It was a tumultuous day at the market for Spectrum Pharmaceuticals Inc. and Allos Therapeutics Inc., as investors responded simultaneously to news of the two companies' merger and the failure of Spectrum's cancer drug apaziquone in two Phase III trials.

Allos's stock (NASDAQ:ALTH) jumped 39 cents, or 26.9 percent, to close Thursday at $1.82, while Spectrum's stock (NADAQ:SPPI) lost $1.15, or 9.4 percent, to close at $11.06.

Spectrum CEO Rajesh C. Shrotriya said he viewed the good news, bad news day for Spectrum as an especially dramatic demonstration of the firm's philosophy of fiscal discipline and risk management.

"We have tried to build a strategy at Spectrum by diversifying our risk of failure," he told BioWorld Today, explaining that with the Allos acquisition the new company will have three marketed drugs and 10 drugs in development, each with a separate mechanism and development plan. "There isn't any binary event that could destroy the company," he added.

Spectrum will acquire all outstanding shares of Allos for $1.82 per share in cash, plus one contingent value right, which will buy stockholders an additional share for 11 cents apiece if Folotyn (pralatrexate injection) gains conditional approval for patients with relapsed/refractory peripheral T-cell lymphoma in Europe in 2012, and has its first reimbursable sale in at least three European markets by Dec. 31, 2013.

The transaction adds up to $206 million up front (on a fully diluted basis) and $108 million net of Allos's cash balance at the end of 2011 .

Shrotriya said the marriage of Spectrum and Allos has numerous synergies. Allos will bring marketed PTCL drug Folotyn to join Spectrum products Fuslev (levoleucovorin), for colorectal cancer and osteosarcoma, and Zevalin (ibritumomab tiuxetan), for indolent non-Hodgkin's lymphoma.

Shrotriya pointed out that Spectrum's sales force for Zevalin and Allos' sales force for Folotyn were each working to sell the products to the same hematologists. "If we can have two drugs in the bag of the same salesperson, we can increase coverage with the combined sales force," he said.

And because the two drugs are different molecules with different indications, there is no competition.

In addition to sales, the two companies will be able to discover efficiencies in research, human resources, accounting and even legal. Cost synergies from the merger are expected to total $40 million to $50 million, and Spectrum anticipates Folotyn sales of more than $100 million.

Cost synergies also were cited during Allos' ill-fated merger deal last year with AMAG Pharmaceuticals Inc. That agreement, hit immediately with opposition from major shareholders, ended up being terminated. Despite offering Allos shareholders a 22 percent premium, the Spectrum acquisition also has its detractors, with at least one law firm emerging to investigate alleged breaches of fiduciary duty on the part of Allos' board. (See BioWorld Today, July 21, 2011.)

For Spectrum, Shrotriya emphasized that his firm has an extremely disciplined fiscal strategy. "When we started the company nine years ago, we had no listing notice, hardly any money in the company, some debt and a handful of employees. Today, we are a successful company; we have revenue; we have profits."

Part of that discipline is a do-it-yourself approach to clinical research. Spectrum saves money by doing its own clinical research, and not using contract research organizations (CROs). "We need to manage the burn rate, and make sure revenue is coming in," Shrotriya explained. Because Allos does use some CROs for its research, Shrotriya said there could be some additional synergies realized in the future by putting an in-house research organization to work on Allos's clinical pipeline.

With regard to the disappointing results of the apaziquone trials, Spectrum is, for the time being, standing behind the product.

The two double-blinded, randomized, placebo-controlled studies evaluated the effect of a single dose intravesical instillation of apaziquone into the bladder following surgical resection of low-grade, non-muscle invasive bladder tumors, compared to placebo. Data showed the drug did not achieve statistical significance in the primary endpoint of rate of tumor recurrence at two years in either trial.

Spectrum, however, has two potential avenues for proving that the drug really does work. First, it carried out an analysis of pooled data from both studies, and that pool, having a larger number of data points, produced a statistically significant effect in favor of apaziquone in tumor recurrence at two years, and in a secondary endpoint, time to recurrence.

The company will seek expert opinion on the validity of that pooled analysis, as well as meetings with the FDA to discuss possible steps forward.

In addition, Spectrum is conducting an additional Phase III trial in the same indication using six weekly intravesical instillations of apaziquone or placebo, rather than a single dose. "We are hoping . . . that we might be able to see a better drug effect and statistical significance," Shrotriya said,

Apziquone is partnered with three other companies, Allergan Inc., Nippon Kayaku Ltd. and Handok Pharmaceuticals Co. Ltd.

Spectrum partnered with Nippon Kayaku in 2009 for commercialization of apaziquone in Asia. The deal was worth $15 million up front, with $151 million in potential milestones. Its deal with Handok, also in 2009, for commercialization in South Korea, was valued at more than $19 million, with Handok taking over 100 percent of development and commercial expenses for that region. (See BioWorld Today, Nov. 9, 2009.)

Spectrum closed its deal with Allergan in 2008, agreeing to share profits in exchange for $41.5 million up front, a potential $304 million in milestones and 65 percent of development costs. (See BioWorld Today, Oct. 30, 2008.)

In partnering, Spectrum helped spread out the risk associated with apaziquone. "We gave up some of the upside . . . but we covered our risk by making partners in the deal," Shrotriya said.

Based on its stock movement, the combined effect of Spectrum's mixed news seemed to give more weight to the negative of the drug failure, over the positive of the Allos acquisition.

"For the time being, at least, the financial loss from the projected apaziquone revenue will not be replaced by the Allos acquisition," Joseph Pantginis, an analyst with Roth Capital Partners, wrote in a research note, adding that in spite of Spectrum's salvage plans for the drug, "we believe Allergan will be hard pressed to stay on board."

For Spectrum's part, Shrotriya seemed unfazed. "Drugs do fail. Therefore we have tried to build a strategy at Spectrum by diversifying our risk of failure. . . . We believe in diversification in every possible way."