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SPPI > SEC Filings for SPPI > Form 10-Q on 28-Oct-2011All Recent SEC Filings

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Form 10-Q for SPECTRUM PHARMACEUTICALS INC


28-Oct-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements regarding our future product development activities and costs, the revenue potential (licensing, royalty and sales) of our products and product candidates, the success, safety and efficacy of our drug products, revenues, development timelines, product acquisitions, liquidity and capital resources and trends, and other statements containing forward-looking words, such as, "believes," "may," "could," "will," "expects," "intends," "estimates," "anticipates," "plans," "seeks," "continues," or the negative thereof or variation thereon or similar terminology (although not all forward-looking statements contain these words). Such forward-looking statements are based on the reasonable beliefs of our management as well as assumptions made by and information currently available to our management. Readers should not put undue reliance on these forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified; therefore, our actual results may differ materially from those described in any forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in our periodic reports filed with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as well as those discussed elsewhere in this Quarterly Report on Form 10-Q, and the following factors:
• our ability to successfully develop, obtain regulatory approval for and market our products;

• our ability to continue to grow sales revenue of our marketed products;

• risks associated with doing business internationally;

• our ability to generate and maintain sufficient cash resources to fund our business;

• our ability to enter into strategic alliances with partners for manufacturing, development and commercialization;

• efforts of our development partners;

• the ability of our manufacturing partners to meet our timelines;

• the ability to timely deliver product supplies to our customers;

• our ability to identify new product candidates and to successfully integrate those product candidates into our operations;

• the timing and/or results of pending or future clinical trials, and our reliance on contract research organizations;

• our ability to protect our intellectual property rights;

• competition in the marketplace for our drugs;

• delay in approval of our products or new indications for our products by the U.S. Food and Drug Administration, or the FDA;

• actions by the FDA and other regulatory agencies, including international agencies;


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• securing positive reimbursement for our products;

• the impact of any product liability, or other litigation to which we are, or may become a party;

• the impact of legislative or regulatory reform of the healthcare industry and the impact of recently enacted healthcare reform legislation;

• the availability and price of acceptable raw materials and components from third-party suppliers, and their ability to meet our demands;

• our ability, and that of our suppliers, development partners, and manufacturing partners, to comply with laws, regulations and standards, and the application and interpretation of those laws, regulations and standards, that govern or affect the pharmaceutical and biotechnology industries, the non-compliance with which may delay or prevent the development, manufacturing, regulatory approvals and sale of our products;

• defending against claims relating to improper handling, storage or disposal of hazardous chemical, radioactive or biological materials could be time consuming and expensive;

• our ability to maintain the services of our key executives and technical and sales and marketing personnel;

• the difficulty in predicting the timing or outcome of product development efforts and regulatory approvals; and

• demand and market acceptance for our approved products.

We do not plan to update any such forward-looking statements and expressly disclaim any duty to update the information contained in this report except as required by law.
You should read the following discussion of our financial condition and results of our operations in conjunction with the condensed consolidated financial statements and the notes to those financial statements included in Item 1 of Part I of this quarterly report and our audited consolidated financial statements and related notes for the year ended December 31, 2010 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Business Outlook
We are a biotechnology company with fully integrated commercial and drug development operations with a primary focus in both hematology and oncology. Our strategy is comprised of acquiring, developing and commercializing a broad and diverse pipeline of late-stage clinical and commercial products. We market two oncology drugs, ZEVALIN® and FUSILEV® and have two drugs, apaziquone and belinostat, in late stage development along with a diversified pipeline of novel drug candidates. We have assembled an integrated in-house scientific team, including formulation development, clinical development, medical research, regulatory affairs, biostatistics and data management, and have established a commercial infrastructure for the marketing of our drug products. We also leverage the expertise of our worldwide partners to assist in the execution of our strategy. Apaziquone is presently being studied in two large Phase 3 clinical trials for non-muscle invasive bladder cancer, or NMIBC, under strategic collaborations with Allergan, Inc., ("Allergan"), Nippon Kayaku Co. Ltd., ("Nippon Kayaku"), and Handok Pharmaceuticals Co. Ltd., ("Handok"). Belinostat, is being studied in multiple indications including a Phase 2 registrational trial for relapsed or refractory peripheral T-cell lymphoma, or PTCL, under a strategic collaboration with TopoTarget A/S "TopoTarget".


