. This could result in FDA approval in late 2015 or early 2016 if the NDA receives standard review times under PDUFA guidelines.

Although Spectrum may be able to turn itself around with the value of its pipeline, the wait may be long and SPPI certainly has the potential to move lower just based on the continuing skepticism and doubt of Fusilev’s prospects on the market. Fusilev is Spectrum’s main source of revenue, after all.

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