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Summary

  • With overwhelming efficacy results from the PREVAIL Phase III trial, acceptance is a foregone conclusion that is not yet fully built into the price of the stock.
  • Xtandi outperformed the $2.5B-a year drug Zytiga in every metric, including overall survival and time to chemotherapy, which should enable it to take the majority of the market.
  • With the prostate cancer market expected to double by 2021, there is a significant chance Xtandi could pull in $3-$5 billion a year.
  • Today's valuation of $5.4B is significantly undervalued and provides investors with a good entry point.

Investors in biotechnology stocks, including myself, are always trying to balance risk and reward when purchasing stocks in this highly volatile sector. Having a biomedical Ph.D., I spend endless hours poring over data looking for underappreciated stocks with significant upside and manageable risk. Finding these gems in today's market has become challenging, however I'm confident I've found a sure money-maker in cancer drug developer Medivation (NASDAQ:MDVN). The FDA review date for the androgen receptor blocker Xtandi in the high-volume pre-chemotherapy prostate cancer market is set for September 18. With the overwhelming efficacy results from the PREVAIL Phase III trial, acceptance is a foregone conclusion that is not yet fully built into the price of the stock.

As I've detailed in my previous article, Medivation/Astellas prostate cancer drug, Xtandi is already approaching blockbuster status, despite only being FDA-approved for treating patients with metastatic castration-resistant prostate cancer (mCRPC) who have already been treated with docetaxel chemotherapy. Due to its unmatched efficacy, the drug has been grabbing market share from Johnson & Johnson's (NYSE:JNJ) Zytiga at a rapid pace since its approval in 2012. However, the post-chemotherapy setting is a very limited market. The patient volume in the pre-chemotherapy mCRPC market is several times as big, with the duration of treatment expected to be at least twice as long. In fact, Dr. Tomasz Beer, director of the Knight Cancer Institute at Oregon Health and Science University, believes about 50,000 men a year in the US alone could benefit from pre-chemotherapy treatment with the drug. Although Zytiga currently owns this market, with an estimated 2014 run rate of ~$2.5 billion, the Phase III PREVAIL study testing Xtandi in these patients easily outperformed Zytiga on every metric measured, leaving few to doubt that Medivation will capture the lion's share of this market beginning in 2 months, when the FDA reviews the data and expands the drug's label.

Xtandi Outperforms the Competition

With Johnson & Johnson's androgen receptor blocker Zytiga currently the drug of choice for pre-chemotherapy treatment in mCRPC, Medivation's Xtandi would need to have better efficacy to capture significant market share. This is exactly what the Phase III PREVAIL study demonstrated, and it's not even close. The study, which enrolled 1,700 men with pre-chemo mCRPC, was stopped 11 months early, based on overwhelming efficacy. When comparing the clinical benefits between Zytiga and Xtandi, there wasn't a single metric I could find on which Xtandi did not outperform Zytiga.

  • Median time to initiation of chemotherapy. Probably one of the most significant metrics, and the one which resonates most with urologists. Xtandi demonstrated a 17-month delay in starting chemotherapy, compared to 8.4 months with Zytiga. With twice the benefit seen, this is a clear advantage for Xtandi.
  • % reduction in risk of radiographic progression. Xtandi demonstrated an 81% reduction in risk of radiographic progression, compared to Zytiga 47%. Again, an easy win for Xtandi.
  • Overall Survival. Always the metric everyone wants to see. This one is a little harder to compare, since both Xtandi and Zytiga trials were stopped early. At the time of analysis, over 70% of patients on Xtandi in the PREVAIL trial were still alive. Therefore, the proper way to determine survival advantage is to compare the Kaplan Meier Survival curves below and the hazard ratios. Xtandi has a hazard ratio of .706 and reduction in death of 29%, which was better than Zytiga's hazard ratio of .792 and 21% reduction in death. Most importantly, compared to placebo, Xtandi's overall survival impact was statistically significant, while Zytiga's was not. In addition, you can see the survival curve in the Xtandi trial begin to separate from the control arm around 4 months, while there's no clear separation between Zytiga and the control arm until nearly 18 months. All the data compiled together gives Xtandi a clear overall survival advantage compared to Zytiga.

