What makes this pill even tougher to swallow is that just a few weeks ago management was saying that there would be sales growth in 2013. Therefore, how could the tide change so fast? How did they not see this coming? In my opinion, there are no reasonable answers to these questions, but rest assure, the SEC, analysts, and countless attorneys will find out. At first glance there looks to be various signs of fraud, misrepresentation, and misleading guidance on behalf of the company. Therefore, although it hurts to admit when you’re wrong, sometimes it’s better to admit the obvious, and live to fight another day.
With a 40% Loss Why Shouldn’t I Buy?
There will be many who look at the performance and the guidance issued by Spectrum Pharmaceuticals, Inc. (NASDAQ:SPPI) and believe that it presents opportunity, and it’s very possible that these people could be right. However, at this point, it’s not an issue of valuation, but rather trust, and trust in management. Once a company loses the trust of investors it is quite difficult to regain. There’s no overnight solution.
Consider the fact that Spectrum Pharmaceuticals, Inc. (NASDAQ:SPPI) now expects total revenue of $160 million-$180 million for 2013; therefore with a 40% loss it’s trading with a future price/sales of about $2.60. In my opinion, this is too expensive for a company that just slashed full-year sales for its best-selling drug by 60%, and much of this guidance is based on the company’s guidance that sales of Folotyn and Zevalin will rise in 2013. However, can we trust the company with this guidance? My answer is no, not until proven otherwise.
Conclusion
Already, I have received emails and tweets with people comparing this situation to that of Questcor Pharmaceuticals Inc (NASDAQ:QCOR). Questcor saw a decline from $51 to $20 following bearish research, a regulatory investigation into business practices, and insurance restrictions that will affect sales by less than 10%. Spectrum Pharmaceuticals, Inc. (NASDAQ:SPPI)’s is far worse because it was sudden, after months of denial from management. Questcor is still growing by 100% year-over-year and faces far less questions than Spectrum Pharmaceuticals, Inc. (NASDAQ:SPPI).
I will conclude by saying that this is not an overreaction to news on my part. Instead, this is the result of a fundamental shift where the shorts were proven to be right and the longs were wrong. Sometimes a stock can have all the makings of being undervalued, but you are just flat wrong. It’s times such as this that being long a speculative stock backfires horribly, and works out beautifully for shorts.
The article Spectrum Pharmaceuticals: When Being “Long” Backfires! originally appeared on Fool.com and is written by Brian Nichols.
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