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The following is an update of our business strategy for 2011, as described in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC.
• Maximizing the growth potential of our marketed drugs, Zevalin and Fusilev. Our near-term outlook largely depends on sales and marketing successes for our two marketed drugs. For Zevalin, we stabilized sales in 2009, increased sales in 2010 and continue to work on growing the Zevalin brand. For Fusilev, which we launched in August 2008, we were able to benefit from broad utilization in community clinics and hospitals and recognized a dramatic increase in sales beginning in the second half of 2010 due to a shortage of generic leucovorin. While generic leucovorin supplies and utilization have been negatively impacted by this shortage, we cannot predict how long the shortage may continue or the extent the shortage may ultimately have on Fusilev utilization. Our focus had previously been to obtain approval for Fusilev in advanced metastatic colorectal cancer, which we received on April 29, 2011. We are now actively engaged in marketing Fusilev for use in advanced metastatic colorectal cancer and have engaged a focused commercial sales organization to work with our commercial group to support efforts to grow Fusilev sales.

For both Zevalin and Fusilev, we initiated and continue to stage appropriate infrastructure expansions and additional initiatives to facilitate broad customer reach and to address other market requirements, as appropriate. We have formed a dedicated commercial organization comprised of highly experienced and motivated sales representatives, account managers, and a complement of other support marketing personnel to manage the sales and marketing of these drugs. In addition our scientific department supports field activities through various MDs, PhDs and other medical science liaison personnel.
• Optimizing our development portfolio and maximizing the asset values of its components.While over the recent few years, we have evolved from a development-stage to a commercial-stage pharmaceutical company, we have maintained a highly focused development portfolio. Our strategy with regard to our development portfolio is to focus on late-stage drugs and to develop them rapidly to the point of regulatory approval. We plan to develop some of these drugs ourselves or with our subsidiaries and affiliates, or secure collaborations with third parties such that we are able to suitably monetize these assets.

We have assembled a drug development infrastructure that is comprised of highly experienced and motivated MDs, PhDs, clinical research associates and a complement of other support personnel to rapidly develop these drugs. During 2009, this team achieved our goal of completing enrollment in the two Phase 3 apaziquone trials (with more than 1,600 patients enrolled), expect to finish evaluation of the last patient in 2011 and file a NDA in 2012. We expect to continue to maximize the value of apaziquone through further developmental efforts and additional trials.
With regard to our anti-cancer drug belinostat, a novel HDAC inhibitor, we have to date opened more than 100 sites. We completed enrollment in September 2011, and expect to file a NDA in 2012. Belinostat has received "Fast Track" designation from FDA, which means, if the FDA agrees, we can start filing a rolling new-drug application even before the clinical package is ready, beginning with the filing of pre-clinical data and Chemistry Manufacturing and Control.
We have several other exciting compounds in earlier stages of development in our portfolio. Based upon a criteria-based portfolio review, we are in the process of streamlining our pipeline drugs, allowing for greater focus and integration of our development and commercial goals.
• Expanding our pipeline of late stage and commercial drugs through licensing and business development. It is our goal to identify new strategic opportunities that will create strong synergies with our currently marketed drugs and identify and pursue partnerships for out-licensing certain of our drugs in development. To this end, we will continue to explore strategic collaborations as these relate to drugs that are either in advanced clinical trials or are currently on the market. We believe that such opportunistic collaborations will provide synergies with respect to how we deploy our internal resources. In this regard, we intend to identify and secure drugs that have significant growth potential either through enhanced marketing and sales efforts or through pursuit of additional clinical development. In January 2011, we signed a letter of agreement with Viropro, Inc., for the development of a biosimilar version of the monoclonal antibody drug rituximab. Biosimilars, or follow-on biologis, are terms used to describe officially-approved subsequent versions of innovator biopharmaceutical products made by a different sponsor following patent and exclusivity expiry. Under the agreement, we paid a nominal upfront payment and are required to make additional payments based on certain development and regulatory milestones should we elect to continue development efforts. We believe our in-licensing of belinostat, a novel histone deacetylase, or HDAC, inhibitor, is also demonstrative of such licensing and business development efforts outlined above.


