To say that Wall Street and investors are in love with biopharmaceutical cancer-focused company Medivation (NASDAQ:MDVN) would be a dramatic understatement. Over the trailing-three-year period shares of Medivation have galloped higher by better than 1,000%!
Yet here's the truly amazing thing about Medivation: it's actually considered a cheap stock by Wall Street's most commonly used valuation metric. Let's have a look at how a company which has returned so much already could still potentially be cheap, discuss for a bit why Wall Street is so in love with Medivation, and touch on where the stock could head next.
What exactly is a "cheap stock?"
There are a lot of ways to analyze whether a company is considered undervalued or overvalued, but perhaps the most commonly used by Wall Street the price/earnings to growth, or PEG, ratio.
A PEG ratio divides a company's price-to-earnings ratio, which is in itself a measure of how cheap or expensive a company is relative to its profits over the past 12 months, into the company's long-term growth expectations as determined by Wall Street analysts (usually a five-year period). As an example, imagine a company had a P/E ratio of 25 and a five-year growth forecast of 20%. In this instance its PEG ratio would be 1.25 (25 divided by 20). Generally speaking, any stock trading at a PEG ratio below one is considered cheap.
Medivation currently has a four-year compounded annual projected growth rate of 45% between what it delivered in revenue for 2013 and what Wall Street expects it'll generate in revenue in 2017. All told, Medivation is currently valued at a PEG ratio below one, making it a cheap stock by the numbers.
Why Wall Street loves Medivation
But Medivation is more than just cheap; it's beloved by Wall Street analysts. Of the 19 firms that are covering the company, nine rank it the equivalent of a strong buy, seven the equivalent of a buy, two a hold, and one the equivalent of an underperform.
But what is it that makes Medivation such an attractive company to Wall Street? Let's have a look.
In terms of catalysts nothing is more important for Medivation than the cancer drug that it and Astellas Pharma (NASDAQOTH:ALPMY) developed, known as Xtandi. When Xtandi was approved in Aug. 2012 as a treatment for metastatic castration-resistant prostate cancer (mCRPC), investors and Wall Street were thrilled, but they weren't quite certain what to expect as the prostate cancer market was already getting crowded. Johnson & Johnson's (NYSE:JNJ) Zytiga, for example, was approved by the Food and Drug Administration to treat mCRPC in April 2011, and received an expanded labeling to be used in a pre-chemotherapy setting in Dec. 2012. Additionally, Dendreon's (NASDAQ:DNDN) cancer immunotherapy vaccine Provenge was approved in April 2010 and was widely expected by Wall Street to revolutionize late-stage prostate cancer care.
Fast-forward to today and it's pretty evident that, of the wide moat of mCRPC fighters, Xtandi is the cream of the crop. Provenge's higher price point and botched marketing effort caused it to fall flat on its face, while Zytiga was simply outperformed by Xtandi based on pre-chemotherapy data. In January Medivation and Astellas released late-stage data from their PREVAIL study, which showed that patients taking Xtandi had a 29% reduced risk of death; demonstrated a significantly reduced risk of radiographic progression or death of 81%; and led to a 17.2 month improvement over the placebo in terms of delaying the initiation of chemotherapy. Not surprisingly, Xtandi received its expanded label approval from the FDA for the pre-chemo setting last month.
This long-winded story leads to one conclusion from Wall Street: Xtandi is going to be a blockbuster over the long run. Peak sales estimates for Xtandi are wide-ranging, but Goldman Sachs' estimates of possibly more than $6 billion in sales has Wall Street believing in this stock.
Wall Street is also optimistic that Xtandi will find success in other indications, including as a neoadjuvant treatment in prostate cancer, as well as as a treatment for androgen-positive, triple-negative breast cancer and estrogen-positive or progesterone receptor-positive and HER2-normal breast cancer. Given its success in prostate cancer, there's little reason to believe it won't succeed.
Medivation may be a cheap stock, but is it still a buy?
Although Medivation is a cheap stock by Wall Street's standards, and analysts love it, is the stock still considered a buy for investors?
On one hand there's certainly reason to believe that Medivation's run could be nearing an end. The rise of cancer immunotherapies, which modify the body's own immune cells to better recognize and attack cancer cells which would otherwise go undetected, could be the new way that prostate cancer is treated even a few years from now. In other words, I have to be somewhat concerned about the longevity of a therapy like Xtandi, considering that innovation in the biotech sector never ceases.
Yet my personal opinion is that Xtandi stands out so far ahead of its peers that it will be years, if not a decade, before Medivation sees meaningful sales losses. For now, Xtandi is shaping up to be the go-to mCRPC treatment for years to come and, assuming it gets a number of additional indications, could still be considered quite inexpensive at less than two times peak sales estimates (even with the revenue split with Astellas).
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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