Stock buybacks are generally considered a bullish signal on Wall Street. They return capital to shareholders, while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.
But don't forget -- a company isn't obligated to repurchase shares just because it announced its intention to do so. So don't use the announcement as a reason to buy by itself, rather use it as a launching pad for additional research.
Gray clouds forming
Spectrum Pharmaceuticals (NAS: SPPI) seems to be caught in a torrential downpour these days. Its stock is down 28% from recent highs and management has approved a $100 million share buyback program -- an increase from the previous $25 million repurchase agreement it already had in place -- to take advantage of the new lower price. But there have been a series of flash floods that have swamped the biopharma that should cause investors to pause.
When it rains it pours
Spectrum is trying to acquire Allos Therapeutics (NAS: ALTH) and has been at it for some time after AMAG Pharmaceuticals (NAS: AMAG) failed to get enough support of its own to buy it. Spectrum's hoping to gain access to the one drug Allos has on the market, the lymphoma drug Folotyn, as well as the pipeline of drug candidates in its development portfolio. But sales of Folotyn are less than stellar and some question why Spectrum wants to tread where AMAG failed to go.
Spectrum offered Allos $1.82 a share, along with the prospects of an $0.11-per-share cash boost if it got approval in Europe, but European regulators just killed off that option so there's no chance there will be a milestone payment being made. Spectrum has had to extend its tender offer for Allos' shares four times since the bidding began, but the number of shares tendered have actually fallen since the original tender date expired on May 24. Back then, more than 85 million shares were tendered, or 80% of those outstanding; the current amount tendered after the latest extension stood at more than 63.5 million shares, or 59% of the total.
Raining cats and dogs
Then last week it announced second-quarter results that showed a 51.5% increase in revenue to $68.7 million, as strong sales of colorectal cancer treatment Fusilev surged, generating profits that were 48% ahead of last year's efforts.
Its other drug on the market, Zevalin, a treatment for B-cell non-Hodgkin lymphoma, has not been selling well and earlier this year it cost Spectrum $26 million to acquire the rights from Bayer to sell it outside of the U.S. In the quarter, revenues related to Zevalin were $9 million, up slightly from $8.4 million last year. Part of the problem is that it competes for doctor attention against Rituxan, which is manufactured by Roche and Biogen Idec (NAS: BIIB) , and as the Fool's Brian Orelli points out, that's been a tough sell so far.
With Teva Pharmaceutical (NYS: TEVA) and other generic-drug makers diligently working to overcome manufacturing issues with a generic version of Fusilev, the market has started a countdown to when the drug's sales begin to falter.
Singing in the rain?
At just eight times trailing earnings and estimates, Spectrum seems cheap. Even more importantly, its enterprise value trades at a very cheap 7.5 times its free cash flow. Now there are risks to its business on the horizon, in addition to it being reliant on just two drugs for its sustenance, and its acquisition of Allos Therapeutics has been anything but smooth, however, management's willingness to step in and buy its stock doesn't seem misplaced.
CAPS member Zhraath doubts cancer patients will want to opt for a generic version even when it becomes available again. I've also had a rather successful long-term outperform rating on Spectrum Pharmaceuticals, but tell me in the comments box below whether you agree the new, lower prices the biopharmaceutical trades at are worth a significant investment on the part of management.
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The article Is Spectrum Pharmaceuticals Wasting Your Money? originally appeared on Fool.com.
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