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Cancer drug stocks are the picture of health

11 April 2016 in Trading Ideas

Key Takeaways

  • Medivation shares surged after reports that it hired a banker to deal with takeover interest.
  • Larger pharma firms may be targeting smaller firms with fast-growing cancer drug assets.
  • Motifs mentioned: Battling Cancer
  • Stocks mentioned: Medivation Inc (NASDAQ:MDVN), Gilead Sciences, Inc. (NASDAQ:GILD), Amgen, Inc. (NASDAQ:AMGN), Sanofi SA (NYSE:SNY) and AstraZeneca plc (NYSE:AZN)

While politicians and consumers still have misgivings about the runaway costs of certain prescription drugs, investors seem to be a little more forgiving.

You may remember the scandal last summer when Turing Pharmaceuticals, led by millennial hedge fund runner-turned CEO Martin Shkreli, raised prices overnight on a drug used to treat a potentially dangerous parasitic infection, from $13.50 to $750 a pill.

Shkreli eventually resigned his post (after an unrelated indictment for securities fraud connected with an entirely other company he controlled), but the revelation set off a national furor that both hit drug stock prices and prompted congressional hearings.

One company that became the focus – and wrath – of Congress was Medivation Inc (NASDAQ:MDVN), a San Francisco-based maker of prostate-cancer drug Xtandi. A published letter late last month by 12 members of Congress called on the National Institutes of Health to exercise its “march-in” right to cut prices on Xtandi.1

The letter pointed out that Xtandi, which is sold by Medivation’s partner Astellas, costs $129,000 in the U.S., but sells for less than one-third of that in Japan, Sweden and Canada. The letter also urged the NIH to hold a public hearing on Xtandi and its pricing.2

Medivation’s stock immediately tanked 10 percent.

Yet here we are, less than two weeks later, and Medivation’s stock has surged more than 12 percent.

From demon to darling

For investors, it seems that having a product you can charge six figures for has outweighed the wrath of the people, particularly when it also leads to speculation that a larger pharmaceutical company could come along with a sweet takeover offer.

Just two days after the published letter by members of Congress, reports emerged that Medivation has been working with investment bank JPMorgan Chase to handle interest from other companies in a potential acquisition, even though Mediviation has said it has no plans to sell itself.3

Within hours several companies were speculated as being interested buyers, including Gilead Sciences, Inc. (NASDAQ:GILD), Amgen, Inc. (NASDAQ:AMGN), Sanofi SA (NYSE:SNY) and AstraZeneca plc (NYSE:AZN).4

A note by Credit Suisse analyst Kennen MacKay cited by Barrons.com suggested that Medivation could be worth $54-$59 a share on operational synergies, and $60-$75 a share with leveraged tax benefits.

Medivation’s stock closed Friday at just above $46, up about 70 percent in the past two months.

The takeover buzz has contributed to an overall revived profile of many cancer drug stocks.

The Battling Cancer motif, for example, has gained 12.4 percent in the past month. In that same time frame, the S&P 500 has increased 2.9 percent.

Over the last 12 months, the motif has fallen 18.9 percent; the S&P 500 is down 2.9 percent.

Scarcity of biotech mid-caps could fuel acquisition premiums

Such targeting is not uncommon in the healthcare industry, but the interest in Medivation also signals a new reality in the industry: there’s hardly anything out there in Medivation’s $5 to $10 billion market cap range for large pharmaceutical and biotech companies to buy.

The sector’s largest companies need to keep replenishing their product portfolios as old drugs lose patent protection or face competing drugs. But buying the small companies won’t likely do much to immediately improve the growth profile of the biggest ones.5

Although 2016 has been relatively quiet in terms of merger activity, the hyper-pace in 2014 and 2015 has depleted the number of publicly traded small and midsize biotechs. Within the 189-company Nasdaq Biotechnology Index (^NBI), Medivation is one of just five firms with a market value between $5 billion and $10 billion.

As well, Medivation’s lead drug, Xtandi, has seen sales growing rapidly and has a fairly large pipeline of new cancer drug candidates.

Keep your eyes on this space to see whether the industry can make more cocktails of winning products that heighten takeover interest.

  1. Amy Reeves, “Medivation Stock Hit After Congress Targets Cancer Drug Price,” investors.com, March 29, 2016, http://www.investors.com/news/technology/medivation-stock-hit-after-congress-targets-cancer-drug-price/?ven=YahooCP&src=AURLLED&ven=yahoo, (accessed April 10, 2016).
  2. ibid
  3. Ben Levisohn, “Medivation: Let the M&A Speculation Begin,” barrons.com, March 31, 2016.
  4. ibid
  5. Charley Grant, “Why Midsize Biotechs Have Scarcity Value,” wsj.com, March 31, 2016.

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