Seeking Alpha
Short only
Profile| Send Message|
( followers)  

Until Medivation (NASDAQ:MDVN) can actually produce a commercial drug that lives up to the hype - now at levels that suggest a looming blockbuster even bigger than the market that it aims to serve - it will remain the same overvalued company it has always been since its 2004 debut on the penny-stock exchange. A highflier trading on the mere promise of a breakthrough treatment ever since it originally went public, utilizing a reverse-merger process long associated with pump-and-dump scams, Medivation has still yet to introduce a single product to the marketplace.

Despite the miserable failure of its original drug candidate, a Russian antihistamine fruitlessly tested for years as a treatment for Alzheimer's disease, Medivation has staged a phenomenal comeback. Thanks to promising late-stage trials of its remaining prospect, a prostate cancer drug that allows dying patients to live a few weeks longer than rival breakthroughs on the market, Medivation already looks like a remarkable success. With its stock exploding from $15 to a recent all-time high of almost $90 a share, Medivation has managed to achieve a $3 billion market value well ahead of the long-awaited launch of its very first drug.

To Wall Street, the new Medivation treatment obviously seems like a valuable breakthrough. To urologists who spoke with TheStreetSweeper, however, that medication looks like just another temporary fix with an outsized sticker price.

"Most of these drugs tend to cost around $100,000," one doctor emphasized. "That's a lot of money for a few months of life."

A former member of the Medivation board actually shares that point of view. While Medivation has yet to publicly announce the price of its new prostate cancer drug, Enzalutamide (previously MDV3100), the former director pegs the cost around $120,000 - higher even than an expensive rival and more than double the reported cost of a similar drug - while portraying the benefits as limited at best. He suspects that health insurers could easily reach a similar conclusion, restricting coverage of a six-figure drug that results in even steeper medical bills for terminal cancer patients, with that push-back ultimately curtailing sales.

By now, Dendreon (NASDAQ:DNDN) has already tested the same market - with miserable results - by charging an enormous price for a breakthrough prostate cancer treatment of its own. When Dendreon first secured approval of its $93,000 Provenge cancer vaccine two years ago, Reuters noted, bullish analysts automatically expected the drug to achieve blockbuster status. With doctors reluctant to even order the vaccine because of its gigantic sticker price, however, Dendreon soon lost its popularity on Wall Street and ultimately emerged as an outcast.

A former $55 highflier that peaked shortly after regulators cleared its first (and only) drug, Dendreon now languishes in single-digit territory at just $7 a share.

Medivation currently trades at even loftier levels on the promise of a rival drug that may cost even more, but its former director wonders just how long that gigantic premium can last. While he fully expects the company to secure approval from the U.S. Food and Drug Administration to market its new therapy, he still views Medivation as a $20 stock and nothing more.

"Look, I think it's the most overpriced pharma stock out there," he bluntly told TheStreetSweeper after selling his own shares. "I don't know what's holding that stock up."

One of the most generously valued companies in a biotech space notorious for speculative highfliers, Medivation indeed looks like a stock priced for outright perfection right now. At $85 a share, in fact, Medivation sports a market cap that almost rivals the projected future value of the broader general market for all prostate cancer therapies combined. That price suggests little room for error going forward, to say the least, if it even allows for inherent limits to prospectivesales in the first place.

As indicated by the evidence presented below, Medivation trades at lofty - but potentially unsustainable - levels that fail to properly reflect the following: rights to only a portion of future drug sales and initial access to only a limited section of the market; fierce competition from a similar drug and documented progress toward a superior version of its own therapy; inexperience in commercial operations and dependence on a marketing partner where sales reps have long complained of toxic working conditions; and prior clinical results that sparked false hopes for an earlier drug that ultimately failed, scaring off an industry giant and staining its record with a potential source of continued doubt.

Medivation did not respond to messages from TheStreetSweeper seeking input for this story.

Math Test

To be sure, Medivation looks wildly expensive based on any standard measures.

