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Bull of the Day

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Looking for a biotech stock with the potential to steal major market share from Johnson & Johnson (JNJ - Analyst Report) in a key disease market?

Then it's time to take a look at Medivation (MDVN - Analyst Report), a $4 billion biopharmaceutical company based in San Francisco that is projected to turn profitable next year with a breakthrough drug treatment for prostate cancer.

Big Market

The prostate cancer market represents huge commercial potential and Medivation's drug, Xtandi (enzalutamide), is already off to a strong start since its approval by the FDA last August. Launches in Europe and Asia will drive sales further, with projected revenues of $2 to $4 billion over the next five years.

According to the American Cancer Society, prostate cancer is the most commonly diagnosed cancer among men in the U.S., other than skin cancer. It is estimated by the American Cancer Society that about 242,000 new cases of prostate cancer were diagnosed in the U.S. in 2012 with 28,000 men dying from it.

New Life

Medivation's business model is to acquire promising technologies in the late preclinical development phase and develop them quickly and cost-effectively.

The approval and launch of Xtandi is a major milestone for the company which had previously faced failure with the development of another key pipeline candidate, dimebon (Alzheimer's disease and Huntington disease).

The company has consistently presented impressive data on Xtandi. Based on clinical results so far, many institutional research analysts believe Xtandi has blockbuster potential. The drug is currently in several studies including for the pre-chemo setting which would be a big opportunity for Medivation.

Key Partner for Global Reach

As with all up-and-coming small and mid-cap biotech companies with unproven science and little-to-no positive cash flow, a big partner is often required to sustain years of drug R&D. Medivation's "big brother" is the Japanese drug-maker Astellas Pharma.

Medivation and Astellas have been targeting patients with metastatic castration-resistant prostate cancer (CRPC). Metastatic prostate cancer that has become castration-resistant is extremely aggressive and this is a key treatment differentiation for Xtandi vs JNJ's drug Zytiga.

The partners are also studying Xtandi in early stage prostate cancer patients (pre-chemo), which could represent a very big market for the candidate. In 2010, the companies initiated a phase III study (PREVAIL) in chemotherapy-naïve advanced prostate cancer patients with data read-outs expected in the second half of 2013.

With the aid of Astellas, Xtandi gained EU approval in June 2013. Medivation recorded $181.7 million in revenues in 2012 under its collaboration agreements with Astellas and former partner, Pfizer (PFE - Analyst Report). While the Pfizer upfront payment of $225 million was recognized through the third quarter of 2012, the $110 million Astellas payment will be recognized through the first quarter of 2014.

As the drug gains new reach, Medivation has a 60-person sales force in place for promoting Xtandi and Astellas has a 90-person sales force to promote the product in Europe and Asia.

Positive Data, Enthusiastic Analysts

For one quick snapshot of the efficacy of Xtandi, let me share this data bite: Xtandi showed a 4.8-month advantage in median overall survival compared to placebo (18.4 months versus 13.6 months). And a 37% reduction in risk of death was observed in the Xtandi arm compared to placebo.

Based on these results, Xtandi enjoys fast track status with the FDA for the post-chemo indication.

Major institutional research houses covering the biotech industry have been watching the preliminary data from Medivation and in the last two months they've been scrambling to upgrade the stock with expectations of positive data from the PREVAIL study.

The average 12-month price target on the Street is north of $65 if PREVAIL data is positive, with UBS recently raising eyebrows with their $74 target.

Running the Gauntlet

As with all young, unprofitable biotech companies, there is extra volatility and risk as we watch them pass through the FDA gauntlet of clinical trials.

For me, the key is seeing enough analysts positive on the company and its chances of success with new R&D because, by myself, I can't keep up with all the complex science and so I use the analysts as my researchers.

Many biotech analysts are physicians or clinical researchers themselves who have gone to work for brokerages. And in cases where no medical PhDs are on the research staff, they all have a routine of consulting physician experts who are considered Key Opinion Leaders (KOLs) in clinical circles and that the FDA may rely on as well.

I also want to see the analysts raising their estimates as future profitability becomes visible. Climbing back to being a Zacks #1 Rank (Strong Buy) or #2 Rank (Buy) on a regular basis now -- vs a Rank #4 (Sell) or #5 (Strong Sell) as it was last fall -- is a nice turn-around we want to see.

Throw in a positive price trend and institutional accumulation and I'm all in. In full disclosure, I own MDVN for the Zacks Follow the Money portfolio and I own September 55 calls for my own portfolio.

Kevin Cook is a Senior Stock Strategist with Zacks.com

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