On March 28, Bernie Sanders and several of his colleagues attacked Medivation (NASDAQ:MDVN). Medivation is a San Francisco-based company that is trying to cure cancer. It has a prostate cancer drug Xtandi that is its only source of revenue. Bernie and his colleagues attacked Xtandi's pricing; they complained that the compound had been discovered at the University of California, Los Angeles (UCLA), but cost a lot more in the United States than in Japan or Europe. Note that Medivation gets half of US revenue and a lot less of international revenue, the rest goes to its Japanese partner, Astellas.
To see what was so evil about this company, I looked at its annual report. A total of 12 lawmakers attacked Medivation. I doubt the attackers read Medivation's annual reports. The annual reports show a company that has spent all its profits and a lot more on trying to cure cancer. Very simple addition and subtraction show that its combined profits over the last ten years are much smaller than what it has spent on cancer drug discovery and development.
Medivation fell 25% in an already depressed biotech stock market due to the attack. Sanofi (NYSE:SNY), the French drug company, grabbed the opportunity to unveil a hostile takeover effort for Medivation. The takeover would be a good thing because it would remind investors that these political attacks could be ignored. It looks like the takeover might happen at a 100% premium to where Medivation traded in the aftermath of Bernie's attack.
Unless 2 + 2 = 25, the politicians don't have a case. Very clearly, either they didn't read the annual reports, or assumed their audience wouldn't read the annual reports. They have completely ignored the cost of clinical trials and FDA approval. This is proof that investors should ignore this kind of rhetoric; it defies logic and basic arithmetic. Biotech investors have become unnecessarily frightened.
The top two shareholders of Medivation are Fidelity and Vanguard. They own 22% of Medivation. That means Bernie Sanders and his colleagues hit the 401(k) savings of many people when they attacked Medivation. The Medivation founder and CEO owns less than 1% of the company.
Medivation's financial history
Based on what these Senators said, I had expected to find rogue behavior in Medivation's SEC filings. I was surprised to find a blameless company.
It is not surprising that no journalist anywhere has written about this. They are still absorbed with Valeant (NYSE:VRX). They were a few years late to the Valeant story, they won't be in time for the Medivation story. Medivation is the exact opposite of Valeant.
As shown above, Medivation has been profitable only in 2015 and 2014. It racked up losses since inception until turning profitable in 2014 after Xtandi's approval.
The stock market funded Medivation's adventures in drug discovery for many years without a return. Many elections came and went during that time, but nobody mentioned Medivation's losses as they kept piling up and its drug discovery efforts failed to yield a success.
The Xtandi patent expires in 2026. So Medivation has 10 more years before it has to find the next cancer cure.
What Medivation did with its profits
So, the curious reader might ask, what did Medivation do with its 2014 and 2015 profits? The answer is that Medivation spent all that on acquiring two cancer compounds for clinical trials. It acquired MDV3800 (talazoparib) from BioMarin (NASDAQ:BMRN) and MDV9300 (pidilizumab) from CureTech. MDV3800 is in Phase3 clinical trials for breast cancer and MDV9300 is in clinical trials for blood cancer.
Medivation paid $410 million upfront for MDV3800 (note that Medivation's combined after-tax profits over the last ten years add up to just $200 million) and owes $160 million more:
In the fourth quarter of 2015, we acquired all worldwide rights to talazoparib (which we refer to as MDV3800) from BioMarin Pharmaceutical Inc., or BioMarin. Upon closing of the transaction, we paid BioMarin an upfront cash payment of $410.0 million. We also assumed certain costs for ongoing clinical trials of MDV3800, and commitments under certain agreements previously entered into or assumed by BioMarin and assigned to us. BioMarin is eligible to receive up to an additional $160.0 million upon the achievement of defined regulatory and sales-based milestones, and mid-single digit royalties on net sales of products that contain MDV3800 during the royalty term specified in the asset purchase agreement.