The company currently trades at almost 40 times its book value, for example, a steep multiple achieved by a tiny fraction of the players (many of them obscure penny stocks) that populate the high-stakes biotech arena. It sports a similar price-to-sales multiple, too, which eclipses the single-digit ratio assigned to the growth industry as a whole.

At this point, in fact, Medivation enjoys a rich premium when valued entirely on its forecasted revenue instead. Medivation trades at almost 20 times its projected revenue for 2013, with actual drug sales (rather than simple milestone payments) expected to begin driving its financial results by that point.

Even if Medivation finally hits a homerun, with Enzalutamide ultimately achieving blockbuster status, the company already boasts a market cap that approaches the $4 billion value placed on the future market for prostate cancer therapies as a whole. Since Medivation must split any revenue generated by Envalutamide with a funding partner, however, its market cap theoretically reflects only half of the overall value assigned to its only product. In other words, investors have effectively pegged the full value of Enzalutamide above the projected value of the entire market for prostate cancer drugs.

Medivation cannot even target most of the patients included in that market for a while, either, with the company seeking initial approval of Enzalutamide only for those who have previously failed chemotherapy. While Medivation clearly expects to expand beyond that limited niche -- which accounts for just one-third of the estimated market overall -- the company must first secure official approval before it can actively promote its drug to that larger crowd.

Medivation faces tough competition from rival breakthroughs that enjoyed a valuable head-start, too, including a popular drug -- introduced by powerful Johnson & Johnson (NYSE: JNJ) more than a year ago -- that draws routine comparisons to its own therapy. That drug, known as Zytiga, has already captured a growing chunk of the market since it first arrived on the scene.

Despite reimbursement challenges overseas, with the United Kingdom initially refusing to cover the drug because of its premium price, Johnson & Johnson counts Zytiga among its most successful new medications right now. A key driver of growth for the company, records show, Zytiga generated $200 million in revenue last quarter alone and by now shows legitimate blockbuster potential itself.

"We feel very good about Zytiga," Johnson & Johnson proclaimed earlier this year, when celebrating the rapid adoption of its treasured prostate cancer drug. "We have terrific data from patients and from physicians. There is a comfort level with people using the product (NYSEARCA:AND) very high market shares" -- in the very population that Medivation will initially target itself.

Double Vision

Johnson & Johnson certainly aims to build upon that momentum going forward, despite the expected launch of a competing drug that Medivation likes to celebrate as the best one in its class.

When specifically questioned this year about the potential threat posed by Enzalutamide, records show, Johnson & Johnson basically downplayed clinical data favoring that drug as inconclusive and expressed ongoing confidence that - regardless of future competition - Zytiga would further expand upon its phenomenal success. While Medivation obviously looks to capitalize on data supporting Enzalutamide, which extended survival about four weeks longer than Zytiga did in a recent late-stage trial, Johnson & Johnson can always point to earlier studies that favor its own drug in certain areas instead. After all, records show, Medivation itself has mentioned the stronger numbers backing Zytiga when comparing the overall performance of the two drugs in the past.

At this point, in fact, even a physician who participated in the Medivation studies reportedly views the competing drugs as equivalent.

"Basically, to him, they're all the same," says a fellow urologist who works with that doctor. "They all give about three to five months increase in life.

"But we don't really do things in medicine for a few months, because of quality-of-life issues," he adds. "It's market-pushed. It's not considered a very big advance at all."

Medivation executives have already struck it rich regardless. In early February, just one week after Medivation released the celebrated results of its latest clinical trial, company insiders began dumping the highflying stock. By the time that Medivation actually filed an application seeking formal approval of its drug this month - with an actual launch still up to eight months away - company insiders had cleared roughly $30 million in stock-related gains.

Three key executives, along with the company chairman, pocketed that entire mountain of cash.

