As Xtandi Prevails, Medivation stays ahead of the curve

The Prevail study having virtually assured Xtandi’s role in treating prostate cancer in the pre-chemotherapy setting, attention will once again focus on how long the drug’s originator, Medivation, will remain a standalone entity.

With the benefit of hindsight the company should by now have been acquired, though at its current valuation the case is less clear-cut. If the goal was for Xtandi to challenge Johnson & Johnson’s Zytiga in pre-chemo use then Medivation has now achieved this – on just about every metric – but a takeout will still require a bold bet.

Even better

The signs for pre-chemo use were already strongly positive, as evidenced by Prevail being halted early for efficacy last October (Early halt augurs well for Xtandi expansion, October 23, 2013). The actual results, to be presented tomorrow at the Asco-GU conference, look even better.

Of particular interest are data regarding time to initiation of chemo, with a median 17.2-month benefit over placebo; in a separate study, COU-AA-302, Zytiga gave an 8.4-month benefit over what was a stronger placebo response.

Xtandi also showed a clear benefit on radiographic progression-free survival (PFS), with an 81% reduction in risk of progression versus placebo; Zytiga had shown an 8.2-month benefit in median PFS, with 47% reduction in risk of progression. The median number for Xtandi has not yet been reached.

These endpoints are important because they could drive uptake by urologists, who in contrast to oncologists tend to focus more on disease progression than overall survival (OS). Not that OS data were poor, of course, but with a 2.2-month benefit over placebo these look no better than Zytiga’s 5.2 months.

Still, thanks to an earlier benefit shown by Xtandi, its 0.71 hazard ratio for median OS (p<0.0001) bettered Zytiga’s 0.79. While Xtandi might already have started to be used off-label in pre-chemo patients, formal approval in this setting would allow marketing to the urologists who usually treat this population.

Already sales of the Medivation drug, partnered with Astellas, are set to soar, in contrast to those of Zytiga, which was approved in the pre-chemo setting in December 2012, but which analysts see as enjoying a rather brief moment in the sun.

A takeover thesis?

Whether this makes for a compelling thesis for a Medivation takeover, however, is less clear. One approach is to take EvaluatePharma’s consensus forecasts for Medivation’s share of the drug and apply a relatively low cost base given that the Astellas deal results in ex-US royalties and a share of US profits feeding straight through to Medivation’s bottom line.

This simple valuation, taken out to Xtandi’s expected 2027 US patent expiry, illustrates the problem. Applying a standard 12.5% cost of capital puts the pretax value of this asset at $6.1bn, while a more generous 10% gives $7.3bn – neatly bracketing Medivation’s market cap, which rose 13% in early trading today to $6.4bn.

EvaluatePharma consensus sales forecasts ($m)
2011 2012 2013e 2014e 2015e 2016e 2017e 2018e
Zytiga (J&J) 301 961 1,698 2,037 2,351 2,269 1,877 1,746
Xtandi (Astellas) 0 48 482 941 1,495 2,146 2,586 2,916
Xtandi (Medivation*) 0 36 198 349 593 850 1,093 1,305
NPV of Medivation's interest at 12.5% WACC 6,130
NPV of Medivation's interest at 10.0% WACC 7,277
*profit share in the US; royalty on ex-US sales; excludes milestones

In other words the market already prices in success, and a likely takeover premium of, say, 40% makes Medivation expensive.

True, the group is nowhere near some overblown peers, which boast entirely undeserved multi-billion dollar market caps despite barely having reached phase II. But it is basically a one-drug stock, whose ability to stay ahead of the valuation curve has rarely provided an obvious opportunity for an affordable acquisition.

Moreover, there is no strong rationale for Astellas to pull the trigger, since it already has 50% of the US locked in; in contrast, the Japanese group’s 2010 takeout of OSI Pharmaceuticals gave it a new US asset – the lung cancer drug Tarceva – that was already partnered there with Roche, at a price that reflected pre-bull market sentiments.

This means that the takeover thesis calls for a third party to step in – Pfizer has frequently been mooted – and pay top dollar.

One need look no further than Amgen’s buyout of Onyx to see that significant premiums to the base case are being paid. And Medivation does offer future upside, such as possible use of Xtandi before androgen therapy and in additional cancer indications.

But, barring a bold bet before any future positive events take its market valuation up to the next high, Medivation might stick around for some time yet.

To contact the writer of this story email Jacob Plieth in London at jacobp@epvantage.com or follow @JacobEPVantage on Twitter

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