As it turns out, I wish I had purchased InterMune (Nasdaq: ITMN) instead of Medivation (Nasdaq: MDVN).

You see, InterMune's stock price jumped 65% yesterday, on top of a 59% jump last Friday. Medivation's stock price, on the other hand ... Well, suffice it to say that last Wednesday was not kind to shareholders, as the company suffered a 67% plunge. That's almost as big a one-day drop that another biotech firm, Sequenom (Nasdaq: SQNM), suffered almost a year ago.

However, successful investing, especially in biotech, isn't about letting stock price movements dictate what you should invest in. It's about making the best choices you can with the information available at the time.

So, congratulations to you InterMune shareholders. You won that roll of the dice. The Food and Drug Administration advisory panel, with reluctance, recommended that pirfenidone receive FDA approval within the next couple of months. However, given that there was great reluctance on the part of at least two panel members, and that the drug failed in one of its two pivotal studies, I don't think the FDA will approve the drug, so I am staying out. After all, with better data, the FDA rejected Dendreon's (Nasdaq: DNDN) first bid to get its prostate cancer drug Provenge approved.

I could end up missing a double or more from here, but I'm protecting myself from a potentially huge haircut. That's my process for biotech: Judging whether or not the drug is good enough to pass the trials, and then get past the FDA.

In that case, what is the process with regards to Medivation today? It already got a big haircut last week. Is it worth investing in at these lower prices?

Where we've been
Well, let's review the story. Dimebon, which is Medivation's lead drug candidate for Alzheimer's disease, had performed extremely well in a trial in Russia. So well, in fact, that the FDA said that Medivation could use those results as one of its two pivotal studies when it came time to submit the approval application. Further, the data appeared to be so good that it was published in the very prestigious British medical journal, The Lancet.

The company was conducting five phase 3 trials, looking at the drug's performance against various stages of Alzheimer's and with different approved drugs, or none. And, the mechanism of action -- protecting against mitochondrial death -- was brand new to the field of Alzheimer's treatment and appeared to work in the way the company's management said. Current treatments don't work all that well, so Dimebon's potential market was huge.

Finally, Dimebon was also in a phase 3 trial against Huntington disease, and the company had another drug, at an earlier stage, for treating prostate cancer. That's the same disease Provenge will treat, if it gets approved, and is another potentially big market. Plus, Medivation had signed Pfizer (NYSE: PFE) and Japan's Astellas as partners for dimebon and the prostate cancer drug, respectively.

That's where I found the company, and I ended up opening a small position. However, as we know now, Dimebon failed its first phase 3 trial, Connection, showing results no better than placebo. That was announced last week, and the stock tanked.

Where we're going
Back to our process. What are the chances of success for Dimebon now? Frankly, I think it's probably as low as 15% or 20%. Even though the Russian trial data was published in The Lancet, other drug trials conducted in Russia have produced positive results that proved difficult to duplicate elsewhere. Pfizer and Medivation are looking closely to see why the results between the two trials were so different. In any event, that first trial's results are now tainted and probably won't be able to be used as a pivotal study.

So Medivation will need at least two unambiguous successes out of the four remaining phase 3 trials, and perhaps even a third before the FDA will grant approval. Even with success, it would then probably only get approval as an add-on treatment. Here's the status of the current trials:

Title

Level of Disease

Dimebon Plus ...

Status

Safety

Mild to moderate

Nothing or stable level of other anti-dementia drugs

Completed

Constellation

Moderate to severe 

Namenda from Forest Labs (NYSE: FRX)

Nov. 2011 finish

Contact

Moderate to severe 

Aricept from Eisai and Pfizer

Recruiting

Concert

Mild to moderate

Aricept

Dec. 2011 finish

Source: FDA website Clinicaltrials.gov.

Pfizer might hang around long enough to see the results from the Constellation and Concert trials. However, if either of those turns out badly, or possibly if the finished Safety trial doesn't go well, Pfizer will most likely say, "It's been nice, but see ya."

What about that prostate cancer drug? It, too, has had exciting early results. But any submission probably won't happen until 2013, at the earliest. The company is still enrolling for the first phase 3 trial, Affirm, after all, so the value of this drug really can't be determined yet.

So what's the expected value?
If enough of the remaining phase 3 trials for Dimebon are successful, then, depending on the exact results, the company could be worth upwards of $50 or $60 per share, roughly 30% to 60% higher than where it was trading before the Connection results came out. However, if the results are similar to what Connection showed, then the company is probably worth only $2 or $3 per share, to give it some long-term credit for the prostate cancer drug.

Given my 15% to 20% estimate of success at this point, that places the value of the company somewhere between $10 and $14 today. That's pretty much where the company is trading.

For an extremely risk tolerant investor, shares might be worth purchasing, but only in the context of a basket of biotech stocks within a larger, balanced portfolio. While biotech can win big, as InterMune showed earlier this week, it can also hurt badly, as Medivation showed last week. But if all you want is exposure to medical companies, then you could do a lot worse than invest in the big name players, such as Abbott Labs (NYSE: ABT).

So consider your risk tolerance, and invest accordingly.

Biotech isn't the only way to play for big growth. Todd Wenning serves up a recipe for finding growth in all sorts of industries