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Investing in clinical-stage biotechs is terribly risky, but once in awhile a few stocks produce astounding gains. An $8,000 investment in AxoGen (AXGN -0.58%), 10 years ago would be worth about $258,400 today. The biggest long-term biotech winner of the past decade, though, is Pfizer's latest splurge, Medivation (MDVN). Eight grand invested in the developer of prostate cancer therapy Xtandi would be worth about $620,800 today.
Let's look at what what's caused these stocks to put up outstanding gains, and measure the chances of further success.
AxoGen: on the periphery
Each year in the U.S. alone an estimated 1.4 million people suffer peripheral nerve damage, resulting in roughly 700,000 surgical procedures to fix the damage. AxoGen's products have become increasingly popular by addressing drawbacks to traditional surgical nerve repair methods. For example, to bridge long gaps between severed nerves, surgeons generally harvest nerve tissue from a second site on the patient. The company's Avance Nerve Graft is an off-the-shelf solution that makes the second site harvesting, and the complications it can lead to unnecessary.
Last month the company reported record quarterly revenue of $10.4 million, marking its 22nd consecutive quarter of double-digit revenue growth compared to previous year periods. The company's bottom line hasn't followed the same trajectory as the top, but with an estimated market about $1.6 billion in the U.S. alone, it's easy to see why investors are willing to absorb years of losses as the medical community becomes more familiar with its products.
Considering the size of the space it operates in, and its rapid growth, the stock's recent price of about 7.5 times trailing sales isn't outrageous, but the company's long-term success is far from certain. The Avance Nerve Graft is a derived from donated human cadavers, which brings its ability to rapidly increase supply to meet growing demand into question.
Another potential hurdle grating on investors' nerves is the Avance Nerve Graft's odd regulatory status. It's a biological product, but AxoGen hasn't submitted a biologic license application (BLA) to the FDA yet. The Agency currently permits its distribution while AxoGen conducts a large clinical trial comparing outcomes among patients treated with its Avance Nerve Graft to nerve cuffs derived from cows.
The trial is still enrolling patients, with results expected in December 2018. If successful, the stock could continue soaring. If not, however, AxoGen's less popular AxoGuard products probably wouldn't carry the company to profitability on their own. This would make repaying a $25 million loan due in 2020 extremely difficult.
Medivation: to the highest bidder
Medivations only commercial stage product, Xtandi for the treatment of advanced prostate cancer earned its first FDA approval in 2012, and has become a popular treatment for this large patient population. In the first half of the year, worldwide sales rose 35% over the previous year period, putting it on pace to reach about $2.28 billion this year.
If Medivation were entitled to all of that Xtandi revenue, Pfizer's $14 billion buyout offer would seem like a great value, but it isn't. Medivation has to split half of U.S. profits with Astellas Pharma, and receives a royalty percentage in the low teens to the low twenties on ex-U.S. sales.
Until recently, collaboration revenue from Astellas was enough to outpace its operating expenses. A recent reevaluation of potential payments to BioMarin for worldwide rights to oncology candidate, talazoparib tacked a non-cash charge of $674.0 million to Medivation's operating expenses in the second quarter.
In April, an investigator-sponsored phase 1 trial with talazoparib in a group of heavily pretreated patients suggests the PARP inhibitor has interesting potential. Among 40 patients with a variety of cancers (a majority of which had progressed after six or more different treatments), 23 showed a clinical benefit.
The Big Pharma has a long track record of making big acquisitions, without delivering much bottom-line growth. Pfizer's earnings over the past twelve months of $1.13 per share is less than half of 2006's reported earnings of $2.66 per share.
Although Xtandi should add $0.05 to Pfizer's bottom-line immediately following the acquisition of Medivation, I'm afraid this stock rocket is out of fuel. The offer of $81.50 per share expected to close before the end of the year might pique the interest of an M&A arbitrageur, but buying Pfizer stock in hopes of Medivation-esque gains would be ill-advised.