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• Managing our financial resources effectively. We remain committed to fiscal discipline, a policy which has allowed us to become well capitalized among our peers, despite a very challenging capital markets environment during 2009, 2010 and continuing in 2011. This policy includes the pursuit of non-dilutive funding options, prudent expense management, and the achievement of critical synergies within our operations in order to maintain a reasonable burn rate. Even with the continued build-up in operational infrastructure to facilitate the marketing of our two commercial drugs, we intend to be fiscally prudent in any expansion we undertake. In terms of revenue generation, we plan to become more reliant on sales from currently marketed drugs and intend to pursue out-licensing of select pipeline drugs in select territories, as discussed above. When appropriate, we may pursue other sources of financing, including non-dilutive financing alternatives. While we are currently focused on advancing our key drug development programs, we anticipate that we will make regular determinations as to which other programs, if any, to pursue and how much funding to direct to each program on an ongoing basis, based on clinical success and commercial potential, including termination of our existing development programs, especially if we do not expect value being driven from continued development.

• Further enhancing the organizational structure to meet our corporate objectives. We have highly experienced staff in pharmaceutical operations, clinical development, regulatory and commercial functions who previously held positions at both small to mid-size biotech companies, as well as large pharmaceutical companies. We have strengthened the ranks of our management team, and will continue to pursue talent on an opportunistic basis. Finally, we remain committed to running a lean and efficient organization, while effectively leveraging our critical resources.

Financial Condition
Liquidity and Capital Resources
Our cumulative losses, since inception in 1987 through September 30, 2011, are approximately $270.2 million. We may incur additional losses for at least the next few years, as we implement our growth strategy of commercializing marketed drugs, while continuing to develop our portfolio of late-stage drug products. Our long-term strategy is to generate profits from the sale and licensing of our drug products. Accordingly, in the next several years, we expect to supplement our cash position with sales of Zevalin and Fusilev and generate licensing revenue from out-licensing our other drug products.
We believe that the approximately $160.8 million in cash, cash equivalents and investments, which includes long term marketable securities, we had available on September 30, 2011 will allow us to fund our current planned operations for at least the next twelve to eighteen months. However, we may seek to obtain additional capital through the sale of debt or equity securities, if necessary, especially in conjunction with opportunistic acquisitions or license of drugs. We may be unable to obtain such additional capital when needed, or on terms favorable to us or our stockholders, if at all. If we raise additional funds by issuing equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock. If we raise additional funds through the issuance of debt securities, the terms of such securities may place restrictions on our ability to operate our business. If and when appropriate, just as we have done in the past, we may pursue non-dilutive financing alternatives as well.


