MDVN Chart

What: Shares of Medivation (NASDAQ:MDVN), a biopharmaceutical company focused on developing novel cancer therapies, plunged 14% in December, according to data from S&P Capital IQ, after AbbVie (NYSE:ABBV) forged a multi-year agreement with pharmacy-benefits manager Express Scripts (NASDAQ:ESRX) for recently approved hepatitis C drug Viekira Pak.

So what: Understandably you're probably scratching your head wondering what in the heck an AbbVie approval for hepatitis C has to do with Medivation's and Astellas Pharma's prostate cancer drug Xtandi. This agreement is groundbreaking because Gilead Sciences(NASDAQ:GILD) Harvoni and Sovaldi were notably pricier than Viekira Pak, and this agreement nets Express Scripts Viekira Pak at a discount, while dropping Harvoni and Sovaldi for most genotype 1 patients. In other words, it was the first high-profile case of a pharmacy benefits manager, or PBM, cutting a high-priced drug out of its approved drug list in favor of a cheaper, but arguably inferior, one.

Source: Astellas Pharma.

Still wondering what this has to do with Medivation? You see, Xtandi's clinical data has been impressive thus far, and it doesn't need to be co-administered with corticosteroids like its peer Zytiga from Johnson & Johnson (NYSE:JNJ), potentially making it more convenient. But, here's the catch: For this added convenience Xtandi costs patients and insurers about $1,600 more per month. Is Xtandi really worth this much in premium? There's a chance PBMs may not see it that way and exclude Xtandi in favor of Zytiga because of cost. Thus, the AbbVie deal was a groundbreaker in that it could tip the scales in favor of Zytiga in treating advanced prostate cancer due to its markedly lower monthly price point. 

Now what: Medivation's swoon in December essentially comes down to whether or not Wall Street believes a price war is about to be incited among prostate cancer drug developers. To this end, and of course this is just my personal opinion, I don't believe that's going to happen. Cancer is arguably a far tougher disease to get a grip on than hepatitis C, and it's also a much quicker killer in many instances. This means developed cancer drugs are highly specialized and often costly -- it unfortunately just comes with the territory.

It's also hard to argue that Xtandi isn't a major leap forward in patient quality of care. In its PREVAIL study, which looked at Xtandi's use in the pre-chemo setting, treated patients when compared to the placebo group had a 29% reduced risk of death and a significantly reduced risk of radiographic progression or death of 81%. Furthermore, the length of time patients went before beginning chemotherapy was extended by 17.2 months over the control group. This is a drug that works well and is unlikely to be taken off any formulary. With its EPS projected to double between 2014 and 2017, I still believe there could be upside to Medivation's shares.