CEO David Hung and CFO Patrick Machado cleared more than $9 million apiece, with the latter executing his final transaction on the very day that the stock reached its all-time high. Dr. Lynn Seely, a physician who serves as the chief medical officer, scored an even bigger payout by collecting a $12 million windfall. Even Chairman Kim Blickenstaff, who carried out the smallest of the trades at prices well below peak levels, picked up enough to achieve instant millionaire status.

While the CEO still holds more than 1 million shares of Medivation stock, records indicate, the remaining three insiders sold far more stock than they now directly own. In fact, records show, the chairman actually owns no outright stock in the company at the present time at all.

Together with other company insiders, however, those Medivation leaders control a massive pile of stock options priced well below recent market levels. They can always exercise those options, most of them priced between $12 and $22 a share, and further capitalize on the dramatic rally if they choose.

'Son of Medivation'

Back when that selling spree first began, records show, a noteworthy threat -- lurking in the background for years -- suddenly burst into the spotlight. With Medivation still conducting studies on its experimental prostate cancer drug, privately held Aragon Pharmaceuticals achieved its own noteworthy milestone by producing impressive preclinical data on a second-generation version of that drug.

Both drugs originate from novel compounds discovered in the laboratory of acclaimed medical researcher Dr. Charles Sawyers, who actually views the competing drug ARN-509 -- nicknamed the "Son of Medivation" -- as the more promising of the two.

"It came out later than MDV3100 and is more potent, and has what we think is a better safety profile," Sawyers stated in a revealing May 2011 interview ahead of actual trial results on that breakthrough drug. "There is a lot of excitement around it, and we are pushing as fast as we can …

"It will take at least a year, if not a little more, to know with confidence what those numbers are for ARN-509 compared to MDV3100," he predicted. "And by then, Medivation will be approved."

That race looks somewhat closer now. Aragon has reported impressive progress since that time, while Medivation only recently filed for approval of its new cancer drug. Now at the mercy of busy regulators, Medivation may not actually secure permission to market that drug - even under an accelerated review process - until the beginning of next year.

Aragon will continue to move forward with its own studies in the meantime, with the company already finishing its Phase I trial of ARN-509, which "showed greater efficacy than MDV3100", and completing enrollment "well ahead of schedule" for a crucial Phase II trial that is underway right now. Meanwhile, records show, a prominent Harvard-based researcher has initiated yet another study -- this one combining ARN-509 with popular Zytiga -- that has further heightened interest in the new drug.

When news of that outside trial surfaced last month - showing the young drug, rather than its more established parent, linked with Zytiga - Medivation actually suffered a notable (if temporary) hit to its stock price. Medivation sank a whopping $10 over the course of two short days, falling from peak levels to less than $80 a share, and remains highly volatile even after recovering some of that lost ground.

Medivation looks rather worried about that rival drug itself, corporate filings reveal, with the company recently suing Aragon in a desperate attempt to block that competition altogether. Back when Medivation originally licensed its own compound as a young startup trading on the penny-stock exchange, however, the company obviously realized that others might use similar compounds to develop new drugs like its own.

"There is a large body of prior art, including multiple issued patents and published patent applications, disclosing molecules in the same chemical class as our MDV300 series," Medivation noted in the 2005 annual report filed by the company after it first licensed those molecules. "Even if we can obtain protection for and defend the intellectual property position of our product candidates, we or any of our potential future collaborators still may not be able to exclude competitors from developing or marketing competing drugs.

"Should this occur," the company concluded, "we and our potential future collaborators may not generate any revenues or profits from our product candidates."

Bad Memory

Medivation has already soaked its first collaborator, records show, spoiling a treasured relationship with the world's largest drug maker along the way.

Four years ago, Medivation convinced industry heavyweight Pfizer (NYSE: PFZ) to finance expensive trials of its original drug candidate Dimebon - an over-the-counter Russian antihistamine normally used for allergies and hay fever - as a possible treatment for Alzheimer's and/or Huntington's disease. Pfizer paid a whopping $225 million for the initial rights to co-develop that long-shot therapy, offering up to $500 million more for the achievement of critical milestones, but finally abandoned that doomed project earlier this year. Striking out for good in its final study on Alzheimer's patients, with earlier trials producing mixed results at best, Dimebon wound up working about as well as a pointless sugar pill.

