Armistice Capital 2nd letter to Spectrum Pharmaceuticals
Armistice Capital owns 6.6% of Spectrum Pharmaceuticals (been active since early May) and it is the fund's first activist campaign [our previous detailed thoughts here], letter below:
I appreciate you traveling to New York to meet with me on Tuesday, May 19th. And I appreciate our subsequent phone conversations. However, saying that the Board takes its fiduciary responsibility "seriously" and that the Company will evaluate "any serious offer it receives" is not good enough.
How does the Board of Directors define a "serious offer"? After losing the Sandoz litigation and deferring Fusilev revenue in the first quarter earnings release, the market said SPPI was worth $5.68 per share. Even at that price 1/3 of the shares were sold short. In our meetings it became clear that you believe my reference to a 40% premium, or $8 per share, is too low a purchase price for the Company. Why should your biased view outweigh an efficient market? As a long-term shareholder, I am positively biased, too. And I believe that the Company will fetch more than $8. But I recognize that the market is the ultimate weighing machine. To ignore it is both irresponsible and indefensible.
Your bias extends beyond share ownership. As discussed, executive compensation at Spectrum has been deplorable for more than ten years. Your Board has ignored two consecutive negative shareholder votes on the annual "Say on Pay." Not coincidentally, they are overpaid, too. The average board member at Spectrum earns nearly the same compensation as board members of Eli Lilly ("LLY") and Merck & Co ("MRK"), companies greater than 100x the size of SPPI. Over the last three years, Spectrum board members have earned 2x the compensation of board members of truly comparable hematology/oncology companies such as AMAG Pharmaceuticals ("AMAG"), Array Biopharma ("ARRY"), Infinity Pharmaceuticals ("INFI"), and TG Therapeutics ("TGTX"). Each of these companies has a market capitalization twice as large as SPPI. Of the seven board members at Spectrum, three have at one point or another had their primary income come from the Company. We believe all but one have worked with you in some capacity in the past. Two have had family members employed at the Company.
Beyond bias, not one of your Board members has valuation expertise. Not one of your Board members has shepherded an exit greater than $125 million. In fact, from the dates your Board members have become affiliated with public companies (not including SPPI) through the end of May 2015, the median share price performance of those companies is -49%. Not surprisingly, they are unwilling to engage in a conversation with me about creating shareholder value.
Armistice reiterates our request for Spectrum to immediately disclose any formal or informal expressions of interest and/or non-binding offers to acquire the Company. We are aware of multiple parties interested in acquiring SPPI. Some of these companies have an outward strategy to make and integrate acquisitions and have completed purchases significantly larger than SPPI. We request that the Board of Directors immediately engage a top-tier investment bank and initiate a formal process to sell the Company. We are happy to provide any bank a list of potential suitors or to make the introductions personally.
I want to be clear. Our interest in selling the Company is not driven by short-term thinking. It is the logical conclusion to years of unfulfilled promises. To your credit, you have amassed a collection of valuable assets. However, you have demonstrated an indifference to execution that puts the value of these assets at risk.
Take Folotyn, as an example. You made a tremendous bargain purchase of Allos Therapeutics ("ALTH") in 2012. At the time you projected Folotyn sales could eventually reach $100 million. ALTH had given guidance of $50-55 million of sales for 2012. In Spectrum's hands, Folotyn has yet to achieve $50 million of annual sales. You referenced combination studies with Fusilev. Those have been cancelled due to patient preference for an oral rinse, like MuGard. You referenced label expansion into indications like breast, lung, and acute lymphoblastic leukemia ("ALL"). No work has been done. Not pursuing non-small cell lung cancer is most disappointing given the positive proof-of-concept data generated by ALTH.
Look at Marqibo. Once again, you made a tremendous bargain purchase of Talon Therapeutics ("TLON"). Once again, you touted the benefits of the drug – the ability to give higher doses and the reduction of peripheral neuropathy. You talked about twenty indications of use for traditional vincristine. Yet you have not taken any concrete steps to capture the opportunity. We believe the ALL trial is enrolling slowly and the German non-Hodgkin's lymphoma ("NHL") trial is years from completion. The Company seems barely aware of the 2004 FDA Oncologic Drugs Advisory Committee meeting to discuss the Marqibo data then generated by Inex and Enzon Pharmaceuticals. Armistice believes there is an accelerated path to NCCN Compendium listing. Your indifference to execution impairs Marqibo's value.
The elephant in the room is Fusilev. On February 27, 2013, you stated, "our product revenue will grow and operating income will grow…we expect year-over-year Fusilev sales to continue to grow." Thirteen days later, on March 12th, the Company lowered its annual revenue guidance to an estimated decline of -33% to -40%. You ended up delivering less than the bottom end of the range. Fusilev sales, which you said would grow, declined from $204 million in 2012 to $68 million in 2013, a decline of -67%.
In early 2013, you touted Zevalin's growth and said you expect sales of the drug to eventually reach $300 million. In 2014, sales of Zevalin were $22 million, a -25% decline from the previous year. Nine months ago you said you would out-license RenaZorb. More than two years ago you said you were planning its Phase II program. Nothing has happened. The apaziquone Phase III studies failed in 2012. Three years later you released the data. Upon re-acquiring the rights to apaziquone from Allergan, you announced you would submit a New Drug Application in 2013. More than two years later nothing has happened.
The list goes on and on. Trials are announced and never completed. Drugs like Ozarelix and SPI-1620 are highlighted and then never spoken of again. The recent patent litigation on Fusilev was mismanaged and immediately swept under the rug. The Company recently uploaded a new investor presentation in which there is no mention of SPPI's revenue, financial position, or commercial operations. These are the Company's most valuable assets. Your indifference puts their value at risk.
In the right hands, Spectrum could be transformed into an exciting, pure play specialty oncology company. Potential acquirers have greater access to capital, manufacturing / distributor synergies, tax advantaged corporate structures, demonstrated abilities to capture overhead synergies, track records of R&D success, and finally, investor trust. They give guidance, which Spectrum has not done since 2Q 2013; and most importantly, they execute against it.
Armistice is committed to affecting change at Spectrum. We encourage fellow shareholders to make their voices heard. We will not hesitate to nominate qualified directors to the SPPI board. And we are evaluating all options to ensure our requests are met.
For the avoidance of doubt, Armistice does not support a potential spin-off of the Company's development stage assets. Nor do we support the Company's commercial infrastructure being dismantled. We are steadfast in our belief that the Company needs to be sold immediately.
I welcome further discussion with you and the Board.