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Medivation (MDV soon to be MDVN on the Nasdaq) is testing its drug Dimebon. This
drug may one day be an effective treatment for alzheimer's disease. Currently there
is no cure for alzheimer's and the current treatments only slow the progression. Dimebon
has the potential to temporarily stop the progression by inhibiting brain cell death.
The company is in pre-clinical trials in the US and is at stage II trials in Russia.
In early clinical trials, Dimebon has proved statistically effective in patients
cognitive performance in 5 key areas with less side effects compared with current
treatments.
This is a biotech company and thus it is very risky. There is a substantial risk in
losing all money invested in this stock. With the high risk, however, comes high potential reward.
Demographic trends are certainly working in favor of this drug including the current 4.5 million people
in the US with alzheimer's. This number is expected to grow to 11 million by 2050. Also
working in the company's favor is the lack of suitable treatments to cure or stop Alzheimer's disease.
The company was valued just for Dimebon for treatment of Alzheimer's. As icing on the cake,
Dimebon is also being tested for Huntington's disease. Medivation
also has another drug in the pipeline called MDV3100 for the treatment of prostrate cancer.
| Company: |
Medivation |
| Trading Symbol: |
MDV / MDVN after 3/20 |
| Date of Recommendation |
3/13/2007 |
| Risk |
Extreme |
| Stock Price as of Recommended Date |
19.90 |
| Fair Value |
50 |
| Discount of Price vs Fair Value: |
60% |
| If you win on this stock |
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|
| Bears Say |
We Say |
| This company has no revenues and obviously no profit. How can this even
be considered a value? |
Stocks can still be considered cheap even without current revenues. Assuming Dimebon obtains
FDA approval, This stock has the potential for to make $2 billion in annual sales for 15 years starting in 2011.
There are many risks that would prevent those potential sales - most notably an FDA rejection.
However, the risk of the stock is incorporated in the cost of
capital which is assumed to be 15%.
The most important thing to consider in buying any speculative stock, including Medivation is that this stock
might win big but the entire investment could be wiped out as well.
|
| There is so much risk such as Medicare price caps, FDA rejection and competition with other
new and existing alzheimer's drugs. With all the uncertainty it is hard to be comfortable with
this stock. |
This stock will be volatile and those risks are real. However, there is a great need for an effective alzheimer's treatment
as the population gets older. The potential rewards are enormous. The assumptions
in the valuation model were in our view moderately conservative and the stock still looks undervalued.
|
| The company burns cash at around $13 million a quarter. At this rate
is will need to issue more shares to raise cash to meet its operating needs. These new shares will
dilute the value of the existing shares. |
Undoubtedly the company will need to issue more shares to continue its operations. The company will not
be expected to make any money until 2011 assuming it passess all the FDA hurdles. In the meantime it will
need to issue more shares to fund its operations but that has already been accounted for in our valuation
model with the negative cash flows during the clinical trials.
|
| Assumptions |
| Expected Cash Burn Over Next 12 Months |
$27 million |
| Expected Rate of Cash Burn Growth / Year through 2010 |
10% |
| Expected Margins on Future Sales Growth Starting in 2011 |
50% |
| Number of alzheimer's patients in 2011 |
4.5 million |
| Expected Year of Patent Expiration |
2026 |
| Expected Dimebon Market Share for alzheimer's patients for years 2011-2026 |
20% |
| Assumed monthly drug price the 2011-2026 period per patient |
$180 |
| Assumed number of months of treatment per patient |
12 Months - The company has tested a 6 month treatment and will test the
12 month treatment as well. The longer the treatment the more valuable the stock |
| Cost of Capital |
15% |
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