Johnson

Source: Johnson & Johnson.

Johnson & Johnson (NYSE:JNJ) is losing the battle for prostate cancer market share to the far smaller Medivation (NASDAQ:MDVN), but that may not mean that J&J should step up and acquire the company.

First, a little background
Medivation's Xtandi, which was co-developed with Japanese drugmaker
Astellas (NASDAQOTH:ALPMY), has already dethroned J&J's Zytiga to become the top prescribed drug for the treatment of post-chemotherapy prostate cancer, but it may displace Zytiga as the best selling-treatment in pre-chemotherapy patients, too.

That's because Xtandi put up arguably better results in pre-chemotherapy patients during late-stage clinical trials than Zytiga, which is dosed alongside prednisone. In phase 3 studies, patients receiving Xtandi enjoyed a statistically significant increase in overall survival versus placebo and hormone therapy. In fact, the results were so good that independent trial monitors halted the study early to allow those in the control group to switch over to Xtandi.

Achieving that statistically significant boost in overall survival without the use of prednisone could cause Xtandi to win away prescriptions from Zytiga in pre-chemotherapy patients.

Since the FDA granted approval for Xtandi in pre-chemotherapy patients, sales appear to be growing. In Medivation's third-quarter earnings release, the company guided investors to expect full-year 2014 collaboration revenue from Xtandi will hit the high end of, or exceed, its previously announced forecast of between $600 million and $640 million.

What's at stake
J&J's Zytiga is one of the company's best-selling drugs. Zytiga's sales totaled $568 million worldwide in the third quarter, up 22.4% from last year. That brought its year-to-date sales to $1.64 billion, up 36.5%.

That's impressive, but not as impressive as the growth that Xtandi is enjoying. During the third quarter, U.S. sales of Xtandi jumped 67% to $108 million.

Given that Zytiga's sales run rate is north of $2 billion annually and Xtandi is growing more quickly, J&J would appear to have a lot of incentive to insulate itself from Xtandi's competitive threat, particularly following the approval in the much larger pre-chemotherapy patient population.

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Source: Medivation.

Why J&J shouldn't make an offer
It's easy to argue that Xtandi is a superior drug to Zytiga. Doctors already appear to be voting in favor of Xtandi based on its sales and market share growth.

But J&J made an intriguing purchase last summer that could outmaneuver Xtandi in a couple years. That move was to spend $1 billion to acquire Aragon's ARN-509, a promising midstage prostate cancer drug that was developed by the same researchers at UCLA responsible for creating Xtandi.

Since acquiring ARN-509, J&J has already kicked off a phase 3 trial studying the drug in non-metastatic prostate cancer that should have results in 2016. That suggests that while Zytiga is likely to lose its luster for a few years, J&J could be back in the game soon enough.

That may be reason enough to give J&J reason to pause on a potential bid for Medivation, particularly given that Medivation has gotten pretty pricey.

Medivation is trading at 20 times trailing-12-month sales and at more than 13 times its expected sales of around $640 this year. Even using next year's analyst forecast for $838 million in sales, Medivation still boasts a price-to-sales ratio of more than 10. That's pretty expensive, even for a fast-growing biotech company.

Wait and see
There's no question that Medivation has a blockbuster on its hands in Xtandi, but until J&J has more insight (such as interim phase 3 trial date for ARN-509), it may be content to sit tight and see just how much of a dent Medivation and Astellas' Xtandi makes in Zytiga. If that's the case, then investors should invest in Medivation for Xtandi's potential, rather than for its buyout potential.

Todd Campbell owns shares of Medivation. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends and owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.