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Zevalin sales growth is largely dependent on the adoption of Zevalin for use as part of first-line therapy for follicular non-Hodgkins's lymphoma, or NHL and continued use in its initial indication. As discussed earlier, during 2010 and through September 30, 2011, our sales of Fusilev grew considerably over prior years because of a shortage of generic leucovorin. We are unable to predict how long this current shortage may last. On April 29, 2011 we received approval from the U.S. Food and Drug Administration (FDA) for the use of FUSILEV® (levoleucovorin) in combination with 5-fluorouracil in the palliative treatment of patients with advanced metastatic colorectal cancer. This new, expanded indication supplements the original 2008 FDA approval of FUSILEV. This approval now allows us to actively market Fusilev for use in the treatment of colorectal cancer.
With regard to estimated future development expenditures, our drug development efforts are subject to the considerable uncertainty inherent in any new drug development. Due to the uncertainties involved in progressing through clinical trials, and the time and cost involved in obtaining regulatory approval and in establishing collaborative arrangements, among other factors, we cannot reasonably estimate the timing, completion dates, and ultimate aggregate cost of developing each of our drug product candidates. Accordingly, the following discussion of our current assessment of expenditures may prove inadequate and our assessment of the need for cash to fund our operations may prove too optimistic.
Our expenditures for research and development consist of direct product specific costs, including, but not limited to, upfront license fees, milestone payments, active pharmaceutical ingredients, clinical trials, patent related costs, and non-product specific, or indirect, costs. During the nine-month period ended September 30, 2011, our total research and development expenditure, including indirect expenditures, was approximately $20.9 million (net of $5.8 million received from Allergan).
Our primary focus areas for the foreseeable future, and the programs that we expect to represent a significant part of our research and development are the on-going registrational clinical trials of apaziquone and belinostat and additional clinical studies in supporting the expanded utilization of our FDA approved products (ZEVALIN and FUSILEV). While we are currently focused on advancing these key product development programs, we continually evaluate our research and development programs with respect to other pipeline products in response to the scientific and clinical successes of each product candidate, as well as an ongoing assessment as to the product candidate's commercial potential. Our anticipated net use of cash for research and development in the fiscal year ending December 31, 2011, excluding the cost of in-licensing or acquisitions of additional drugs, if any, is expected to range between approximately $25 and $30 million.
Further, while we do not receive any funding from third parties for research and development that we conduct, co-development and out-licensing agreements with other companies for any of our drug products may reduce our expenses. In this regard, we entered into a collaboration agreement with Allergan whereby, commencing January 1, 2009, Allergan has borne 65% of the development costs of apaziquone. Additionally, we entered into a collaboration agreement with TopoTarget, whereby, commencing February 2, 2010, TopoTarget bears, for belinostat, 100% of the CUP trial costs and 30% of other development costs unrelated to the PTCL study.
In addition to our present portfolio of drug product candidates, we continually evaluate proprietary products for acquisition. If we are successful in acquiring rights to additional products, we may pay up-front licensing fees in cash and/or common stock and our research and development expenditures would likely increase.
Net Cash Provided by Operating Activities Net cash provided by operating activities was $32.3 million for the nine months ended September 30, 2011. The principal components of such cash provided by operations was net income in the period of $40.2 million plus net non-cash credits of $13.7 million, offset primarily by a $26.9 million increase in accounts receivable as a result of increased product sales.


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Net Cash Used in Investing Activities
Net cash used in investing activities was $356,000 during the nine months ended September 30, 2011, which was primarily due to acquisitions of property and equipment of $380,000 and purchases of available for sale securities of $164,000.
Net Cash Provided by Financing Activities Net cash provided by financing activities was $24.8 million for the nine months ended September 30, 2011, primarily relates to $24.8 million in proceeds from the issuance of common stock as a result of the exercise of approximately 3.7 million warrants and $2.8 million related to the exercise of stock options and purchases of shares under our Employee Stock Purchase Plan. These proceeds were partially offset by a payment of $2.8 million to repurchase stock under our stock repurchase program.
Results of Operations
Three months ended September 30, 2011 and 2010 Revenues. Revenues increased $34.3 million, or 205%, to $51.0 million in the three months ended September 30, 2011 from $16.7 million in the three months ended September 30, 2010. We recognized $47.9 million from product sales, of which $41.0 million related to sales of FUSILEV and $6.9 million related to sales of ZEVALIN (each net of estimates for promotional, price and other adjustments, including adjustment of the allowance for product returns). Product revenues recorded in the three months ended September 30, 2010 were $13.7 million, of which $6.0 million related to sales of FUSILEV and $7.7 million related to sales of ZEVALIN. Revenues from the sales of FUSILEV have increased due to FDA approval of FUSILEV for use in the treatment of advanced metastatic colorectal cancer received on April 29, 2011 and a supply disruption of generic leucovorin. Sales of FUSILEV grew significantly in the third and fourth quarter of 2010 and have continued through September 2011. We are unable to determine how long the current disruption in supplies of generic leucovorin will last. During each of the three months ended September 30, 2011 and 2010, we also recognized $3.1 million of licensing revenues from the amortization of a $41.5 million upfront payment we received from Allergan in 2008, and a $16.0 million upfront payment we received from Nippon Kayaku and Handok in the first quarter of 2010.
Cost of Product Sales. Cost of product sales increased $5.1 million to $8.8 million in the three months ended September 30, 2011 from $3.8 million in the three months ended September 30, 2010. The increase in total cost of product sales relates to an increase in product revenues, start up costs incurred for new suppliers and an increase of $344,000 for the amortization of certain milestones.
Selling, General and Administrative. Selling, general and administrative expenses increased $4.4 million, or 39%, to $15.8 million, in the three months ended September 30, 2011 from $11.4 million in the three months ended September 30, 2010. The increase is primarily due to an increase of approximately $2.3 million in stock compensation expense relating to the long-term retention and management incentive plan adopted during the second quarter of 2011 and a $1.5 million increase in compensation and associated benefits attributable to the expansion of our sales force. We expect that expenses associated with sales and marketing activities will increase as we invest in additional commercial resources to increase market expansion of FUSILEV for its recently approved indication in colorectal cancer. Research and Development. Research and development expenses decreased $97,000, or 1%, to $7.4 million, in the three months ended September 30, 2011 from $7.5 million in the three months ended September 30, 2010. The decrease is primarily due to a one-time charge of $1.7 million for an asset acquisition of in process research and development in July 2010 which was partially offset by an increase in on-going clinical trial expense incurred in 2011. We expect research and development expenses to range between approximately $25 and $30 million for the year ending December 31, 2011, excluding the cost of in-licensing or acquisitions of additional drugs, if any.


