Elle Investments Research Report: SPPI

 

 

Company: Spectrum Pharmaceuticals, Inc.                                       

Symbol: SPPI                                                                                                                   

Analysis Date: 8/9/19

Analysis Price: $8.00

Price Target (PT): $17.08

Upside: 114%

Dividend: NA                                                                                                            

Recommendation: Strong Buy                                                                      

 

 

SPPI: 1-Year Chart

Source: Seeking Alpha

 

 

INVESTMENT THESIS:

 

Great results in exon-20-mutant NSCLC pushed SPPI to new highs back in 2017. While successive data readouts have seen the initial ORR come down from above 60% to the 40% range, we still feel that this would represent a significant improvement in the treatment paradigm for this difficult to treat condition. The great cash position and the potential to disrupt the exon-20-mutant NSCLC space make SPPI a Strong Buy.

 

 

LIQUIDITY POSITION: Excellent

 

As of 2Q19 (ended June 30, announced August 8), SPPI had cash & equivalents on hand of $282M, with a quarterly cash burn of about $25M. On the 2Q19 earnings call, the guidance provided indicates that SG&A spending levels (currently $17M per quarter) will hold steady for the remainder of the year, while R&D spending levels (also currently $17M per quarter) will increase a bit to support the expansion of the poziotinib trials and expanded manufacturing for both poziotinib and ROLONTIS.

 

Even if we assume that the quarterly cash burn increases to about $30M, SPPI’s cash position is more than enough to fund their trials and cover any regulatory milestone payments for ROLONTIS or poziotinib that might be triggered in the near future. Their cash balance also provides enough to expand the salesforce when the time comes (keep in mind that current SG&A spending already includes “a core group of commercial talent” that was retained after the divestiture to Acrotech for the specific purpose of launching poziotinib and ROLONTIS). We think the risk of dilution is low.

 

 

COMMERCIAL PROSPECTS: Excellent

 

Poziotinib

Value: $1.8B

 

We think that the most promising candidate in SPPI’s development pipeline is poziotinib, an orally administered TKI which has been developed to target tumors with EGFR and HER2 with exon 20 insertion mutations. The data readouts that caused investors to be very bullish in late 2017 were for NSCLC trials, but the hope is that it can eventually be used to treat other non-lung exon 20 mutant tumors.

 

SPPI licensed poziotinib from Hanmi Pharmaceuticals on March 4, 2015. They own worldwide rights (except for Korea and China) and are required to pay Hanmi regulatory milestones of up to $33M, commercial milestones of up to $325M, and a royalty of low- to mid-teen digits on net sales.

 

Over the past decade, lung cancer treatment has evolved from a “one-size-fits-all” philosophy to a more precise and targeted approach based on underlying genetic and molecular make-ups. Among the earliest mutations identified are the exon-19 deletions, exon-20 insertions, and L858R mutations (found on exon-21).

 

For those that are particularly interested, the article in Nature magazine titled “Targeting EGFR exon-20 insertion mutations in non-small cell lung cancer” (published on March 8, 2019) goes heavy into the science (specifically steric hindrance) behind why therapies targeting exon-20 mutations are proving to be more effective than previous treatments. But to understand the value proposition for poziotinib, it suffices to know the following: 1) the response rates for previous non-exon-20 targeting TKIs have been very poor, 2) the structure of poziotinib has been designed to overcome the hindered binding pocket issues believed to be responsible for the poor response rates of previous TKIs, and 3) poziotinib’s early results represent a dramatic improvement in response rates.

 

While targeted oncology treatments severely limit the size of the patient pool, the growing body of evidence seems to indicate that it dramatically increases the chance of success for patients that exhibit certain genetic biomarkers.

 

Response rates for first, second, and third generation TKIs continue to be extremely poor, coming in under 10%. Results for chemotherapy, immunotherapy/immuno-oncology ("IO"), and combo treatments have fared a bit better, but the 20% range is still low. Additionally, the toxicities associated with both IO and chemotherapy need to be considered, and lend support to the notion that a targeted TKI treatment should be the standard of care.

 

It would have been very remarkable if response rates for poziotinib had stayed above 60% throughout the phase 2 trial at MD Anderson. While successive data readouts (responsible for the decline in the stock price) have seen the ORR come down to the 40% range, this still represents a tremendous improvement. We feel that even if the ORR were to drop to the 30% range for a large-scale phase 3 trial, it would still represent significant progress in the NSCLC exon-20 treatment paradigm (keep in mind that the initial goal was to get response rates between 20-30%).

 

On the safety front, the rates of AEs seen with poziotinib that lead to a dose reduction or discontinuation appear to be right in line with other already approved and marketed TKIs (i.e. afatinib, dacomitinib). The safety profile is not a major concern at this point.