It paid $5 million upfront for MDV9300, but owes $330 million more in milestone payments:
In the fourth quarter of 2014, we entered into a License Agreement with CureTech, pursuant to which we have licensed exclusive worldwide rights to CureTech's late-stage clinical molecule, pidilizumab, an immune modulatory anti-PD-1 monoclonal antibody. CureTech is entitled to contingent payments totaling up to $85.0 million upon attainment of certain development and regulatory milestones, up to $245.0 million upon the achievement of certain annual worldwide net sales thresholds, and tiered royalties ranging from 5% to 11% on worldwide net sales
Both these acquired compounds do not appear on the income statement yet; so the net income shown does not yet reflect these investments. These two compounds are parked in intangible assets as shown below. Medivation will be amortizing them (deducting the purchase price from net income) only after regulatory approval; it will take an impairment charge if these compounds do not end up getting FDA approval.
The Medivation attackers said that Xtandi was discovered in UCLA with federal funds. So my question is, why didn't the FDA approve Xtandi upon being discovered?
The answer is the FDA requires clinical trials that universities don't conduct. These clinical trials cost a lot of money. A drug has to be tried on a large number of patients to get approval. Even after such an approval, it could happen that the drug kills people when it actually goes into the market. If the clinical trial involved 1000 patients and after approval 100,000 patients take it, you could have a few of those 100,000 die. If that happens, the company might be sued into bankruptcy.
In Medivation's case, the first set of clinical trials won approval only in post-chemotherapy patients. Medivation had to get FDA approval for a larger patient population step-by-step with more clinical trials. That is, the FDA approved the drug only in patients for whom all other treatments failed in 2012. Then the FDA gave the pre-chemo approval in 2014. Medivation is expecting more label expansion (pre-Casodex) from the FDA in October 2016. The label expansion has already been recommended by the CHMP in Europe. (One of the Xtandi versus Casodex trials was also conducted in Europe.)
Don't expect other countries to pay US prices
Biotech companies and their shareholders and employees are all American. Why should we expect foreign countries to pay US prices for drugs when all that money comes into America? Drug exports benefit the country greatly. Some of the beneficiaries are the mutual funds, pension funds, 401(k) funds, university endowments, insurance companies, and others who own biotech stocks.
If the US forces price cuts, other countries will want price cuts too. As we can clearly see from Medivation's financial statements, that will bring all drug discovery to a halt. The golden goose would have been killed.
Hillary Clinton has attacked only Valeant and Turing - two companies that were clearly rogues that price-gouged decade-old drugs. She is the de-facto Democratic nominee and has said biotech companies trying to discover new drugs have nothing to fear. She is able to differentiate those companies doing R&D versus those who don't. One of her ideas is to set a minimum threshold on R&D expenditure, something that would weed out companies like Valeant.
In my opinion, investors can ignore the attack on Medivation by Bernie Sanders and other lawmakers. Following their prescription, in this case, would mean that the only way to get new drugs would be to ban the FDA and clinical trials. Note that Medivation is conducting clinical trials using Xtandi on Triple Negative Breast Cancer (TNBC) with highly encouraging results. Would lawmakers prescribe Xtandi to TNBC patients without clinical trials just because it was "discovered in UCLA with federal funds?" Should Medivation listen to lawmakers, cut Xtandi prices, and stop all clinical trials on its cancer drugs?
Medivation's Xtandi patent expires in 2026 after which the drug essentially becomes almost free.
Currently, biotech companies have been starved of capital because the stock market does not want to give them any more money. They have been locked out of IPOs and secondary offerings. The XBI (NYSEARCA:XBI) has fallen 45% from its peak and the IBB (NASDAQ:IBB) has fallen 35% from its peak. If investors can believe that logic-defying, arithmetic-defying, data-ignoring, kill-the-golden-goose policies will not be implemented in America, biotech is a good buy right now. The Medivation attack is proof that the political rhetoric is not worth paying attention to.
Disclosure: I am/we are long IBB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.