(click to enlarge)

  • Trial Enrollment. It should be noted that the Zytiga trial excluded patients with visceral metastasis, while this patient population made up ~11% of the enrollment of the Xtandi trial, which makes the data that much more impressive.
  • Practical Considerations. Besides efficacy, many patients and insurance companies are interested in ease of use, and therefore, drug compliance. Zytiga requires co-administration with steroids, while Xtandi does not. In addition, there are strict food intake guidelines when taking Zytiga that Xtandi also does not have.

Xtandi convincingly beat Zytiga on every efficacy metric tested. With Zytiga already FDA-approved for the pre-chemo mCRPC indication, there is no way come September 18 that the FDA does not grant approval to Xtandi for label expansion. With approval, Xtandi is positioned to take the lion's share of the prostate cancer market. Xtandi is already on pace this year to bring in close to a billion in revenue in the limited post-chemo market. The label expansion into the higher volume pre-chemo setting will enable Medivation/Astellas to take significant market share from Johnson & Johnson's Zytiga, which collects the majority of its annual ~$2.5 billion revenue in this setting. I couldn't imagine urologists and oncologists analyzing the data between Xtandi and Zytiga and picking a less effective drug. With the prostate cancer market expected to double by 2021, there is a significant chance Xtandi could pull in $3-$5 billion a year. Importantly, Medivation has several other clinical trials ongoing, with Xtandi moving the indication further upstream in the prostate cancer treatment flow. These include a Phase III trial in pre-chemo non-metastatic CRPC patients not responding to androgen deprivation therapy, and 2 Phase II trials comparing Xtandi to a common anti-androgen. In addition, there are clinical trials ongoing testing Xtandi in androgen receptor-positive breast cancer. Any positive results in these trials will further increase the use and revenue for the drug.

Share price compared to mid-cap peers

When comparing the share price of Medivation to its peers, I looked for companies similar in their maturation process, currently having a mid-size market cap ($5-$8 billion), a drug development partner, and only one product on the market. The best two examples are Pharmacyclics (NASDAQ:PCYC), which markets the blood cancer drug Imbruvica, and Incyte (NASDAQ:INCY), which markets the Myelofibrosis drug Jakafi, having enterprise values of $6.4 billion and $8.1 billion respectively.

Medivation

Pharmacyclics

Incyte

Drug on market

Xtandi

Imbruvica

Jakafi

2014 estimated revenue

$556M

$485M

$472M

2014 estimated EPS

$1.37

$.17

$-.41

Enterprise Value

$5.4B

$6.4B

$8.1B

Source: Yahoo Finance

All three drug companies are on the same path of trying to expand their primary drug indication. However, in my opinion, Medivation's Xtandi will have a much easier time expanding market share, as both Imbruvica and Jakafi have stiff competition on the horizon. By analyzing the valuations of other mid-cap biotechs on the market in a similar situation as Medivation, I believe current fair market value is $100 per share, resulting in ~$7.5 billion enterprise value. An increase of ~40% in share price.

Conclusion

Medivation's Xtandi is less than 8 weeks away from being approved for mCRPC in pre-chemo patients, a high-volume, highly lucrative market. In clinical trials, Xtandi outperformed the $2.5 billion-a year drug Zytiga on every metric, including overall survival and time to chemotherapy, which should enable it to steal the majority of the market once approved. Today's valuation of $5.4 billion is significantly undervalued and provides investors with a good entry point. I expect the stock to surpass $100 by end of the year as Xtandi expands its label and begins proving to investors how much it can grow sales in the pre-chemo prostate cancer market.

Disclosure: The author is long MDVN. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Source: Medivation Significantly Undervalued, With Xtandi Weeks Away From Prostate Cancer Label Expansion