Spectrum Pharmaceuticals Inc (NASDAQ:SPPI), a USD$1.94B small-cap, is a healthcare company operating in an industry, which has experienced tailwinds from issues such as higher demand driven by an aging population and the increasing prevalence of diseases and comorbidities. The growth in development of new drugs for unmet needs, as well as the ongoing and increasing need for biotech drugs as Baby Boomer generation continues to age, are growth drivers for the positive outlook in the biotech industry over the long term. Healthcare analysts are forecasting for the entire industry, negative growth in the upcoming year , and a whopping growth of 44.94% over the next couple of years. This rate is larger than the growth rate of the US stock market as a whole. Should your portfolio be overweight in the biotech sector at the moment? Today, I will analyse the industry outlook, as well as evaluate whether SPPI is lagging or leading its competitors in the industry. Check out our latest analysis for Spectrum Pharmaceuticals
What’s the catalyst for SPPI’s sector growth?
New R&D methods and big data analytics are creating opportunities for innovations, however, stakeholders have been challenged to keep abreast of this structural shift while under pressure to cut costs. In the past year, the industry delivered growth of 8.45%, though still underperforming the wider US stock market. SPPI lags the pack with its negative growth rate of -23.41% over the past year, which indicates the company will be growing at a slower pace than its biotech peers. However, the future seems brighter, as analysts expect an industry-beating growth rate of 5.09% in the upcoming year. This future growth may make SPPI a more expensive stock relative to its peers.
Is SPPI and the sector relatively cheap?
The biotech industry is trading at a PE ratio of 27x, higher than the rest of the US stock market PE of 22x. This means the industry, on average, is relatively overvalued compared to the wider market. However, the industry did return a higher 16.08% compared to the market’s 10.06%, which may be indicative of past tailwinds. Since SPPI’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge SPPI’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? SPPI’s industry-beating future is a positive for shareholders, indicating they’ve backed a fast-growing horse. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto SPPI as part of your portfolio. However, if you’re relatively concentrated in biotech, you may want to value SPPI based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If SPPI has been on your watchlist for a while, now may be the time to enter into the stock, if you like its growth prospects and are not highly concentrated in the biotech industry. However, before you make a decision on the stock, I suggest you look at SPPI’s future cash flows in order to assess whether the stock is trading at a reasonable price, as well as other important fundamentals such as the company’s financial health in order to build a holistic investment thesis.
For a deeper dive into Spectrum Pharmaceuticals’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other healthcare stocks instead? Use our free playform to see my list of over 1000 other healthcare companies trading on the market.