Buy, Sell, or Hold: Spectrum Pharmaceuticals

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Spectrum Pharmaceuticals (NAS: SPPI) today, and see why you might want to buy, sell, or hold it.

Spectrum Pharmaceuticals, with a market cap near $650 million, was founded in 1987 and is based in Nevada. It's a biotechnology company, focusing mainly on hematology and oncology drugs. Before 2002, you may have known it as NeoTherapeutics. The stock is down about 5% over the past year, but over the past decade it has grown by an average of 15% annually.

One reason to look at Spectrum is its business: biotech. With our planet's population growing and aging, there will be much need for health care and treatments for diseases and conditions. Biotech companies have a lot of potential, as blockbuster drugs they develop can make a lot of people wealthy. But it's also a risky business, as drugs can cost hundreds of millions of dollars to develop and don't always end up earning approval from the Food and Drug Administration.

Spectrum's bladder-cancer drug apaziquone, for example, has not fared well in recent clinical trials.

Unlike many biotech companies, Spectrum actually has products on the market, such as its colorectal cancer drug, Fusilev. It's not without competition, though, as generic versions of it are being developed by Teva Pharmaceutical (NYS: TEVA) and others. (Teva is worth considering as a possible investment, as it derives much of its income by producing generic versions of already-successful drugs.) Fusilev may remain preferable to its generic counterparts, though, in doctors' eyes, due to being a purer formulation and offering higher reimbursements. It's selling well abroad, even in places with generic alternatives.

Spectrum has more than a dozen other drugs in development in its pipeline, and has broadened its scope with the recent purchase of Allos Therapeutics. When the company recently reported very strong quarterly earnings, it also upped not only its revenue projections, but also projections of cost savings from the Allos acquisition. Meanwhile, Spectrum's non-Hodgkins-lymphoma drug Folotyn, developed by Allos, has had its patent expiration postponed by five years.

Another appealing aspect of Spectrum is its valuation . Its recent price-to-earnings ratio is just 7, and its price-to-book and price-to-cash-flow ratios are below their five-year averages.

Many of its other numbers bode well, too. Revenue, for example, has surged from $8 million in 2007 to $29 million in 2008 and to $233 million over the past 12 months. Net income and free cash flow entered positive territory last year and are growing briskly. The company has minimal debt, too. Over the past year, net margins, return on equity, return on invested capital, and return on assets have all been above 30%, which is quite impressive.

One reason to stay away from Spectrum Pharmaceuticals and other biotech companies is that most of us know very little about biotechnology and related fields. Thus, it can be especially hard for us to discern which companies are best poised for success, and what the risks are for each. It can make a lot of sense to just steer clear, or to invest in a bunch of biotech companies at once, via an ETF. The market-beating SPDR S&P Biotech ETF (NYS: XBI) , for example, is rather inexpensive and includes several dozen biotech companies, such as Spectrum, Arena Pharmaceuticals (NAS: ARNA) , and Dendreon (NAS: DNDN) . Arena has many excited because it's targeting the widespread problem of obesity with an approved drug. Dendreon is an example of why a basket of biotechs can sometimes be far preferable to a single one: It's down some 46% this year and has averaged 11% losses over the past five. It has experienced a lot of bumps in the road getting its prostate-cancer drug to market.

Spectrum bears worry about how long Fusilev's strong sales will continue, given generic competition. For now, that remains an uncertainty.

Another thing to consider is dilution, as Spectrum's number of shares outstanding has nearly doubled since 2007. If that keeps up, it will shrink the value of shareholders' positions. Spectrum has actually announced plans to buy back many shares, though, which will help. That's often a bad idea, if a stock is overvalued, but that doesn't seem to be the case here.

Hold (off)
Given the reasons to buy or sell Spectrum Pharmaceuticals, it's not unreasonable to decide to just hold off on it. You might want to wait for more of its drugs to secure approval and start selling briskly, or for it to report additional quarters of profits and free cash flow. Alternatively, you might look at other promising biotech companies, too.

The verdict
I'm holding off on Spectrum Pharmaceuticals for now, but everyone's investment calculations are different. Do your own digging and see what you think. Dynavax may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.

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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Teva Pharmaceutical Industries. The Motley Fool owns shares of Dendreon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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