Letter: Armistice Capital Active On Spectrum Pharmaceuticals
Armistice Capital has gone active on Spectrum Pharmaceuticals, taking a 5.4% stake. Here’s the letter from Armistice to Spectrum:
Rajesh C. Shrotriya, MD
Chairman and Chief Executive Officer
Spectrum Pharmaceuticals, Inc.
11500 South Eastern Avenue, Suite 240
Henderson, NV 89052
cc: Board of Directors
On the night Spectrum Pharmaceuticals ("SPPI" or the "Company") lost its United States District Court case against Sandoz, exposing half of its revenue to potential generic competition, investors anxiously awaited the Company's response. Minutes after the court decision, an 8-K was filed. In it, the Company disclosed nearly $2 million of cash bonuses to its top four executives accompanied by increases in their base salaries. The next business day, three days later, the Company announced the court's decision.
Armistice Capital, LLC ("we") beneficially owns 5.4% of the outstanding shares of SPPI. We are a long-term shareholder of the Company. Recent events and underperformance necessitate intervention. As of Friday's close, SPPI stock has declined -22.2% over the past year, -47.7% over the past three years, and earned a +3.0% cumulative return over the past ten years. The Nasdaq Biotechnology Index has appreciated +55.8%, +187.0%, and +443.5% over the comparable periods.
We see no reason for SPPI to have redefined its peer group in this year's Form 10-K other than to mask the Company's underperformance. New additions, Theravance Biopharma ("TBPH") and Salix Pharmaceuticals ("SLXP"), have little in common with SPPI besides dismal share price performance in the second half of 2014. Regeneron ("REGN"), a stellar performer, was removed, but Dendreon ("DNDNQ"), a bankrupt entity with no on-going operations, was kept. AMAG Pharmaceuticals ("AMAG"), a perfect comparable with terrific total shareholder return, was not included.
Dr. Shrotriya, two quarters ago, you announced, "I'm excited that we are at the beginning of a multi-year growth story." One year ago, you stated that Fusilev had, "solid patent coverage until 2022." Three years ago, you said, "all the naysayers…who believe that somehow Fusilev sales are going to go fall off the cliff, we have proven them wrong for eight quarters and you must take my word for it, we [will prove] them [wrong] forever." You once said you would submit a New Drug Application ("NDA") for apaziquone in 2013; 2013 became 2014, and now it is slated for late 2015. You reference not diluting shareholders, yet the share count has increased 35% over the past five years, excluding a convertible bond that was the equivalent of issuing 11.4 million shares at $10.53 per share. Including it, the share count has risen 58%. You say you own greater than 10% of the Company, yet our review of the Proxy Statement suggests a fully diluted stake of 5% at the current share price.
I will be the first to acknowledge that the business of forecasting is a thankless profession. Nonetheless, the disconnect between your statements and reality have created distrust in the investment community, employee turnover, shareholder lawsuit expense, and an SEC investigation that is on-going. The fact that neither you nor any fellow executive or board member has bought stock in the open market over the past two years only confirms the investment community's skepticism.
Our interviews with former employees speak to a dysfunctional culture at SPPI. The Company is disorganized and disjointed. I was shocked to find that the Company has offices in Henderson, NV, Irvine, CA, Westlake Village, CA, Westminster, CO, Tokyo, Japan, and Mumbai, India; and that the top eight executives of the Company frequently reside in seven different locations. The Company has also mishandled the generic challenge to Fusilev. It was stunning to hear you say that you actively chose not to pursue a settlement with Sandoz, especially since SPPI does not have a general counsel and the executive overseeing the matter does not have meaningful pharmaceutical patent trial experience.
We acknowledge that under your leadership the Company has built a valuable commercial asset and an underappreciated pipeline. Joe Turgeon and Tom Riga did a miraculous job stabilizing and then growing Fusilev. And they've done a great job growing your PTCL franchise. They need additional high quality assets. Zevalin and Marqibo have significant option value without the threat of generic competition. Evomela is a meaningful, low risk, near-term commercial opportunity arguably worth half your market capitalization. Apaziquone appears to be a highly active treatment for non-muscle invasive bladder cancer. Finally, your investigational candidate, SPI-2012, has significant value. Merck ("MRK") paid Insmed ("INSM") $130 million to access its Neupogen/Neulasta follow-on biologics. Recent deals by Pfizer ("PFE"), Hospira ("HSP"), Pfenex ("PFNX"), Momenta ("MNTA"), and Amgen ("AMGN") affirm the value of this market, as does the commercial performance of Teva Pharmaceuticals ("TEVA") in the U.S. and HSP and Sandoz in Europe.
We request immediate disclosure of formal and informal expressions of interest and/or non-binding offers to acquire the Company. If they have not already, I believe that multiple parties will offer to pay upwards of a 40% premium to the unaffected stock price at Friday's close. Frankly, the risk is to the upside.
We request that the Board of Directors immediately engage a top-tier investment bank and initiate a formal process to sell the Company.
In parallel, we request that you either step down as CEO or adjust your compensation to better align with the interests of shareholders. Mike Pearson at Valeant Pharmaceuticals ("VRX") is an example of a CEO whose incentives are clearly aligned with shareholders. John Mackey, Mark Pincus, Sehat Sutardja, Larry Page, and Steve Jobs are exemplary founders who have elected salaries of $1 per year. Over the past three years, you have received $20 million of total compensation. During that time period the Company's stock price has been cut in half. The past two years, shareholders have voted against the executive compensation proposed by the Board. Nothing has changed. As far back as June 7, 2005, Xmark filed an amended 13-D challenging your compensation practices. Yet, in the ten years since Xmark's filing, you have received total compensation of $65 million, or 17% of your current market capitalization. It's time for the Board and CEO to work on behalf of shareholders.
As we have discussed, Armistice recommends an immediate restructuring of the Company. All offices should be consolidated into Irvine. All research and development programs beyond post-marketing commitments, Evomela, and SPI-2012 should be immediately ceased. Money-losing international operations should be shuttered immediately and converted to distribution agreements. Non-customer facing employee staffing levels should be evaluated. The Company should focus on in-licensing and co-promotion agreements to enhance the near-term utilization of its commercial infrastructure. And the Company should be sold.
Dr. Raj, I have a tremendous amount of respect for your business development prowess and the Company you have built. I know you have poured your heart and soul into SPPI. While our preference is a sale of the entire Company, Armistice is willing to accept contingent value rights for higher risk assets (e.g., litigation outcomes on Fusilev, pipeline candidates) and we may also support the spin-out of a new entity containing certain pipeline assets (e.g., poziotinib, SPI-1620, ozarelix), similar to Patrick Soon-Shoing's carve-out post-Celgene's ("CELG") acquisition of Abraxis BioScience ("ABII"). We are steadfast in our belief that the Company needs to be sold immediately.
I welcome further discussion with you and the Board.