In hindsight, that treatment actually seemed rather farfetched from the start. After all, old corporate filings suggest, Medivation began pursuing Dimebon as a therapy for Alzheimer's disease based primarily upon two animal studies and a single human trial involving just 14 Russian patients who suffered from the incurable disorder.

Despite that flimsy data, Medivation pounced on Dimebon as a promising Alzheimer's therapy and initially viewed the drug as a potential miracle cure for the aging process as well. Trumpeting the high survival rate of mice in a Russian experiment, Medivation once considered pursuing the antihistamine as a life extender for household pets.

"While developing a drug to prolong survival in humans would require extremely long and costly clinical studies,"Medivation explained at the time, "development of Dimebon as a treatment to prolong survival in pets would require significantly less time and cost and may represent a significant market opportunity for us."

Medivation wound up testing Dimebon on humans anyway, however, based largely upon the results of a tiny study -- involving barely a dozen Alzheimer's patients -- that hardly qualified as a scientific trial at all. As Medivation admitted in its own corporate filings, that pilot study lacked a placebo-controlled group and also utilized different endpoints than those required for FDA approval as a legitimate Alzheimer's drug.

When Medivation followed up with a much larger study of its own, testing Dimebon on 183 patients in faraway Russia this time, the company nevertheless reported miraculous results. Dimebon met all five of its primary endpoints in both that Phase II study and an extended version of the trial that concluded the following year. While the studies clearly impressed Pfizer enough to reach into its fat pocketbook, however, the results looked rather dubious to skeptical experts with a keen eye for detail.

Dr. Eric Sharps, a trained biochemist who worked for two different drug companies before founding FourSquare Partners, conducted his own review of the data and found clear reason for alarm. Sensing potential flaws in the Phase II studies, Sharps ultimately concluded that Dimebon would fail to help Alzheimer patients in the end.

"There are really only two explanations for the remarkably positive Phase II data reported for Dimebon," Sharps decided at the time. "The first is that, despite several flawed or unsubstantiated hypotheses (dosing, mechanism of action), Dimebon is truly a superb treatment for Alzheimer's …

"The second explanation for these data invokes fraud," he added bluntly. "By whom and to what end are not known. (But) the Phase III results, expected in less than two years, should resolve the dilemma."

When Medivation completed that Phase III trial the following year, the results looked like an outright disaster. Dimebon failed to achieve either of its primary endpoints, actually faring worse than placebo on one of those two measures, and missed all of its secondary endpoints as well. The stock, previously driven by the rosy outlook for that drug, totally collapsed.

Clearly stunned by the news, panicked investors raced for the exits, with 45 million shares of the stock -- more than the existing float -- changing hands in a single day. A $40 stock right before that bombshell dropped, Medivation ended the session at just $13 a share. The stock continued to spiral lower as the year wore on, the hope that once supported it no longer there, and ultimately languished in single-digit territory for months until progress on the prostate cancerdrug injected the shares with a fresh source of life.

Despite that devastating blow, Medivation continued to pursue Dimebon as a treatment for both Alzheimer's and Huntington's disease -- with no better results -- until a remaining last-ditch study failed earlier this year and ended the Pfizer collaboration for good. Thanks to positive Phase III data on its remaining drug, however, Medivation had already rebounded by then to emerge as triumphant darling of Wall Street.

Blind Date

With giant Pfizer out of the picture, Medivation now counts Astellas - a Japanese company blasted for years by its disgruntled sales force - as the only corporate partner that it has.

