Sales of Zevalin have been lackluster so far with slow growth for the past several quarters. Spectrum began selling Zevalin in 2009 with sales of $15MM. In 2010, Spectrum saw sales of Zevalin nearly double to $29MM, but sales for 2011 are expected to be relatively flat compared to 2010 with management projecting $29-30MM for this year, as well. This is disappointing considering Spectrum’s past guidance that Zevalin should be a $100MM/year therapy. Management believes that sales of Zevalin have been low in the past due to a number of hurdles: an inadequate sales force, a non-uniform reimbursement system for the drug, and the bioscan, which is believed to be viewed as a hassle by doctors. Two of these three issues have been resolved, but the FDA still technically requires a bioscan prior to Zevalin Y-90 treatment. In Europe, no bioscan has ever been required, and management decided to investigate if patients in the US who had abnormal bioscans were still receiving Zevalin Y-90. The company discovered that only 1% of patients have abnormal bioscans, but some of these patients have still been receiving the drug. Fortunately, there is no increase in adverse events, so the bioscan may truly be unnecessary. Management believes the FDA will approve the removal of the bioscan requirement, and the final hurdle to an increase in Zevalin sales will be gone.

In order to further bolster sales of Zevalin beyond NHL, Spectrum is planning to initiate a trial in diffuse large B-cell lymphoma (DLBCL) in 2012. Management has stated in the past that the company plans to expand Zevalin into many CD20+ malignancies. This is good news for patients and shareholders, though results for DLBCL and other cancers could take years. In any event, the upcoming PDUFA for Spectrum’s Zevalin could be a major value driver for the company if prescription rate truly does increase once the bioscan is gone.

Disclosure: No position

DUSA Pharmaceuticals, Inc. (DUSA) – based in Wilmington, MA is a dermatology company engaged in the development and commercialization of Levulan photodynamic therapy (PDT).  Utilizing their proprietary Kerastick 20% Topical Solution with PDT and the BLU-U brand light source for the treatment of non-hyperkeratotic actinic keratoses (AKs) of the face or scalp, the company aims to continue focusing on growing domestic PDT revenues and generate positive cash flows.  AKs are precancerous skin lesions caused by chronic sun exposure that can develop over time into a form of skin cancer called squamous cell carcinoma (approximately 10% will turn cancerous).  The Kerastick is a proprietary applicator that delivers Levulan, while the BLU-U is the patented light device, and they are regulated as a combination therapy with unified labeling.  For a comprehensive overview of DUSA, see here.  While the recent price action of the stock is enough to induce cardiac arrest in even the most composed volume and price volatility has decreased of late as the stock has fallen off investors’ radar, Thursday’s earnings release and conference call caused the stock to sell off sharply (approximately 13%), on what was a +112 point day in the Dow.  Below I’ve summarized the highlights of the quarter, provided historical financial data, and updated forecasts.

3^rd Quarter Highlights: The 3^rd quarter featured a 10% year over year (YoY) increase in domestic Kerastick revenues (7% from a price increase, and 3% from a volume increase).  The weak volume growth is a significant risk factor going forward, given that in the current healthcare environment cost increases significantly greater than the rate of inflation may not be possible.  The $3.5 MM GAAP bottom line net income reflected the termination of a distribution agreement with Daewoong Pharmaceuticals (for Korea and Asia Pacific countries) for acceleration of deferred revenue of $1.4 MM and income from operations of $1.3 MM, as well as a decrease in warrant liability of $2.57 MM.  As previously guided, the trial to expand the label to include shorter incubation times will begin in the 4^th quarter.  As a result, management expects a slight uptick in R&D costs going forward.  While BLU-U devices sold exhibited a large, 54% increase over the prior year quarter, this is a result of the previous year’s quarter being extremely low, and this now represents a normalized level.

Financials and Updated Forecast: DUSA uses a razor-razorblade business model (definition here).  They make virtually no profit (<5% profit margin) on the sale of the BLU-U device and derive their profits from the Kerastick sales (~90% gross margin).   Due to the seasonality of quarter over quarter comparisons, annual numbers are more relevant (see below).  The company reached profitability on both a GAAP and non-GAAP basis for full year 2010; as well as, generated positive cash flow for the first nine months of 2011.  As of September 30, 2011, total cash, cash equivalents, and marketable securities were $24.4 million.  As the table and graph below show, the earnings are predictably seasonal and several trends are readily apparent.  Backing out one time charges and international sales (which are already low), we can see the growth rate of the primary value driver, Levulan PDT (the razor blades).  DUSA’s cash stockpile is steadily growing, and although this quarter’s low level of sales appear to represent a rough breakeven level with respect to cash flow, any additional sales flow to the bottom line; expenses and balance sheet line items do not greatly increase with larger sales of the Kerasticks.

The Company generated approximately $4.7 million in positive cash flow (change in cash and cash equivalents and marketable securities) during the first 9 months of 2011.  Generation of approximately $2.3 to $3.0 MM in cash in the 4^th quarter will lead to cash earnings of $7 to $7.7 MM for all of 2011 or $0.26 to $0.29/share with approximately $1/share in cash.  Assigning a low multiple of 15 to the lower estimate provides a share price target of 3.9, well above the current share price.  Current market capitalization is $87 MM with $24.4MM in cash, and no debt, for an enterprise value of $63 MM (not including NOLs).  This of course raises the interesting question of: what will management do with the excess cash?

