Medivation: Zacks’ Bull of the Day Play

After a mid-year slump in revenues and a 35% drop in the stock price, Medivation (MDVNAnalyst Report) appears to have the odds in its favor for a turnaround.

A solid Q2 earnings report, including raised sales guidance, and a key drug acquisition from BioMarin (BMRNAnalyst Report) have made analysts more positive about the maker of the number one prostate cancer drug in the world, Xtandi.

With Astellas, its Japanese “big brother” pharma partner, Medivation is expected to share in $2 billion in global sales in 2015 and projections for peak global sales of Xtandi approaching $7.5 billion in the next decade.

And the company continues to drive R&D to expand Xtandi for the treatment of breast cancer.

In its early August quarterly report, the company said that unit demand for Xtandi increased by roughly 13% sequentially. Importantly, as Xtandi gains market share in the treatment of prostate cancer from Johnson & Johnson‘s (JNJAnalyst Report) Zytiga, Medivation reported significant growth in prescriptions written by both oncologists and urologists following Xtandi’s approval for the chemo-naïve indication.

Moreover, while most of the Xtandi scrips are written by oncologists, there was significant growth in the number of urologists writing Xtandi. The company said that about 20% of scrips are now in urology.

Analyst Reaction

On September 8, UBS analysts put out a research note explaining their renewed optimism for the Medivation growth story. The firm reiterated a Buy rating and $74 price target on Medivation as shares continued to drop. The firm believes that shares are now at a 60% discount to the peer group, versus near-parity in April-May 2015. Analyst Matthew Roden noted…

MDVN shares have been in free fall since ASCO, and are now at a whopping 60% discount to the peer group, versus near-parity in April-May 2015. We think the fear is mostly centered on the risk that US demand for Xtandi could dry up at any minute and trigger downward revisions (as was seen with BIIB’s Tecfidera at 2Q).

In contrast, our fundamental view that Xtandi has the potential to be a $3bn+ (US sales) drug prior to early stage prostate label expansion remains unchanged, based on our new analysis of the current underlying growth trends.

Further we acknowledge the market needs more data before believing in Xtandi in breast cancer, the PARP, or pidilizumab, but our point from the risk-reward standpoint is that neither of these program are reflected in the multiple, and hence represent potential upside drivers.

And it was on August 25 that the same analyst had initially raised his price target to $74 following Medivation’s acquisition of a breast cancer drug from BioMarin. The drug, talazoparib, is an oral PARP inhibitor, belonging to a group of pharmacological inhibitors of the enzyme poly ADP ribose polymerase (PARP). Roden said that the acquisition diversifies the revenue stream and adds to pipeline optionality. He further noted…

“Medivation’s acquisition of world-wide rights to Biomarin’s talazoparib (BMN 673), an oral PARP inhibitor is a fundamental positive, in our view, as it diversifies the revenue stream and adds to pipeline optionality. We spoke with management, who pointed to the literature on talazoparib that suggests it is a best-in-class PARP and may be effective in multiple high-value indications beyond breast cancer, including in prostate (potentially in combo w Xtandi) and lung. The macro selloff aside, we believe a higher multiple is warranted fundamentally (intraday 18x our new 2016e and 12x ’17e) given the steep earnings ramp, multiple revenue growth opportunities, and revenue diversification.”

In other analyst actions, on September 15, Nomura Securities initiated coverage of Medivation with a Buy rating and a price target of $70. Also last week, William Blair analysts put out a fresh research note reiterating their Outperform rating and $83 price target. The Blair analysts stated…

“We believe Medivation is building an industry-leading oncology portfolio with strong fundamentals for sales growth and scientific rationales for future growth, in particular through combination therapies.”

Medivation Q2 Institutional Action

Accumulation of MDVN shares in Q2 was steady. Yes, there were some sellers in July with a big 8 million share down day on the 29th. But the stock has since seen a capitulation in price (on lighter volume) and the analyst reaction since Q2 earnings and the key drug acquisition created a big turn in sentiment to drive price above the July 29 selling levels, prior to the Hillary Clinton tweet that tanked the whole Biotech complex on September 21.

Plus, we have a very clear picture of the big guys and gals buying on the way down from $65 to $55 in Q2. I don’t think these very smart and successful players were plunking down this kind of dough here to run away between $40 and $50 now. Data courtesy of…

As long as these great stock investors are still accumulating shares of this emerging Biotech powerhouse, I will be as well — regardless of what Hillary tweets.

Disclosure: I own MDVN shares for the Zacks FTM Trader.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

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