In the fall of 2009, back when its relationship with Pfizer still remained promising and new, Medivation landed Astellas as a partner for its prostate cancer drug. Under the terms of that deal, the two companies will split any revenue generated by Enzalutamide here at home - where they will both market the drug through their respective sales forces - with Medivation simply collecting a double-digit royalty on sales generated by its partner outside of the country.

Because Medivation has spent its entire history simply pursuing breakthrough drugs, while relying on stock sales and partnership agreements to finance its operations, the company has never actually tried to market a commercial product yet. Medivation has placed a relative newcomer in charge of its sales force, too, since its veteran chief commercial officer suddenly departed "to pursue other opportunities" just as the company neared completion of late-stage trials on both of its drug candidates.

With Medivation entering the field as a novice in commercial operations, the company will obviously lean on its veteran partner for a lot of help. Indeed, back when Medivation first announced its collaboration agreement, the company introduced Astellas as "an ideal partner for MDV3100" because of its "global reach" as a "leading" player in urology expanding into the oncology space. Since then, however, Astellas has come under regular fire from sales reps who clearly hate their jobs and routinely warn others against joining the company.

Those reps have by now spent years blasting Astellas on a toxic Café Pharma message board, accusing the company of everything from outright fraud - including off-label marketing abuses - to complete incompetence. They have also mentioned some disturbing shortcuts that (if true) could really compromise a product launch, with one complaining that his/her team "was told that we could not take any time out of the field to study for the two drugs we just added to our bag."

By the time that Astellas recently began recruiting candidates ahead of the expected launch of Enzalutamide -- with its sales team still trying to scare outsiders away -- one rep expressed a clear preference to simply work for inexperienced Medivation instead. At this point, in fact, even Astellas sales managers (and not just disgruntled reps out in the field) sound desperate to escape the company.

"It was such a negative week, and really solidified what we've been thinking about this company for so long," one of them reported after attending a recent meeting with fellow Astellas sales managers. "I did not talk with ONE person who was happy. I did not hear one conversation that was positive.

"I left the meeting knowing that I will be searching for a job next week. Everyone at that meeting was running scared. I am not scared - but you bet I'll be running."

Peer Pressure

For its part, records indicate, Medivation already expects a slow launch for its celebrated prostate cancer drug.

Shortly after Medivation lost the head of its entire commercial division, records show, the company basically acknowledged that Enzalutamide and Zytiga look an awful lot alike. With Enzalutamide actually underperforming its rival in certain areas at that point, in fact, Medivation pointed to the convenience of its drug -- as a once-a-day pill requiring no steroid therapy -- as perhaps its biggest selling point. Even now, with Enzalutamide boasting slightly better clinical benefits than its rival does, the two drugs remain similar enough that Medivation likely counts on that convenience to serve as a helpful attraction.

Initially, however, even Medivation doubts that those minor differences will really jumpstart sales.

"Given the fact that physicians are generally conservative and it's hard to change their practicing, we think the launch will be slow initially," Medivation CEO David Hung admitted a few months ago. "But we think, given our profile for the drug -- which we consider quite attractive -- we think, ultimately, we will be just fine."

Back when Medivation first began pursuing its prostate cancer drug, the company actually seemed rather unimpressed with older therapies that offered the same kind of short-term benefits that it now celebrates today. At the time, records show, Medivation highlighted the shortcomings of standard chemotherapy by gravely noting that it increased survival "very modestly" by allowing patients to live "only a few months" longer than they otherwise would before succumbing to their fatal disease. Medivation now trumpets Enzalutamide as an incredibly valuable breakthrough, however, even though the drug -- a short-term fix itself -- extends the lives of terminal cancer patients by an average of just 4.8 months and offers only minor improvements over competing therapies.

Dendreon approached that same level of success with its groundbreaking Provenge vaccine, for example, which extends survival by an average of 4.1 months and ranks as the first of the new-generation prostate cancer drugs. Despite its early arrival to a market that clearly pined for new options -- and its current status as the only breakthrough treatment approved for patients who have yet to undergo chemotherapy -- Provenge no longer looks like the promising blockbuster that Wall Street first celebrated, though.

