Medivation (NASDAQ:MDVN) is a large capitalization ($10 billion) biotechnology company with one approved therapy, Xtandi (enzalutamide) for prostate cancer, which is marketed by Japan-based Astellas (TYO: 4503).
Xtandi was first approved by the FDA in August 2012 and continues to grow revenue rapidly, in part due to geographic expansion. It works by blocking an androgen receptor. It is a small molecule. It was originally approved for metastatic castration-resistant prostate cancer patients who had previously failed chemotherapy.
As is typically the case, after getting the initial approval Medivation continued to conduct trials to expand the label. On September 10, 2014 it was announced that the FDA had expanded the label to include men who had not previously received chemotherapy. Current trials are underway to expand the label further, notably to men whose cancers have not yet become metastatic.
Medivation has a relatively thin pipeline, with no other agent in trials, but it is testing Xtandi on certain breast cancers. I'll develop that further after looking at financials and Xtandi sales data.
Table 1 sets out sales of Xtandi by Astellas, revenue to MDVN, and net income for the quarters of 2014 (in $ millions):
|2014 quarters||Xtandi sales,
|Medivation Revenue||GAAP net income|
Clearly Xtandi sales, Medivation revenue, and Medivation net income are expanding at a rapid clip. Note that Medivation revenue may include milestone payments, so it is not the same percent of sales each quarter. In particular in Q4 milestone payments were $141.4 million, giving quite a boost to the bottom line.
Medivation accumulated cash during 2014 and ended with $503 million plus about $185 million in receivables from Astellas. Medivation had $222 million in convertible notes outstanding.
These results have driven the stock price from a $54.47 in April, 2014 to a 52-week high of $141.48 on March 23, 2015. Clearly Medivation beat the iShares Biotechnology ETF (NASDAQ:IBB) during the last 52 weeks.
Prostate Cancer Competition
Prostate cancer is usually a slow-moving disease. Due to the prevalence of PSA tests growths are often found before they become malignant. Surgery and radiation are standard treatments. Since progression is often tied to androgen levels, lowering those levels has long been a standard treatment. When growth continues despite hormone levels having been lowered, it is classified as castration-resistant.
In addition to non-drug interventions and chemotherapy, in the last few years the most visible competitors to Xtandi have been Provenge, an immunotherapy now owned by Valeant (NYSE:VRX), and Johnson & Johnson's (NYSE:JNJ) Zytiga. However, the most common result from any of these therapies is a delay in progression, not a cure for the cancer. Research in prostate cancer therapies is very active, so at some point older therapies including Xtandi may encounter greater competition. For instance Tokai Pharmaceuticals is testing Galeterone in Phase 3 trials.
On the plus side, good label expansion results continue to come in for Xtandi. On April 2 it was announced that Xtandi had statistically significantly better results that Bicalutamide (by AstraZeneca and generic manufacturers) in a Phase 2 comparison trial. The subjects included men with both non-metastatic and metastatic castrate-resistant prostate cancer.
In addition to expanding its label for prostate cancer, Xtandi is being tested in three types of breast cancer. The types are classified by the genetic mutations involved, including androgen receptor positive (AR+) cancers.
The most recent results from Phase 2 trials are encouraging. This is for a Phase 2 study of Xtandi (enzalutamide) as a single agent for AR+ triple negative breast cancer, enrolling 42 patients in Stage 1 and 118 in total. With 26 of the 42 enrolled women testing AR+ positive (to any degree), 42% met the primary endpoint of complete or partial response, or 16 week of stable disease. The data is good enough to reject the null hypothesis (that Xtandi is ineffective), and full data should be in before the end of 2015.
Medivation also acquired the rights to pidilizumab from CureTech. Pidilizumab is a cancer CPM (check point modulator) for PD-1, which means it will be in competition with other PD-1 modulators. CPMs are a very popular field currently. I would not yet assign any particular value to this.
Medivation has provided non-GAAP guidance for 2015. No global sales for Xtandi were projected, but U.S. sales are put between $1.05 and $1.125 billion, which would exceed 2014 global sales. Non-GAAP revenue to Medivation is estimated between $600 and $650 million, but there may be up to $245 million in additional milestone payments from Astellas. In any case 2015 revenue should greatly exceed 2014 revenue.
With a projected non-GAAP operating expense total of $410 to $450 million, interest expense of $7 million and a tax rate of 36% to 37%, that would make non-GAAP net income in the $90 to $147 range. The midpoint would be $118.5 million. More if milestone payments come in.
Valuation and Opinion
2014 revenue and net income was boosted by milestone payments. Even without milestone payments the net income projection band for 2015 is broad.
Giving half the possible milestone payments, less the tax rate, would bring the non-GAAP net income midpoint to $195 million. However, at some point milestone payments will come to an end as all milestones will be achieved.
Using the 20 P/E rule of thumb (for companies with moderate growth) would give a market cap of $3.9 billion, well below what the stock has already achieved.
Against that, I would argue label expansion and geographic expansion. I would not be surprised if Medivation meets or exceeds the high end of 2015 guidance. A faster growth rate should imply a higher P/E ratio and resulting market capitalization.
Breast cancer is another very large opportunity. While it may take 2 or more years to go from Phase 3 trial planning and enrollment to an FDA submission, there is good reason to think that there will be a positive response for AR+ breast cancers.
But I don't like the overall thinness of the MDVN pipeline. Hopefully the in-licensing of pidilizumab is a sign that a broader pipeline will be built with part of the cash flow. Milestone payments for pidilizumab would have a negative effect on Medivation's bottom line, but any announcements of achieving the goals they represent would likely give the stock a bounce.
Given that my goal is to beat the IBB, Medivation is a good company to contemplate. The stocks in the IBB that do better than average are most commonly those that have pipelines that turn out to be undervalued, until the data and sales come in. The stocks that have helped me beat the IBB in the past, like Gilead (NASDAQ:GILD) and Celgene (NASDAQ:CELG), are now themselves large components, so they tend to establish the average. Medivation could beat the IBB in 2015 if earnings grow at the high end of guidance. In the longer run, MDVN could easily be able to beat the IBB with an approval of Xgiva for breast cancer.
I find Medivation to be an attractive mid-term opportunity at the current market capitalization (and closing price of $126.92 on April 7, 2015). In 2015 I will be looking for indications that guidance may be low, that 2016 growth will be strong from label expansion, and that the breast cancer opportunity is becoming clearer. Whether I actually acquire Medivation stock will depend on how it weighs against other candidates.
Disclosure: The author is long CELG, GILD.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.