ALTH Allos Therapeutics, Inc. (MM)

Allos Therapeutics Inc.’s (ALTH) second quarter 2011 earnings of $0.02 compared favorably with the loss of $0.19 per share incurred in the year-ago quarter. A surge in revenues led to the profit in the second quarter of 2011. The Zacks Consensus Estimate hinted at a loss of $0.14 per share.

Quarterly Results

Total revenues in the reported quarter climbed to $39.1 as opposed to $7.9 million in the year ago quarter. The massive jump was attributable to the presence of $28.1 million in the reported quarter as license and other revenue pertaining to the deal signed with Mundipharma International Corporation Ltd. to co-develop Allos’ sole marketed product Folotyn. Revenues breezed past the Zacks Consensus Estimate of $12 million.

The agreement with Mundipharma was signed in May 2011. Per the terms of the deal, the sole responsibility of commercializing the drug in the US and Canada lies with Allos. Mundipharma is responsible for commercializing Folotyn in rest of the world. The deal has strengthened Allos’ balance sheet substantially and the company has already received $50 million as upfront payment with the potential of receiving substantial milestone payments.

Allos exited the second quarter of 2011 with $109.5 million in cash, cash equivalents and investments and no debt as opposed to a cash balance of $79.5 million and zero debt at the end of the first quarter of 2011.

Folotyn, marketed for treating patients with relapsed or refractory peripheral T-cell lymphoma (PTCL), recorded sales of $11.0 million in the reported quarter, up 39.3%.

Operating costs and expenses (excluding non-cash stock based compensation expense of $2.6 million and cost of license and other revenue of $10.6 million) in the reported quarter declined 5.9% to $23.6 million. Selling, general and administrative expenses fell marginally to $20.2 million in the second quarter of 2011 due to lower costs incurred on selling Folotyn. Research and development expenses fell 21.5% to $5.1 million.

Allos to Merge with AMAG

On July 20, 2011, Allos announced that it will merge with Lexington, Massachusetts based AMAG Pharmaceuticals (AMAG), a biopharmaceutical company which focuses on developing and commercializing a therapeutic iron compound for treating patients suffering from iron deficiency anemia. Per the terms of the deal, Allos' shareholders will receive 0.128 shares of AMAG per share of Allos.

The all-stock deal, expected to close by year-end, will involve a one-time cost in the range of $35 million - $38 million. Following the deal, AMAG shareholders will own approximately 61% of the combined company while Allos shareholders will own the balance. The deal will bring together AMAG’s and Allos’ sole marketed products, Feraheme and Folotyn, respectively.

The merged entity, which will be headquartered in Lexington, Massachusetts, is expected to generate annual cost synergies in the range of $55 million - $60 million by eliminating certain costs, most of which will be realized in the first year after the merger. The merged entity will also benefit from a strong balance sheet which will enable it to diversify its product portfolio and aid business reinvestments.

Forecast for 2011

For 2011, Allos continues to expect operating costs and expenses (excluding cost of sales, cost of license and other revenue and non-cash stock-based compensation expense) in the range of $95 million - $98 million. The projection does not include the transaction costs that would be incurred upon and after the closing of the merger.

Stock-based compensation expenses are expected in the range of $13 million - $14 million for 2011. As the merger with AMAG is expected to close by year-end, Allos did not provide any guidance with respect to net product sales for the second half of 2011.

However, Allos expects license and other revenue to be approximately $4 million and cost of license and other revenue to be about $2 million in the latter half of 2011. These projections relate to Allos’ agreement with Mundipharma.

Our Recommendation

Currently, we are Neutral on Allos. The stock carries a Zacks #4 Rank (Sell rating) in the short-run.

 
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