SuperGen (Nasdaq: SUPG) Sizzled in July, Spectrum (Nasdaq: SPPI) Remains Very Promising Print E-mail
Monday, 27 July 2009 08:12

So far, the Lucky 13 Buys have been winners this month.  Investors, who followed the market’s cues and placed their bets on small cap drug makers, have likely fared very well over the past two to three weeks. All of the companies on the Lucky 13 Buys list ended the third week of July in the green.  While five companies captured gains of more than 20%, eight of the 13 have advanced more than 10% in the past two weeks.





























Gains are based on the closing prices from Tuesday, July 7 to Friday, July 24, 2009.




The one that obviously stands out is SUPG. Since it made the Lucky 13 Buys list, shares of SUPG have jumped 45%.

In addition to collaborations with Johnson & Johnson (NYSE: JNJ) and Eisai; an early-stage pipeline consisting of (1) a first-in-class drug, SGI-1776, (2) PIM kinase inhibitors, and (3) a new class of Etk kinase inhibitors; a modest royalty stream from Dacogen; and several upcoming milestones in 2009-10, SUPG has also maintained a strong financial position throughout the economic challenges of 2008-09.


With $91.8 million in cash, $0 debt, and a relatively low cash-burn rate of $2 to $3.5 million, SUPG was added to the Lucky 13 Buys list when shares were trading close to cash value or $2.03 on July 7.


Regarding smaller drug makers, short-term traders have been playing the catalysts as of late.  While that strategy may work a few times, eventually luck runs out and losses follow.  When playing the small cap drug makers, fundamentals matter.  Cash is critical.  A manageable debt load, sometimes a rare thing in this high-risk environment, does make a difference.  SuperGen’s recent advance only reinforces the importance of fundamentals.




On July 14, 2009, I indicated that SPPI was oversold and undervalued at $4.98.  Since that time, shares of SPPI have advanced 30.52%.  On Friday, July 24, SPPI closed at $6.50.


Going forward, I am still comfortable with my price target of $31 for SPPI over the long-term.  So, it should be obvious, to most anyway, that I also believe SPPI will continue to advance from here and despite less optimistic views held by some analysts and commentators.


Price Target: $31.00

Duration: 12 to 18 months




For those, who have not read or followed my past articles, here's how I derived at the $31 price target for shares of SPPI.




Approval for first-line consolidation treatment in non-Hodgkin’s lymphoma (NHL) is important for Zevalin.  On or before September 7, 2009, Zevalin is likely to be approved for first-line use.  For purposes of the analysis below, I assume Zevalin will be approved for first-line use.

Under the first-line setting, approximately 20,000 additional early-stage NHL patients could qualify for the Zevalin treatment.  Currently, there are about 8,000 patients that already qualify under the existing, approved refractory or salvage setting (last resort).

Over the past six to seven years, Zevalin has only been able to penetrate about 10.5% of the existing, approved market or 8,000 late-stage patients.  Approximately 800 late-stage NHL patients actually receive Zevalin in a given year.

So, if Zevalin only penetrates 10.5% of the new first-line market, an additional 2,100 patients will receive the treatment.  Do the math.  Under both indications – first-line and late-stage - approximately 2,900 patients would receive the treatment with a penetration of 10.5%.

In the US, Zevalin costs between $24,000 and $30,000 per patient.  While such an expense may seem expensive to some folks, Betsy de Parry, the subject of a new documentary, would strongly and rightfully argue otherwise.

With a penetration of 10.5% or 2,900 patients, sales of Zevalin would total $69.6 million.

However, I argue that more patients will be made aware of Zevalin after it is approved for first-line use.  In an era of defensive medicine, the FDA’s seal of approval is very important to treating physicians.  It is also very important to patients.  In past years, doctors have NOT told patients about the Zevalin option.  While there are a number of very poor and disappointing reasons, SPPI appears to have a sound plan to address the problems that led to Zevalin’s past disuse.  Rather than reexamining the problems of the past, I am more interested in Zevalin’s future after it is approved for first-line use.

Doctors should finally find a place for Zevalin after the treatment is approved for first-line use.  In effect, the first-line approval is likely to limit the liability for doctors, who administer Zevalin or refer patients to doctor who can administer the treatment. Under this same reasoning, first-line approval is also likely to increase the liability for those doctors, who do NOT administer Zevalin or refer patients to a doctor who can.

Regarding the latter, let’s examine a hypothetical scenario.  Doctor does not inform the patient about or dissuades the patient from the Zevalin option.  Like most Americans with early and late-stage NHL, this patient does not receive Zevalin because they were never informed about the option or were dissuaded from it.  After some time passes, this patient dies from complications attributed to NHL.  How might that doctor explain to a jury of his peers that he elected to NOT offer his patient Zevalin?  How might that doctor explain why he dissuaded the patient from the Zevalin treatment, even though Zevalin has been proven in several trials to be a very safe and effective treatment for NHL and that the treatment has also been approved by the FDA for first-line and late-stage patients?  How might that doctor explain to the jury why he missed both opportunities? These might be tough hurdles to get over.  While the scenario is hypothetical, it is certainly foreseeable.

Under this reasoning, it seems far more likely than not doctors will begin informing NHL patients about the Zevalin option after it is approved for first-line use.  If more patients are aware of Zevalin (including the benefits of (1) 87% complete response or remission rates after induction therapy and (2) two-years of progression free survival), then it is likely that most early-stage NHL patients might opt for the treatment.  If so, then one could reasonably argue that Zevalin will likely penetrate more than 10.5% of the total market.

I estimate that 7,500 patients, less than 30% of the total patient pool, would elect to have the Zevalin treatment, presuming they are, in fact, made aware of the option.  From my view, 30% penetration, for a safe and extraordinarily effective first-line NHL treatment, which some doctors have called a cure, is a conservative estimate.

With a penetration of 7,500 patients, sales of Zevalin would total $180 million.




Fusilev is scheduled for standard review by the FDA on October 8, 2009 to be used in combination with 5-FU for the treatment of colorectal cancer.  Like Zevalin, Fusilev is also likely to be approved.

In early 2008, Fusilev was approved by the FDA as a combination treatment for osteosarcoma, a form of bone cancer.  In August 2008, SPPI launched Fusilev in the US.

Under the colorectal cancer indication, Fusilev sales are approximately $200 million annually in Europe and Japan where the drug is marketed by Wyeth (NYSE: WYE) and Takeda.

Q1 2009, Fusilev sales totaled $9.4 million.  If sales flat line or remain the same, then Fusilev sales will total nearly $40 million in 2009.

Since the drug was just launched in August 2008, sales are likely to continue growing in 2009.  With the additional colorectal cancer indication, which features a much larger patient pool, sales of Fusilev could grow substantially over the next 12 to 18 months.

In that time, I conservatively estimate Fusilev sales will reach $100 million, or half that which is already generated abroad.


SPPI at $31


Over the next 12 to 18 months, I estimate sales of Zevalin and Fusilev could likely total around $280 million.  SPPI’s price target of $31 was factored by using a relatively conservative multiple of four times revenue or sales ($280 million X 4 = $1.12 billion).  Most drug makers trade above this multiple.

At $31, SPPI would retain a market cap of approximately $1.12 billion.

Disclosure: Long SPPI


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