 

The growing body of evidence that targeted oncology therapies produce better results than non-targeted therapies has attracted other competitors to the NSCLC exon-20 mutant space. Takeda Pharmaceutical’s (TAK) investigational compound, TAK-788, reported good phase1/2 data for exon-20-mutant NSCLC. Out of 28 patients, the ORR was demonstrated to be 43%. At this time, TAK-788 seems to be poziotinib’s top competitor. But it remains to be seen whether these results hold up in a larger pivotal trial. Also, SPPI remains a bit ahead timewise, with the pivotal phase 2 ZENITH-20 trial expected to read out top-line data for the first cohort during 4Q19. And for what it’s worth, a patient that did not respond to TAK-788 treatment (discussed during SPPI’s 9/24/18 webcast) responded well when they were moved to poziotinib.

 

The competitive field is growing, but we put SPPI in the lead due to the results thus far and the likelihood that poziotinib gets to market first.

 

ROLONTIS (eflapegrastim)

Value: $116M

 

The second lead candidate in the pipeline is ROLONTIS, formerly SPI-2012, which has been developed to treat CIN. SPPI licensed ROLONTIS from Hanmi Pharmaceuticals on January 31, 2012. SPPI owns worldwide rights (except for Korea, China, and Japan), and in April 2016 paid about $2M in stock to Hanmi when the first patient in a trial was dosed with ROLONTIS. Going forward, SPPI is required to pay up to $13M in regulatory milestones, up to $225M in commercial milestones, and a royalty of low double-digits to mid-teens on net sales.

 

Chemotherapy is often very damaging to bone marrow, the site of white blood cell production. A specific type of white blood cells, called neutrophils, are especially important for warding off certain types of bacteria-caused infections. When the body is exhibiting a low neutrophil count (confirmed by blood test), the condition is known as neutropenia. While it can have other causes, neutropenia is often a harmful side effect of chemotherapy.

 

In 2015 expectations were high immediately following positive phase 2 results which showed that ROLONTIS had achieved non-inferiority against Amgen’s (AMGN) multi-blockbuster Neulasta (pegfilgrastim). FBR & Co (which has since been acquired by B. Riley Financial) predicted blockbuster potential (implying annual peak sales of over $1B), given Neulasta’s sales of $4.6B in 2014. Since that time, however, commercial expectations have come down significantly. The primary reason for this is the entrance in 2018 of several Neulasta biosimilars, which were priced aggressively at a 33% discount to Neulasta in the hopes of capturing market share.

 

Early results had suggested that there could have been some differentiation in terms of efficacy between ROLONTIS and Neulasta. But the limited evidence demonstrating ROLONTIS superiority has not been consistent enough, and the emphasis of SPPI’s phase 3 trials has been to simply show non-inferiority. ROLONTIS has clearly proven this, across several trials, with respect to both efficacy and tolerability. But at this point, ROLONTIS will eventually enter a crowded market having only shown non-inferiority with Neulasta.

 

Adding to the pessimism, SPPI voluntarily pulled the ROLONTIS BLA on March 15, 2019 (after submitting it in December) due to not being able to provide additional manufacturing-related information before the existing deadline. The company has said that it plans on resubmitting the application as soon as possible. Since the FDA did not cite any need for additional clinical studies, we think it’s very likely that ROLONTIS will eventually be approved. However, this delay, while temporary, further adds to the uphill struggle that marketing ROLONTIS in an already crowded field will be. ROLONTIS is simply not central to the thesis here, but can act as a partial fundraising source for the rest of the more promising pipeline.

 

FIT Platform (Focused Interferon Therapeutics)

Value: none assigned

 

This candidate is in preclinical and phase 1 testing. We have not assigned it any value.

 

 

CONCLUSION:

 

We think that SPPI’s stock has been overly punished from the successive data readouts showing the ORR for poziotinib coming down from over 60% to the 40% range. This still represents a dramatic improvement over current ORRs for available TKIs, and should these results hold up in a large-scale phase 3 trial, we think it would solidly position SPPI to experience commercial success. The excellent cash position and the great prospects for poziotinib make SPPI a Strong Buy.

 

 

GLOSSARY:

 

AE: adverse event

BLA: Biologics License Application

CIN: chemotherapy-induced neutropenia

EGFR: epidermal growth factor receptor

HER2: human epidermal growth factor receptor 2

IO: immunotherapy (immuno-oncology)

NSCLC: non-small cell lunch cancer

ORR: overall response rate (objective response rate)

TKI: tyrosine kinase inhibitor

 

Note: Additional commentary from Elle Investments can be found at http://elle-investments.com. We welcome your feedback. Additionally, we are thinking of launching a subscription service that would offer early access to our research, along with some other features that investors might find useful (i.e. general portfolio management strategies, live blog updates highlighting our reaction to breaking news, etc.). If you would be interested in subscribing to such a service, please let us know.

 

Published By: Elle Investments Research Team

Phone: (914) 715-8066

Email: info@elle-investments.com

 

Disclaimer: The Elle Investments portfolio is managed utilizing a “quantamental” approach where each position, while based on Fundamental Analysis, is sized as part of a larger quantitative portfolio. The commentary presented here is for research purposes only and is not to be taken as investment advice. Readers are expected to perform their own due diligence and/or hire an investment professional prior to entering/exiting positions. Published research ideas are related to the specific market price and publicly available information at the time of research submission/publication. Elle Investments will enter/exit positions without notice.