By J. Duarte MD

As the Federal Reserve dances with the notion of raising interest rates the U.S. stock market is moving in fits and starts.  Most market sectors are experiencing volatility, and biotech is no exception, especially if you follow the widely followed Biotech Index ($BTK) as a benchmark.   Biotech is a quirky sector that requires individual investors to do four things:

1) Avoid too much dependence on traditional valuation criteria, such as price/earnings ratios and book value for analysis.

2) Take what often seem to be outrageous risks.

3) Employ large amounts of patience.

4)  Thoroughly evaluate each company and its products before taking risks.

Let’s look at how two companies, Medivation (Nasdaq: MDVN)  and Astellas Pharma (Nasdaq: ALPMY) – two plays on the same drug – fit into those steps. Medivation has a moneymaker in XTANDI (enzalutamide) a drug that blocks testosterone and helps prostate cancer patients whose disease has moved beyond the prostate to other parts of the body.  Testosterone makes prostate cancer cells grow faster and become more aggressive.  Xtandi reduces the testosterone that binds to cancer cells and so slows the growth of the disease and is most often used in patients with advanced cancer who have been on other testosterone blockers, but their disease has advanced despite the initial treatment. 

Several critical trials showed positive results in 2014, and eventually the FDA expanded the drug’s use beyond its initial approval.  Data reported in March 2015 added to the positive results with men who use Xtandi in early stages of the cancer’s spread, achieving a 35-month increase in survival without having to use chemotherapy.

The trial also showed that men treated with Xtandi were less likely to receive chemotherapy than those taking placebo by a 52% to 81% ratio. For investors this means that over time more patients will likely be treated with Xtandi and the company’s earnings will continue to grow for some time.

The combination of the trials and the FDA approval expansion boosted the company’s share price and profits, which continue to grow. According to the most recent quarterly report, sales were up 73% on a year-over-year basis, yielding $273 million and $679 million respectively.  Profits were $164.2 million for the quarter ended Dec. 31, 2014, compared $2.8 million, for the same period in 2013.

CEO David Hung M.D. said, “we enter 2015 with significant momentum and reason for optimism.”

Even though biotech stocks often look expensive using  traditional value criteria, Medivation sells at a price/earnings ratio of 40, which is cheap for a company growing this rapidly ,and suggests the stock is still undiscovered. Compare this figure to the more mature biotech bellwether Amgen whose P/E is 24.3.

And Medivation is cash positive, unlike many biotech companies. It reported nearly $685 million worth of cash and receivables on its balance sheet with only $120 million in current liabilities and $462 million of total liabilities. 

Let’s put our least technical analyst’s hat on for a second here to look at the company’s stock from another angle.  Compared to the S&P 500’s 12.4% rise, Medivation has appreciated nearly 140% over the last twelve months.  And while the S&P 500 has declined nearly three in the last four weeks, Medivation has gained some 9%, as of the close of trading on March 29.   That is what technical analysts call relative strength—a strong positive.

An alternative and less expensive way to play Xtandi’s success is through shares of the American Depository Receipts (ADR) of Astella, a Japanese company with a presence in the U.S. and who markets Xtandi for Medivation. The ADRs sell for a fraction of the Medivation shares and have a similar trajectory to Medivation’s stock price.

Biotech is a risky business, especially at a time when cost pressures from changes in the insurance market and the Affordable Care Act can are unpredictable.   If you look at the overall stock market you also have another area of potential concern.  Yet, the bottom line, with regard to the company, is that Medivation has a good story and excellent fundamentals, when viewed through the peculiar metrics of the biotech sector. Even though a one month course of Xtandi (120 pills) sells for over $8,000, there are no signs that insurance companies are balking at paying the price.  Compare this to Gilead Sciences’ recent stock price volatility spawned by Sovaldi’s price of $84,000 for a three month course of treatment for Hepatitis C.

And a look at the future uses of Xtandi could mean its use in breast cancer hormonal therapy. Early clinical trials are ongoing.

Bottom line: Medivation and Astella offer an interesting set of potential investment candidates based on the success of Xtandi.  That’s a two for one proposition, which is a rare find in the stock market. 

Dr. Joe Duarte has been a professional investor and independent analyst since 1990.  He has appeared on CNBC, has published articles on Marketwatch.com and has been widely quoted in the major media including The Wall Street Journal.  He is author of “Trading Options for Dummies,” 2^nd Edition and “Trading Futures for Dummies.”  His second book was “Successful Biotech Investing.”  Dr. Duarte does not own shares of Medivation or Astellas as of 3/29/15.