Once a $55 highflier expected to deliver billions of dollars in annual sales, Dendreon mustered just $342 million in revenue last year and -- with high production costs and even steeper overhead -- wound up losing $338 million in the process. Dendreon has missed Wall Street projections for three out of the past four quarters in the meantime and, based on analyst estimates (if it hits them), will continue to lose money on a drug that generates a mere fraction of the $1 billion in sales required for blockbuster status.

With the entire company valued at barely $1 billion at this point, Dendreon now trades in the lowly single-digit arena that it once occupied as a development-stage company with no commercial products at all.

Sticker Shock

Algeta (ALGETA.OL), a Norwegian company looking to introduce a new prostate cancer therapy of its own, has actually started to lose some of its early luster ahead of the expected introduction of its drug. With Algeta sporting a market cap of roughly $1 billion this spring, a trade industry publication noted at the time at the time, UBS began warning investors away from the stock due to valuation concerns that - based on all of the evidence presented above - could theoretically apply to $3 billion Medivation as well

"UBS initiated coverage of Algeta this week with a sell recommendation … taking a rare cautious stance on a product and company that has many supporters," EP Vantage reported. "They wrote that their discussions with oncologists indicate that the market is assuming peak sales and speed of launch far in excess of what can be realistically achieved.

"Algeta's market cap, almost $1 billion, indicates approval is expected," the publication noted. "However, the company has lost around a third of its value in the last nine months, as the real challenge for the product - carving a share of an increasingly competitive prostate cancer market - approaches."

For now, at least, Wall Street experts seem wildly bullish about the prospects for Medivation itself. Most analysts strongly recommend buying the stock, with their lofty price targets climbing all the way up to triple-digit levels.

Following its breathless rally in recent months, however, Medivation now trades barely 10% above the average target price and therefore promises limited gains even if the stock reaches that point. Bears clearly bank on an outright reversal instead, records indicate, selling almost 10% of the available stock short in anticipation of a looming plunge.

At this point, even some former Medivation bulls have lost their appetite for the highflying shares. Zacks downgraded Medivation from outperform to hold months ago, for example, and then reiterated its lukewarm rating -- highlighting competition and valuation as key concerns -- with the stock trading at much lower levels than it does today.

"With Jevtana (yet another prostate cancer drug) and Zytiga capturing a significant share of the post chemo-market, MDV3100 - being a late entrant - may find it challenging to take away market share once launched," Zacks noted back in March, with the stock barely topping $70 a share. "While we remain positive on the company's prospects, we maintain our neutral recommendation, as we believe the positive news is already reflected in the current stock price."

If so, the analysis by that Medivation fan suggests, the stock belongs roughly $15 below its current price, even if the company finally delivers on its promises - for the first time in history - by launching an actual drug with a real shot at commercial success.

* Important Disclosure: Through its members, TheStreetSweeper established a financial position in MDVN prior to the publication of this report and will profit on future declines in the share price. It currently holds the following positions in the stock: 45 contracts for the June $90 puts purchased at an average price of $7.25 apiece; 50 contracts for the June $95 puts purchased at an average price of $11.25 apiece; and a total of 38,500 shares of MDVN stock sold short at an average price of $85.44 a share. TheStreetSweeper will sell the MDVN puts it acquired and cover its short position in the stock at a future date. It will update this disclosure when those transactions occur.

Update: TheStreetSweeper covered 3,600 shares of MDVN at $81.82 a share on May 31, but it continues to short the remaining 34,900 shares at the present time. Going forward, TheStreetSweeper may choose to further adjust the size of this investment -- by increasing, decreasing or covering its short position in the stock -- and will fully disclose the details of any future trades as those transactions occur.

As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in any of the companies that they cover. To contact Melissa Davis, the primary author of this story, please send an email toeditor@thestreetsweeper.org.

Source: Medivation: Intoxicating Rally, Imminent Hangover?