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Amortization of Purchased Intangibles. We incurred a non-cash charge of $930,000 for each of the three months ended September 30, 2011 and 2010 due to the amortization of intangibles from the acquisition of ZEVALIN.
Change in Fair Value of Common Stock Warrant Liability. We recorded income of $3.0 million for the change in the fair value of the warrant obligations during the three month period ended September 30, 2011 compared to income of $1.6 million in the same period of 2010. The change in fair value of the common stock warrant liability was due to the exercise of approximately 3.7 million of the then outstanding warrants.
Other Net Income (loss). The principal components of other net income (loss) of $(144,000) and $578,000 during the three month periods ended September 30, 2011 and 2010, respectively, consisted of currency gains and losses and net interest income. In the current economic environment, our principal investment objective is preservation of capital. Accordingly, for the foreseeable future we expect to earn minimal interest yields on our investments, until such time as the credit markets recover.
Provision for Income Taxes. We recorded a provision for income taxes of $650,000 during the three months ended September 30, 2011 as compared to a $79,000 refund in 2010.
Nine months ended September 30, 2011 and 2010 Revenues. Revenues increased $99.8 million, or 249%, to $140.0 million in the nine months ended September 30, 2011 from $40.2 million in the nine months ended September 30, 2010. We recognized $130.8 million from product sales, of which $109.6 million related to sales of FUSILEV and $21.2 million related to sales of ZEVALIN (each net of estimates for promotional, price and other adjustments, including adjustment of the allowance for product returns). Product revenues recorded in the nine months ended September 30, 2010 were $30.1 million, of which $9.0 million related to sales of FUSILEV and $21.1 million related to sales of ZEVALIN. Revenues from the sales of FUSILEV have increased due to FDA approval of FUSILEV for use in the treatment of advanced metastatic colorectal cancer received on April 29, 2011 and a supply disruption of generic leucovorin. Sales of FUSILEV grew significantly in the third and fourth quarter of 2010 which have continued through September 2011. We are unable to determine how long the current disruption in supplies of generic leucovorin will last. During the nine months ended September 30, 2011 and 2010, we also recognized $9.2 million and $10.1 million, respectively, of licensing revenues from the amortization of a $41.5 million upfront payment we received from Allergan in 2008, and a $16.0 million upfront payment we received from Nippon Kayaku and Handok in the first quarter of 2010.
Cost of Product Sales. Cost of product sales increased $12.9 million to $23.6 million in the nine months ended September 30, 2011 from $10.6 million in the nine months ended September 30, 2010. The increase in total cost of product sales relates to an increase in product revenues, start up costs incurred for new suppliers and an increase of $515,000 for the amortization of certain milestones.
Selling, General and Administrative. Selling, general and administrative expenses increased $11.2 million, or 31%, to $47.3 million, in the nine months ended September 30, 2011 from $36.1 million in the nine months ended . . .

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