Spectrum Pharma turns to VCs
by Clifford Carlsen
Updated 04:46 PM EST, May-8-2003
Spectrum Pharmaceuticals Inc. turned to private investors for $4.4 million to further a shoestring turnaround of the nearly bankrupt company, reshaping it as a cancer-drug specialist following the failure of a major neurology drug trial last year.
SCO Securities of New York arranged the new financing for Nasdaq-listed Spectrum, with president Jeffrey Davis leading the deal, which included its own SCO Capital Partners arm as an investor, along with SDS Merchant Fund LP of Greenwich, Conn., and Xmark Funds and ProMed Partners LP, both of New York.
Gavin Stuttard of the Irvine, Calif., office of Latham & Watkins performed legal work or the company.
The new money boosts the company's paper valuation to about $9 million, from a recent low of $1.3 million, but more importantly is part of about $7 million in cash and expected royalty payments the company now has to carry it over the next year.
In addition to the new $4.4 million, Spectrum pulled in $1 million in funding from joint development partner Lekar Pharmaceuticals Ltd. of India in February. It also expects cancer drug partner GPC Biotech of Germany to contribute another $2 million on top of $2 million it advanced the company in August 2002.
At $2.35 a share, the deal comes at 0.39% of Spectrum's peak trading price of $606 a share in March 2000, and just 3.6% of its trading price in mid-April 2002, before announcing results of a failed drug test. But management of the restructuring company believes the current deal is a major turning point in rebuilding its balance sheet and that the funds give Spectrum footing to continue its resurrection.
"It's not a lot of money on the surface, but it is a big accomplishment for us," said Spectrum CEO John McManus. "This gives us more breathing room to continue what we have been trying to do since new management took over last August."
Failure of clinical trials for a drug to treat Alzheimer's disease sent the company stock plummeting to $20 from $55 a share over the weekend of April 26, 2002, with a further decline to $6.25 a share within a month on volatile trading.
McManus said that despite a hefty research burn rate and only a few million dollars left, some in management held out hopes for continuing the company's neurology focus, while president Rajesh Shrotriya urged shifting the company's focus entirely to its cancer drugs, which the company began in-licensing in late 2000.
Shrotriya, who initiated the company's cancer drug in-licensing program after he came to Spectrum from Bristol-Myers Squibb Co. of New York, ultimately prevailed, and took over as chairman and CEO from Alvin Glasky in August.
McManus, who had left the company in May, returned as chief financial officer, and Luigi Lenaz, head of Spectrum's cancer program, took on a more important role as it abandoned neurology research.
Shrotriya restructured the company based on a belief that cancer drugs are easier to get approved, and that Spectrum's neurological research programs were years away from commercialization. In addition to landing a partner for its first cancer drug, Shrotriya initiated a generic drug partnership with Lekar to sell existing Lekar drugs in the U.S. and steer additional generic products through the regulatory process.
The changes virtually restarted the company, culminating in its name change from NeoTherapeutics Inc. in December.
"We immediately let go 40 people, and cut the burn rate from $1.7 million a month to $500,000 almost immediately," McManus said.
The company quickly negotiated a deal with GPC Biotech to fund all of the $30 million estimated costs of clinical trials of its lead drug, satraplatin, and took a $2 million payment immediately, along with a commitment to invest $1 million and pay another $1 million when clinical trials begin later this year.
McManus said the company has structured its milestone payments from GPC to cover royalties it pays to U.K.-based Johnson Matthey plc, where it initially acquired the drug, and he said it will keep other costs low. The company expects to begin generating revenues from its generic program next year, though McManus said its cancer drugs will generate cash only from partnership agreements until at least 2006.
The new money comes in at a slight premium to Spectrum's February trading price, when the deal was negotiated. Investors in the deal receive preferred stock convertible at $2.35 a share, and grants warrants to buy $6.1 million in additional shares at $3 and $3.50 a share.
The company's shares closed Wednesday at $2.73.
McManus said if fully diluted, the additional shares would give the company a valuation of about $15 million. But he said it is difficult to set a fully diluted valuation of the company because of unexercised warrants set as high as $500 a share that are still outstanding, and because of investment arrangements with its partners.
McManus said none of the company's management options will be reset, but he said new options were created last September.
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