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Why Medivation is a Stunning Biotech Opportunity

image Fundamentals  image   

Medivation (MDVN) is truly unique in its strategy to generate revenue and speed up the process of getting new drugs to market while mitigating the enormous risk associated with drug discovery. The company searches the rare and serious disease spaces for drugs that are ready for development for human testing in 12-18 months (Source: InvestorPlace). While the stock has been punished in the last three months, down nearly 30%, it's up over 1,700% (yes, there is a comma in there) over the last five years.

The biotech space is filled with very promising names, spanning the mega-cap realm with Amgen, Biogen, Celgene and Gilead, to the mid cap realm of Jazz, Alexion and Regeneron. Specific CML news has been written on many of them. Here is the link to the Biotech Corner: Biotech Corner


MDVN presents another compelling mid-cap biotech story. The critical product for MDVN is cancer drug Xtandi. After approval by the FDA in 2012 as a treatment for previously treated patients with metastatic castration-resistant prostate cancer, Xtandi achieved a potentially more lucrative label expansion last year when it was given the green light by the FDA as a first-line indication prior to chemotherapy (Source: The Motley Fool).

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The drug is already a smash success and the extended usage could mean more than a double in sales, making it legitimately a billion dollar drug (actually, more like $1.5 billion). The growth prospects for MDVN due to this extended labelling are remarkable and should ease some fears of a company relying on a single product to drive everything. But there’s more to MDVN than meets the eye. It has taken a remarkably compelling and differentiated strategic approach to the biotech and drug discovery business. Louis Navellier writes it better than I can, so I'll just quote him and cite that same InvestorPlace link, above.

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Here is MDVN's straightforward three-part strategy:

1. Build a portfolio of four to six product candidates that have the potential to be in clinical development within 12 to 18 months after acquisition.
2. Develop those product candidates as rapidly and efficiently as possible; and
3. Consider partnering or selling successful programs to large pharmaceutical, biotechnology or medical device companies for late-stage clinical studies and commercialization.

So, while the company can (and has) brought products to market, it is also trying to become the single most trusted place for mega cap biotech companies to go to for potential drug candidates. MDVN sells the drugs, or partners with the larger firms. It reduces its risk of the costly FDA approval process and continues to grow a pipeline at speed that is virtually unmatched (and unmatchable). If it succeeds in this venture, the firm's growth potential is staggering.

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MDVN has strong fundamentals with rising revenue (TTM), net income (TTM) and levered free cash flow (TTM). It has one of the highest operating margins in the sector and generates a colossal amount of revenue per employee. Further, it's net income growth in percentage terms has a comma in it; yeah, it's over 1,000% year-over-year.

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Gottlieb Risk Factor  image
MDVN has elevated stock price movement potential over the next 30-days (movement up or down). Although several proprietary factors affect the risk rating, in particular for MDVN some of the items driving the rating are:
↳  A large absolute stock return over the last 3-months (-29.2%).

    The stock price range reflected by the option market over the next 30-days is ($82.70, $101.80).

Technicals   |   Support: Stock is Through Support   |   Resistance: 102.71    image

Swing Death Cross Alert: The short-term 10 day MA is now below the 50 day MA.

MDVN's -5.93% drop on Thursday had a material impact on its technical outlook.

MDVN has a one bull (lowest rated) technical rating because it's trading below the 10-day (short-term), 50-day (medium-term) and 200-day (long-term) moving averages.

Let's look at the core elements that drive the company's fundamental rating.

Stock Returns and Chart

MDVN is down -29.2% over the last three months and down -16.1% over the last six months. The stock price is up +6.4% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom). Note the remarkable decline of late.
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Now let's examine the visualizations of the critical financial measures.


Revenue (TTM US$ Millions) 780392218image

Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (seven quarters in this case). MDVN is not only growing revenue by 99.0% year-over-year, but it's 4 fundamental (star) rating implies that the revenue acceleration is pushing the core fundamentals of the company forward. While massive revenue growth often times comes at the expense of earnings, free cash flow and operating margins, that is not at all the case for MDVN. This revenue chart we are about to look at is borderline absurd.

What do all these numbers mean?
MDVN's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Operating Revenues/Operating Expense 1.451.591.00FALLING

Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. The ratio must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter MDVN showed a ratio of 1.45. While the company was generating $1.59 per dollar of expense a year ago, its $1.45 is still massively higher than the sector average. I also note that assets are at an all-time high, up a staggering 93% year-over-year.

What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 1.59. In the last year we can see operating margins are decreasing but are greater than 1.0 for the most recent period.

MDVN's fundamental rating was affected from the operating margin numbers in two ways:
1. The current value is above 1.0 (the firm generates an operating profit).
2. The one-year change was negative (lowers the rating a little bit).

Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.

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Net Income (TTM US$ Millions) 26524-68RISING

Net Income (after tax profit) over the trailing twelve months (TTM) for MDVN is up 1,017% year-over-year (again, yes, that comma is correct). Much of that % gain is from small number math, but the trend is absurdly strong, and there is every reason to believe earnings will increase substantially in the coming years based on the data provided in the introduction of this article.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars. Note that the firm now generates over a quarter billion dollars in net income.

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Levered Free Cash Flow (TTM US$ Millions) 17422-66RISING

Levered Free Cash Flow (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. For MDVN the metric is rising, up nearly 700% year-over-year and up from a negative $66 million dollars two-years ago.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time. Note the rising bars from a year ago (four quarters ago).

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Here are the facts: MDVN revenue is up 99% y-o-y, assets are up 93%, net income is up over 1,000% and free cash flow is up just under 700%. The company has a truly unique place in the biotech industry as it aims to bring products to help people and cure diseases quickly, and if necessary, to then unload a part of the risk on larger players that can complete the FDA approval process. It's a developer of drugs for itself as well as perhaps the single go-to firm for the larger biotechs. The stock is down 30% in the last three-months as the entire biotech space is getting crushed in the market sell off, but the fundamentals are still very strong.

Items to note: In the most recent quarterly earnings report (August 6th, 2015), MDVN reported adjusted EPS of $0.58 versus estimates of $0.37. Revenue came in at $176 million versus estimates of $164 million. The stock closed at $101 on the day of the earnings announcement. In the prior earnings report (May, 2015), the company missed both EPS and revenue estimates.