Wednesday, November 7, 2012

Spectrum pharma - Bull case and the Bear case

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Bull case (Disclosure: I am long SPPI)

Current Products
  • Fusilev - Sales will sustain or grow even with the entry of new Generic Leucovorin. 
    • Per the company's survey to Docs, around 60% of oncologists have NOT yet been contacted by the company sales force
    • More sales force(60 company sales people) selling Fusilev with Allos Acquisition. In addition they have CRO sales force.
    • COO, Ken Keller talked about new strategies(decentralization and region based sales & marketing) to increase Fusilev sales 
    • Fusilev is supported by sales/reimbursement support team unlike generic
    • Fusilev sales could be helped when their pilot study(protocol is ready) with Folotyn to treat Mucositis(grade 3 and grade 4) is completed. There is already 1 study with Folotyn and generic leucovorin where discontinuation rate decreased from 70%(?) to 0%.
    • Company's research with docs, suggests most Docs are prescribing Fusilev not because generic Leucovorin is not available.
    • Docs get a commission based on sales price. Hence docs are incentivized to prescribe higher priced Fusilev(compared to generic) which has its own J-Code.
    • 13% more accounts in Q3.
    • Currently fusilev occupies 31% of the market. So theoretically there is room for growth.
    • There may be a perception that Fusilev is purer. 1 clinical study shows slight improvement in tolerability over Generic leucovorin. Bulls also point out similar cases in the past (Brand Lexapro v Generic Celexa) , Brand Abraxane vs Generic  where the brand sales sustained even with existence of competition generic(not equivalent generic). As can be seen in these cases drug formulary had pre-authorization for the brand.
    • Fusilev sales ex-US is $180m/year with no shortage of generic leucovorin in Europe or Japan for >10 years.
    • Insurers are more focused on bigger drugs(>$1 billion dollar drugs) when it comes to containing costs. 
  • Folotyn sales will increase if Fusilev treats mucositis. Right now majority of patients discontinue from taking full treatment course.
  • Zevalin has growth and could become $100m/year product in 2014-2015
    • Zevalin EX-US is very low as Bayer (for whatever reason had stopped promoting for 4 years). So it has room for growth in Japan(where their partner has already started promoting) and the 4 European countries
    • In US, the removal of Radiologist license requirements so an oncologist can adminster Zevalin, will improve sales.
    • 15+ independently funded papers in upcoming ASH conference on Zevalin speaks to its strong efficacy/interest.
    • Longer term, results from the current and future clinical studies will improve sales
Future Products/Pipeline

  • Belinostat Dec data will highly likely be approvable. Here is the Topotarget's PR.
  • There is a very remote chance that FDA may accept combined data from Apaziquone. 
  • Continued progress on Phase 2(SPI-2012, SPI-1620 to be initiated in next 2 months) and Phase 1 drugs
Management and Company Philosophy

  • Management is very cost conscious and keeps a close tab on burn rate. For example, if Fusilev sales are impacted(unlikely IMO), this company will waste no time in adjusting its costs. Having their own CRO also helps in reducing costs and time.
  • More synergy savings from Allos acquisition
  • The 2 new recruits from Amgen have top notch experience in growing Billion dollar branded Oncology drugs: Ken Keller and his deputy.
Growing Cash can and will be used opportunistically

  • The company has an active Business development team hunting for opportunities, although they guided their plate is full now.
  • Excess cash could be used to buy-back shares
Downside Protection:
  • With effective cash balance of ~$162m(includes $90m AR minus $70m drawdown on credit) as of 09/30 and the fiscal discipline, and at least a few more quarters of Fusilev sales still left in the worst case, this company will very likely not need to raise capital and dilute shareholders. Also, Fusilev's current run rate is just $220m (with 31% market share) even with 15% market share Fusilev could still generate $110m/year.

Bear case:
1.  Fusilev sales would tank significantly to <100m/year(or <15% of the leucovorin market) after generic leucovorin supply shortage abates. 

  • Sagent Pharma introduced their generic in Q4. 
  • There is little differentiation between generic Leucovorin and Fusilev based on some study. 
  • Insurers may force oncologists to prescribe generic Leucovorin if there is no documented shortage issue in the generic. There are some insurance companies that require docs to require pre-authorization before prescribing Fusilev.
  • HR661 pending bill will increase price of generic so more generic companies will start making leucovorin and Fusilev sales  will tank.
2. No growth in Zevalin
3. No growth in Folotyn
4. Belinostat belief trial will fail
5. Apaziquone will never be approved by FDA
6. Will need to raise capital

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