Conclusion and Future Directions: Unlike many small-cap biotech companies focused on developing candidates and securing FDA approval while fighting the cash burn, DUSA continues to commercialize its FDA approved levulan PDT and is generating significant positive cash flow.  In the author’s opinion, a lot of attention will be focused on the 4^th quarter’s results (historically the strongest quarter), now that year over year growth has diminished over recent quarters.  If growth continues to be weak, which today’s selloff seemed to imply, the market may assign a low P/E multiple and the stock may languish at these levels or lower.  However, strong continued growth and a strong 4^th quarter may significantly boost the share price.

To continue development of INX-189, Inhibitex is evaluating INX-189 in combination with other directly acting antivirals (DAAs). Although management would not disclose which DAA is being tested, a Phase 1 drug-drug interaction study has begun in healthy volunteers with INX-189 and another DAA. Results from this trial, which should be available in 1Q2012, will inform the design of trials in 2012 in genotypes 1-3 of an all-oral regimen. Management noted that other DAAs will most likely be tested, and many different combinations are being considered to inform design of an eventual Phase 3 program.

One class of DAA being considered for combination therapy is the HCV protease inhibitors (PIs); Merck’s boceprevir and Vertex’s telaprevir are the two commercially available drugs in this class approved earlier this year. Management disclosed that in cell-based assays, boceprevir has an additive effect with INX-189 while telaprevir has a detrimental effect. Pharmasset has reported similar results in their own studies, noting that telaprevir’s off-target inhibition of an esterase required to cleave the nucleotide DAAs to their active form decreases the activity of these prodrugs in combination with Vertex’s PI. This is obviously bad news for Vertex. While telaprevir outperformed boceprevir in combination with interferon and ribavirin, a shift in HCV treatment away from interferon and towards an all-oral regimen may negate all of Vertex’s advantage. If telaprevir does prove to be detrimental for nucleotide DAAs in humans and boceprevir ends up as the PI of choice for an HCV cocktail, Vertex’s flagship program could be dead in the water. It is too early to tell, however, as results from cell-based assays and results in people can differ dramatically.

The HCV space continues to evolve as the polymerase inhibitors take center stage. Management projects the interferon free era of HCV treatment to begin in 2015 and expects to be competitive in this arena. Roche’s recent acquisition of Anadys and Pharmasset’s continued attention for its robust clinical program in HCV polymerase inhibitors across many genotypes of the virus both highlight how important this therapeutic area has become. Inhibitex jumped more than 100% when its data was announced, and the Phase 2 program is still early in development. Many variables still need to be ironed out, such as what the proper dose should be and what DAA(s) are best for combination therapy. HCV affects 4 million in the US alone and 170 million worldwide. With a patient population that large, any company that can develop a cure stands to reap the rewards, and Inhibitex is one of many well on the way to this goal.

Disclosure: No position in any stocks mentioned.

In order to secure full approval for Adcetris in HL and ALCL, Seattle Genetics must perform proper confirmatory trials. Before the ODAC meeting in July, the company’s AETHERA trial in post-transplant HL patients was planned to be a confirmatory study, but the FDA did not agree that the trial was properly designed to serve in this capacity. As a result, the ongoing AETHERA trial will simply be used to gather safety data, which may be useful but could have turned into a sink with little return. Safety data is gathered in every other trial of Adcetris. In any event, Seattle Genetics has designed two trials of Adcetris as frontline therapy in combination with other commonly used chemotherapy regimens for HL and ALCL which can also serve as confirmatory studies.

In the HL trial, Adcetris is being tested in combination with ABVD (HL four-drug standard of care) and AVD, removing the drug bleomycin. In the Adcetris + ABVD arm, 40% of patients experienced pulmonary toxicity, prompting the conclusion that Adcetris and bleomycin should not be used together. ABVD alone can cause pulmonary toxicity in 10-25% of patients, and the Adcetris + AVD arm has experienced no pulmonary toxicity. For ALCL frontline therapy, Adcetris is being tested in combination with standard of care CHOP vs. CHOP alone. Both of these studies’ primary endpoints are progression free survival with overall survival as a key secondary endpoint.

Management commented that there was pent up demand leading into the launch of Adcetris as patients and physicians were aware of the upcoming PDUFA date. It sounded as though they do not believe that demand for the drug can keep up but would not provide much comment on the matter as the conference call continued, despite many analysts looking for sales or prescription rate guidance. It is unclear whether management was just being cautious or is actually worried about continued demand for the drug, and this uncertainty is probably what caused the sell-off of SGEN in trading Friday. On a positive note, Seattle Genetics has many clinical programs investigating Adcetris in other CD30+ malignancies, including non-Hodgkin lymphomas, multiple myeloma, leukemia, and solid tumors. If these indications pan out, the patient population for Adcetris could significantly expand. Full guidance at the end of the year will be more indicative of how the trend for Adcetris sales will continue in the near-term, and clinical trials will report as they conclude into 2012.

Disclosure: No position