Valuations Don’t Matter-Institutional Holders Are the Drivers

Medivation (MDVN $105.65) sold off 3 pts Friday on modest volume today as profit taking ensued after the big run-up from the high 95. With a market cap of $3.89B the sales of the FDA approved drug XTANDI are expected to begin in early 2013. But with institutions already owning more than 89% of the outstanding stock what will drive the price higher? Eight analysts have a strong buy rating with a price target of $118-124 so we will look for the first downgrade and any estimate changes for the US revenue model. Among the largest institutional holders are :

Fidelity 5.3M (MDVN among top ten holdings in FBIOX mutual fund), Vanguard 1.8M, Landsdowne 1.7M, Scopia 1.36M and Columbus Cir. 1.2M.

Very few new institutions have added positions and and several with positions in the 500k range have sold stock, so current holders have largely been behind the stock move.

Until the commercial launch in 2013 the stock price can be supported by ETF and fund buyers so unless there is significant weakness in NASDAQ or the biotech sector in general we cannot expect a major sell-off. Nonetheless holders with significant profits would be expected to sell some stock so look for distribution.


Medivation (MDVN $104.86) Opens Labor day Weekend in Closing Hours Friday with a 7.6% Move -FDA Approves XTANDI

On Friday at a 2:44p the FDA approved Medivation and Astellas’ oral drug for metastatic castration- resistant prostate cancer. The global prostate cancer drug market is valued at $1B and expected to grow to $5B by 2015. A comparable drug now on the market from Johnson & Johnson called Zytiga had Q2 sales of $232M. After Friday’s action the market cap of Medivation is now $3.86B. The FDA approval was not a surprise but the timing for  approval is 3 months early. The cost of the drug will be $7450/mo. and the clinical trials showed that men lived five months longer than the placebo or a median survival of 18.4 months.

What is the Trade?

On 6/8/12 we recommended a paired trade of shorting Medivation (MDVN) at $86.80 and going long Pharmacyclics (PCYC) at $38.2.We felt that Pharmacyclics at that time was undervalued and Medivation was overvalued and indeed despite the 21% move in Medivation , Pharamacyclics did much better up 75%. So if the bull market in biotechnology continued its momentum the MDVN short was hedged with the PCYC long. Normally biotech stocks sell off  on any major clinical news and with some analyst MDVN price targets in the $100 range we should be near peak. But given the institutional power behind both stocks they could still run so maybe it is time to close the paired trade until we see overall weakness in the sector such as a big dip in the ETF IBB ($136).

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