According to a 13G filed with the SEC, Adage Capital Management, a large hedge fund managed by Phil Gross and Robert Atchinson, owns just over 4 million shares of Medivation Inc (NASDAQ:MDVN), a $3.6 billion market cap biotechnology company. Our database of 13F filings shows Adage with a position of 2.1 million shares as of the beginning of January, so in the last three months the fund has roughly doubled the size of its position. Find more of Adage’s stock picks. Biotechnology stocks have generally been strong this year, though Medivation Inc (NASDAQ:MDVN) is actually an exception having fallen year to date. Currently, Medivation Inc (NASDAQ:MDVN) primarily markets Xtandi, a cancer drug, to post-chemotherapy prostate cancer patients; the company is also studying the use of the drug in other contexts.
Xtandi launched last year and as a general rule the drug has been found to be more effective than competing drugs with some question as to the prevalence of side effects in some groups of patients (which may lead to it being a second-choice drug). Still, revenue numbers have been good and there is at least a prospect of the drug finding wider use if it is approved in other markets (including pre-chemotherapy prostate cancer). As a development stage company Medivation is unprofitable, and cash flow from operations was negative in 2012 as well at a net of about $100 million in cash used. At the end of the year there was about $300 million in cash, cash equivalents, and short term investments on the balance sheet so at least in the short term there should be few cash concerns.
Analyst consensus is for earnings per share of 41 cents in 2014, with a wide range of estimates (from $1.93 per share to a loss of 50 cents per share). Billionaire and Tiger Cub Andreas Halvorsen’s Viking Global had been selling shares of Medivation Inc (NASDAQ:MDVN) between October and December of last year, but still closed 2012 with 3.4 million shares in its portfolio (see Halvorsen’s favorite stocks). Orbimed Advisors, a healthcare-focused fund managed by Sam Isaly, reported owning 1.4 million shares at the end of the fourth quarter (check out more stocks Isaly likes).
Other development stage biotechnology companies include Dendreon (NASDAQ:DNDN) and Amarin Corporation plc (ADR) (NASDAQ:AMRN). Consensus is that both of these companies will be unprofitable this year as well as in 2014, so any investment in them is at least as speculative as buying Medivation Inc (NASDAQ:MDVN). Dendreon’s lead product Provenge is also a prostate cancer drug, with the company working on other cancer treatments as well. The stock price has fallen 55% in the last year, and the most recent data shows that 34% of the float is held short so there continues to be a sizable bearish community. Amarin Corporation plc (ADR) (NASDAQ:AMRN) is also down considerably from its levels a year ago, and is also a popular short target; Amarin Corporation plc (ADR) (NASDAQ:AMRN)’s lead product is designed to reduce triglyceride levels.
We can also compare Medivation Inc (NASDAQ:MDVN) to larger biotech companies including Abbott Laboratories (NYSE:ABT) and Biogen (NASDAQ:BIIB). These companies both generated positive earnings in 2012, though in Biogen’s case the trailing P/E is quite high at 34. While its recent financial performance has not been particularly encouraging- in the fourth quarter of 2012, revenue increased only 7% versus a year earlier and earnings were actually down slightly- the sell-side is expecting improvements in net income over the next couple years and so the forward P/E is only 20. We still think that we would avoid the stock for now. Abbott Laboratories (NYSE:ABT), meanwhile, carries a forward P/E of 16. It’s also not been in a particularly good situation, with earnings falling 35% in its most recent quarterly report compared to the fourth quarter of 2011.
We do expect earnings of these biotech companies to be a bit noisy but at this point it looks to us that Abbott Laboratories (NYSE:ABT) is too speculative to treat as a value stock as well as Biogen. The other three companies we’ve covered here, including Medivation, are yet to be profitable as well and so we’d advise against buying them as well. We do think that Medivation looks to be an unwise short given the emerging success of its drug and the sizable cash on the company’s balance sheet as it attempts to bring Xtandi into additional markets.
Disclosure: I own no shares of any stocks mentioned in this article.