Fools know the value of a stock split: zero. It's a non-event. Instead of a $20 bill in your wallet, you now have two $10 bills. So if they mean nothing, why do them? There are a few reasons, none of which has anything to do with whether the stock is a good investment. Here are the usual ones:
- To make the stock look cheap.
- To increase liquidity.
- To meet stock-exchange listing requirements.
- To express a bullish management sentiment.
Regardless of the reason, markets tend to view splits as positive events, and a company's shares can get a short-term boost from the news. But if the company isn't a good, long-term business, it doesn't matter if its shares split, or whether you buy them before or after.
A split decision
Yet it's not surprising drugmaker Medivation
The arc of Medivation's ascendancy vastly improved when the FDA approved Xtandi after only a three-month review, well ahead of the scheduled late November approval date. The stock, now at $105 a share, trades 460% higher than it did last year.
A surfeit of options
Prostate cancer is quickly becoming a hot market for biopharmaceuticals. It's the second leading cause of cancer deaths in men in the U.S., and there are currently more than 1 million men diagnosed with the illness. Dendreon
According to analysts at Baird, Zytiga is quickly becoming the first line of defense in treatment of prostate cancer even if they also follow up with Provenge, and now J&J won approval for a priority review of the therapy to treat prostate cancer patients who haven't undergone chemotherapy yet. With global sales climbing to $232 million in the second quarter, Zytiga is outstripping Provenge's performance, which had net sales of $80 million.
Keeping tabs on the competition
Medivation is walking a fine line here, because Xtandi is going to be an expensive treatment, more so than what analysts had expected. According to the drugmaker, Xtandi will cost $7,450 a month. If there's a 12-month regiment to the therapy that puts the cost at around $90,000, just what it costs for Provenge and which many have said is partially to blame for the slack sales. Zytiga costs around $5,000 a month.
There is a slight benefit in that patients taking Xtandi lived 4.8 months longer than those taking a placebo in clinical trials while Zytiga patients live 4.6 months longer on average. Moreover, those taking Zytiga also have to take prednisone while Xtandi patients do not.
Price is what you pay
Valuation for biotechs just bringing a drug to market is difficult because we need to see how the market greets it. While we can make all sorts of predictions on what the uptake will be, as Dendreon showed there are many variables that play into the equation. It should also be remembered that Xtandi is limited to the post-chemotherapy market; Provenge is pre-chemo and Zytiga is expected to earn that distinction later this year.
This could be one of those situations where it's "buy the rumor sell the news." The build-up in Medivation's stock price has been to get to this point. Now that it's here it's going to have to prove its worth. While it will have help in marketing Xtandi from Astellas, I think investors would be wise to watch and wait to see how it goes. But tell me in the comments box below whether you believe Medivation is a bargain, whether it's priced at $1,000 a share or $50 a share.
Split the difference
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Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Johnson & Johnson and Dendreon. Motley Fool newsletter services have recommended buying shares of Exelixis and Johnson & Johnson and creating a diagonal call position in Johnson & Johnson. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.