Are You Guaranteed Profits if These Rumors are True?

In early November, Benzinga suggested that Spectrum Pharmaceuticals may be a good long investment for some investors. Recently, rumors started to surface that Sectrum may be acquired by Teva Pharmaceuticals TEVA.

Benzinga also suggested that Teva might be a good investment as well. If the two pharmaceuticals were to combine, what would that mean for investors? Would this result in the ultimate life sciences company?

The first thing to consider is that Spectrum offers products that Teva does not offer. Teva primarily markets generic drugs, such as Lipitor, which recently lost exclusive patent protection. Teva may want to purchase Spectrum in order to gain intellectual property that qualify for patent protection. Currently, Spectrum Pharma has multiple cancer-related drugs in the pipeline. This could help boost the patent portfolio already accrued by Teva's efforts.

Teva Pharmaceuticals also has large distribution channels that could help out Spectrum. Teva operates on a multi-national basis, including Asian and European countries. While it is not as strong as Merck MRK or Pfizer PFE in terms of geographic penetration, it could definitely add value to Spectrum Pharma. It could also streamline certain costs, in the sense that manufacturing facilities along with other property, plant, and equipment could be consolidated. Marketing efforts could also be consolidated between the two entities.

Spectrum Pharma also boasts certain characteristics that qualify it for acquisition, regardless of who the buyer is. It current operates at extremely low debt-equity levels. Both strategic and financial buyers do not want to purchase a company with complicated debt obligations. Moreover, it is well capitalized to sustain operations over the next several years, as it carries approximately $161 million in cash and short-term investments. It has also experienced exponential sales growth over the last several years.

Teva may be making the right call if it purchases Spectrum Pharmaceuticals. While we have no indications if the rumors are true or what the purchase price would be, Teva would gain several strategic advantages by taking over Spectrum Pharma.

Spectrum Pharmaceuticals is currently trading at about $14.20, up over 95% for the year.

• Long Spectrum by purchasing shares or call options. LimeLight currently appears to be close to a technical support level, so now may be a good time to buy.

• Short another similar company, like Par Pharmaceuticals PRX. You could short this company to hedge a long SPPI trade or to accentuate your belief that Spectrum will dominate the oncological pharmaceutical market.

• Long an ETF like the Health Care SPDR XLV. If a significant industry like biopharma is doing well, health care itself will probably do well.

• Short Spectrum after it breaches the $13.25 level, which appears to be a technical support level. The next support level appears to be at about $12.60.

• Long a competitor like Watson Pharmaceuticals WPI, as someone bearish on Spectrum may believe that a large-cap competitor is more likely to garner market share.

• Buy put options as Spectrum Pharmaceuticals' earnings announcement comes along. The company may not be able to sustain its costs as precious metals rallied significantly in Q3 2011