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Medivation: A Value In Biotech

Summary

Reasonable Xtandi sales potential alone anchors the current market valuation.

Multiple assets in the pipeline provide free upside options (including potential best-in-class Talazoparib).

Recent bids for the company provide a reasonable valuation floor.

Thesis Summary

Biotech and value investing are seemingly incompatible strategies due to the lack of protection from permanent loss of capital; i.e. "Rule #1: Never Lose Money." However, there are special situations where an approved, marketed drug provides cash flows which anchor the market's valuation of a company, help fuel pipeline development, and provide protection from permanent loss of capital via a reasonable valuation floor.

In such situations, there is the potential for a company to be valued by the market solely on the basis of its one marketed drug, and an investor coming in at the right valuation can obtain its clinical pipeline for free. "Heads I Win" if pipeline candidates are approved, and "Tails I Don't Lose Much" if the pipeline ends up being worthless, since the market is valuing the company solely on the basis of its one marketed asset.

Medivation (NASDAQ:MDVN) is just such a company which is misunderstood by the market. It is a highly de-risked biotech with a commercialized, blockbuster drug (Xtandi in prostate cancer) already providing significant financial resources for the development of two late-stage clinical candidates in their pipeline (Talazoparib in breast cancer and Pidilizumab in lymphoma), which have the potential to be further expanded to a variety of oncology indications.

However, the market is valuing the company at a multiple of peak Xtandi sales in prostate cancer alone. There is tremendous growth potential on the upside with near-term binary events that can essentially be had for free at the current valuation, adding a potential cumulative ~$26B of value on the upside in the next couple of years (potential upsides of $20B from Talazoparib and $6B from Pidilizumab. I calculate a current fair value of $92/share, a best-case upside value of $212/share, and a downside value of $56/share. Shares currently trade at $65.

On the downside, it is important to realize that Medivation is not your typical biotech with a single Phase 2 asset in development, which could go to zero if clinical proof-of-concept is not achieved. They are already playing in an oligopoly market for Advanced Prostate Cancer with the market shared between their own Xtandi and J&J's (NYSE:JNJ) Zytiga, with the market for prostate cancer treatment experiencing heavy growth in the coming years (estimated to grow to $13.6B globally in 2021 because of Xtandi and Zytiga) and Xtandi being the preferred treatment of the two (I have heard 70/30 split). The growth and stability of Xtandi sales in prostate cancer provides a downside valuation floor in the range of ~$9-10B.

Potential acquirers are essentially trying to buy Medivation for the value of only Xtandi in prostate cancer, aiming to get the pipeline and potential indication expansions of Xtandi for free. For example, Sanofi (NYSE:SNY) made a $9.3B bid for Medivation in late April, or $52.50/share. Medivation management is shrewd and realizes this, and I believe they will continue to act in shareholders' financial interest and only accept a bid at a significant premium to the current market cap, requiring additional value for its two late-stage clinical assets and a premium for the acquisition.

At the current market cap, an investor is essentially buying the certainty (Xtandi sales in prostate cancer) at approximately the fair value of that asset, and getting the uncertainty for free (2 high...


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