Is Medivation Inc's Recent Pullback an Entry Opportunity?

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Medivation (NASDAQ: MDVN  ) reported fourth quarter 2013 earnings after the bell on February 27 that beat estimates on both the top and bottom lines. Fourth quarter revenue grew 163% on year to $96.61 million, beating estimates by almost $24 million. While the Street was expecting a loss of $0.08 per share, the company squeaked out a profit of $0.03. No wonder investors were scratching their heads when the company's stock price sank nearly 15% the following day.

Reaching a plateau?
Apparently the Medivation's guidance for the rest of the year was more conservative than some analysts had anticipated. The company's sole product, Xtandi, is currently approved in most major markets for the treatment of metastatic castration resistant prostate cancer (mCRPC) patients that have previously received docetaxel. Despite the somewhat limited indication, and just over 14 months on the market, US sales reached $392.4 million in 2013.

The figure that has the Street so upset was the company's guidance for 2014 US Xtandi sales of between $500 and $535 million. It's easy to understand why. Fourth quarter 2013 US Xtandi sales reached $126.1 million. The lower end of the company's guidance suggests US sales will remain flat for the entire year.

Another look shows the company prefers to underestimate. When reporting second quarter 2013 earnings, Medivation estimated US Xtandi sales would reach between $345 million and $365 million. The midpoint of that range ended up more than ten percent below actual results. Clearly the company prefers to underestimate on the side of caution. I can't say I blame them. Making an overly conservative estimate, then overshooting it is annoying. But it's much better than the opposite.

A great reason to be overly conservative with Xtandi estimates is the amount of recently approved competitors for post-chemo mCRPC patients. Xofigo from Algeta, in a partnership with Bayer, won FDA approval in May of 2013. The therapy is intended for patients with bone metastases, but it will likely cut into a significant portion of Xtandi's market.

Provenge, from the struggling Dendreon (NASDAQOTH: DNDNQ  ) is an interesting, but complicated and expensive immunotherapy. It involves removal of a patient's white blood cells. The patients cells are cultured with an antigen present on most prostate cancer cells, then reinfused into the patient. The process, which needs to be repeated, is far less convenient than available oral therapies, like Xtandi.

Zytiga from Johnson & Johnson's (NYSE: JNJ  ) pharmaceutical subsidiary, Janssen, appears to be the biggest threat to Medivation. The oral therapy had a head start in the US market and has a share of the pre and post-chemotherapy market roughly three times the size of Xtandi's. But that could change in the years ahead.

Xtandi should get a chance to break into Zytiga's pre-chemo market sooner than expected. An independent data monitoring committee concluded nearly a year early that the drug trial scheduled to finish this September reached its endpoint. The trial screeched to a halt and mCRPC patients in the placebo arm were offered Xtandi.

Medivation hasn't announced the submission of a supplemental new drug application for the pre-chemo mCRPC indication. Given the results of the Prevail trial I think the label expansion is a question of "when", not "if." Patients in the Xtandi arm showed an 81% reduced risk of disease progression compared to placebo. The risk of death, despite subsequent treatments, in patients receiving Xtandi was 40%, compared to 70% in the placebo group.

Efficacy aside, Xtandi is even more convenient than Zytiga. The drug inhibits the production of testosterone. A typical regimen requires four pills taken on an empty stomach followed by twice daily doses of prednisone to counteract the side effects of testosterone inhibition.

Xtandi allows the production of testosterone, but inhibits the stimulation of androgen receptors on tumor cells. A regimen also requires four pills taken once per day, but they can be taken with or without food and prednisone isn't necessary.

Final thoughts
It seems to me that Friday's pullback was a result of impatient investors coming back down to Earth. The stock's pre-announcement highs of over $85 suggested to me that the market was expecting a great deal of off-label use prior to Xtandi's likely pre-chemo mCRPC expansion. I think the expansion is likely, but in the meantime Medivation will just have to share the post-chemo market with Johnson & Johnson. Given the rising use of both Xofigo and Zytiga with pre-chemo mCRPC patients, I expect the number of post-chemo patients will shrink somewhat.

While Xtandi sales this year might be slow, growth should continue in the years ahead following label expansions. A trial testing Xtandi in non-metastatic CRPC is ongoing, and I think we can reasonably expect a successful expansion into this much larger market. The recent pullback based on disappointment over this year's guidance could be a good opportunity for a long term investor to start a long position in Medivation.

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Cory Renauer

Cory is a long-term minded analyst mainly focused on the biotechnology and pharmaceuticals. He genuinely enjoys cutting through the industry's complexities to help everyday investors make better decisions. You can contact Cory on Twitter @coryrenauer

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