How Much Medivation Can Really Fetch in a Buyout

August 18, 2016 by Jon C. Ogg

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Medivation Inc. (NASDAQ: MDVN) has been among the top future biotech mergers for quite some time. The problem is that we still have no idea which company will buy Medivation, nor do we know what price. 24/7 Wall St. has decided to try to see what might be a fair acquisition price if Medivation is truly acquired.

Reports have circulated from many angles, but August is the expected month when final bids are to be submitted. In May Medivation rejected a Sanofi buyout offer of $52.50, and we tracked analyst changes at that point.

With a buyout already having been rejected and with bids or indications of interest being due, all this magnifies a PDUFA expected date in October. The biotech and pharmaceutical companies are interested, rather than private equity, in the case of Medivation. If Medivation’s drugs live up to expectations, the company could ultimately generate billions of dollars by helping cancer patients potentially live years longer.

As far as what will be the driver here, we probably need to look beyond the mere consensus analyst price target. Thomson Reuters now has a consensus target of $70.00 for Medivation, but this was $67.00 a month ago and $66.00 three months ago.

What matters here is that Medivation has been growing revenues and is expected to keep doing so. Revenues were $943 million in 2015, $710 million in 2014 and $273 million in 2013. Thomson Reuters has its consensus estimates at $907 million in 2016 and $1.175 billion in 2017. For 2018 and 2019, those estimates are $1.39 billion and $1.64 billion, respectively.

The earnings scenario is more difficult because Medivation has such a high price-to-earnings (P/E) ratio. Adjusted earnings per share (EPS) was $1.01 in 2015 and is expected to be $1.28 in 2016. Those EPS forecasts are as follows: $2.18 in 2017, $2.84 in 2018 and $3.40 in 2019.

Given that current $67 share price, that puts Medivation’s valuation at 52 times current year earnings and 30 times expected 2017 earnings. Now what has to be considered is that the market cap is $11.1 billion. That is a market cap that would make for an impressive buyout, but it easily could be absorbed by larger players.

Merck & Co Inc. (NYSE: MRK) was recently shown to have indicated an interest in buying Medivation. Pfizer Inc. (NYSE: PFE) was also among Big Pharma companies interested, as was Sanofi (NYSE: SNY). Biotech giants Celgene Corporation (NASDAQ: CELG) and Gilead Sciences Inc. (NASDAQ: GILD) also have been rumored and reported to be among the interested buyers as well.

Merck has a $175 billion market cap. At $63.40, its share price has done well due to a Bristol-Myers Squibb drug failure. Merck shares have a 52-week trading range of $45.69 to $64.00.

Pfizer shares were last trading at $35.07, with a consensus price target of $39.35 and a 52-week range of $28.25 to $37.39. This pharma giant has a total market cap of roughly $213 billion.

Sanofi has made many acquisitions in the past, and its American depositary shares (ADSs) recently were trading at $39.74. The stock has a total market cap of $102 billion. Shares trade within their 52-week range of $37.41 to $51.88, with a consensus price target of $51.33.

Celgene shares have seemed to go dark of late, after its shares rose 300% from 2010 to 2015. Maybe a new deal would make its expected 2017 revenues of $13 billion more attractive. Shares of Celgene were last seen at $112.29. The consensus price target is $137.39, and the 52-week range is $92.98 to $128.49. The company has a market cap of $87 billion.

Gilead is expected to do a deal of some sort. Its stock has been stuck after the HCV run-up, and now its organic growth is elusive with a P/E ratio well under 10 and expected organic revenues of close to $30 billion in each 2017 and 2017. Gilead shares were trading at $80.48, within a 52-week range of $77.92 to $116.09. The consensus price target is $105.76, and this company has a market cap of $106 billion.

24/7 Wall St. wanted to cover what some of the more recent Wall Street analysts have for price targets on Medivation. These price targets generally are called to be their own fundamental valuations rather than would-be theoretical buyout prices.

William Blair recently reiterated its Outperform rating and $67 price target. The firm noted that Medivation’s U.S. Xtandi sales (via Astellas) were $330.3 million, representing an 8% sequential increase but slightly below consensus.

Maxim Group has a $76 price target from its report in August, and it showed that Medivation’s revenue from Xtandi sales were up 13% sequentially to $206 million. Its report said:

Medivation delivered another solid quarter with XTANDI sales continuing to grow. Additionally, we see the next catalyst as a possible label update for XTANDI in 4Q16, which could potentially drive sales expansion into the larger pre-chemotherapy mCRPC market. We continue to believe most of XTANDI’s future commercial opportunity and growth have yet to be realized. We also note that active M&A potential could add upside to our metrics.

Canaccord Genuity has a Buy rating from its August report, with a $70 price target. It also used the $330 million sales figure and noted that the CVS formulary loss is not material given update to abiraterone label. This firm noted the M&A potential:

We maintain our Buy rating and $70 target at this time as we expect Sanofi to come back with a higher bid for Medivation, now that the process is friendlier, though this is dependent on a move being made before the October 22 PDUFA date for Xtandi. Our $70 price target is derived from the average of our EV/S and DCF valuation methodologies.

Barclays has an Overweight rating and a $70 price target. The company gave its base case, as well as an upside case of $80 and downside case of $50. The report said:

Xtandi is meaningfully differentiated from Zytiga, which should support uptake among the urologist prescriber base. The TERRAIN further support that differentiation, as well as supporting in-roads bicalutamide. OUS sales growth is accelerating and should be a more meaningful contributor over the mid- to long-term. … Upside case ($80) — Greater-than-expected adoption of Xtandi in the prechemo setting, supported by compendia listing, and meaningful pipeline progress for talazoparib, pidilizumab, and xtandi in breast cancer. Downside case ($50) — Pace of Xtandi adoption amongst urologists slows and pipeline fails to materialize.

JMP Securities downgraded its Medivation rating to Market Perform from Market Outperform in August with no price target. The firm perceives this to now be a more balanced risk-reward proposition for the shares based on a P/E multiple and comparable company analysis. They feel that the shares appear to be appropriately valued, and the more time passing will make it less likely that a M&A transaction is at hand.

Cowen has a market Perform rating and no price target. The Cowen team said that the U.S. Xtandi sales are struggling and they are far less optimistic, but they still expect a successful outcome to ongoing M&A discussions will render this topic mute.

Brean Capital has a Buy rating and a $71 target. Its report from August said:

With multiple pharma companies interested in Medivation, we expect take-out speculation to continue to support the stock, along with growing Xtandi sales and clinical and regulatory catalysts coming in the second half of 2016.

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Other analyst ratings and price targets have been shown as follows:

  • Leerink has a $64 price target.
  • Credit Suisse’s price target is $72.
  • RBC has a Sector Perform rating but a $70 target.
  • Jefferies has a Hold rating and $60 price target.

With shares trading near $67, Medivation’s market cap is $11.1 billion, and the 52-week range is $26.41 to $68.37. This is a stock that rose exponentially up into the $60s by 2015, but then came crashing back down, and it is now back up in the $60s due to buyout interest.