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Patience With Medivation

The small-cap biotech's two drugs offer a lot of promise, but its stock may offer too much risk.

Drug-discovery company



could be sitting on a revolutionary drug for Alzheimer's. However, there are several issues that could keep investors on the sidelines a bit longer.

Medivation is developing two drug candidates. The furthest along is Dimebon for Alzheimer's and Huntingon's diseases. Dimebon is licensed from

Selena Pharmaceuticals

and has been used in Russia for 20 years as an antihistamine. Medivation recently conducted a phase II trial for its use as an Alzheimer's treatment in that country.

The results were extremely positive. Dimebon met all efficacy endpoints, as it appears to improve patients' memory and cognitive functions. Current Alzheimer's drugs like


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Aricept and

Ortho-McNeil Neurologics'

Razadyne simply slow the patients' deterioration.

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Furthermore, there were fewer of the kinds of side effects commonly experienced with the other approved drugs, indicating to Wayne Lottinville of Dutton Associates that Dimebon is not just another me-too Alzheimer drug.

In fact, he says the data suggest Dimebon is "a novel mechanism of action." Dutton Associates was paid $35,000 by Medivation for four research reports. According to the disclosure on the report, research is performed on behalf of the public and not the company.

Dimebon improved patients' Alzheimer's Disease Assessment Scale-cognition (ADAS-cog) scores by four points vs. placebo over 26 weeks, while in phase III trials the scores of those patients receiving Aricept went up 2.8 and 3.1 points depending on the dosage. That trial was conducted with 473 patients, compared with the 183 who tested Dimebon.

It is important to realize that, generally speaking, results in large, well-controlled domestic phase III trials are almost always not as strong as small, international phase II trials. However, Lottinville counters that the Russian trial was conducted under good Food and Drug Administration practices. Considering the strong efficacy data and lack of side effects, he asks, "What more could one ask for when moving into phase III?"

Raymond Myers of Emerging Growth Equities is bullish on the stock in large part due to his optimism that Dimebon will be expedited by the FDA for Huntington's disease, a genetic disorder affecting about 30,000 people in the U.S. Myers believes "Dimebon is ideally suited to Huntington's because the drug reduces the permeability of cells' mitochondrial pores." He adds, "We know the genetic defect that causes HD increases such permeability, which leads to premature brain-cell death in HD patients."

HD is an orphan indication, so there is the possibility that the drug gets fast-tracked by the FDA. Myers forecasts Dimebon could be approved for HD by mid-2009. He believes the domestic market for HD is $900 million. Phase I/II data for HD is expected in the second half of 2007. Medivation is an investment banking client of Emerging Growth Equities. Myers does not own the stock.

Medivation also has MDV300 compounds for prostate cancer in preclinical development. Phase I/II trials are expected to begin in 2007.

Well-Kept Secret

Not many investors know about Medivation. The company's top 10 holders, including CEO David Hung, own 60% of the outstanding shares. According to Morningstar, only one mutual fund owns the stock.


Fidelity Spartan Extended Market Index Fund has a paltry 18,000 shares.

On the flip side, there are few growling bears. As of Oct. 10, only 201,000 shares were sold short, with the vast majority attributed to one hedge fund, according to a fund manager who wishes to remain anonymous. That certainly leaves a lot of room for institutional buying and shorting.

So What's the Problem?

The stock has had a remarkable run. It is up 234% over the past three months, rising from $4.20 to $14.04, on the strong Russian data. The company has no revenue and is expected to lose money for at least the next two years. It also has just five employees. Despite all that, it has a $357 million market cap and trades at 18 times book value.

But my main concern is dilution. As of June 30, the company had $20 million in cash and short-term investments. In the second half of 2006, Medivation is expected to lose roughly $7 million. The company has not released third-quarter data yet, but will hold a conference call Nov. 15 to provide an update on Dimebon.

Dhesh Govender, an analyst with Monness, Crespi & Hardt, notes that the typical U.S. phase II U.S. Alzheimer's trial costs $20 million. The Huntington disease trial also will add to the cash burn according to Govender.

The funds for further trials will likely come from a stock offering. Medivation filed an S-3 with the

Securities and Exchange Commission

in October that clears the way for the company to raise $30 million. At current prices, that could add 2.1 million shares to the total shares outstanding, diluting the shares by 8%. Additionally, lockup on 6.6 million shares, or 26% of the outstanding, expired in late October. No insiders who own the previously locked-up shares have sold as of yet.

And there is still risk that the favorable results in Russia don't translate into a marketable drug. Last year, Axonyx's Alzheimer's drug Phenserine failed phase III trials, sending shares down by 66% in one day. Govender points out that Axonyx had traded up on some early stage data before crashing and trading below cash value.

However, Dutton's Lottinville is quite optimistic that Medivation won't experience the same fate. "Given the results we have seen so far, future problems are less likely, and Medivation's Alzheimer's and Huntington's development programs appear at this point to have better than average chances of success," he says.

Lottinville is also impressed with Medivation's management, including Hung, whom he calls "one of the brighter and more ethical C-level executives I have run across." The analyst offers the ultimate stamp of approval, "Medivation might be the one biotech stock that I would recommend to my 91-year-old mother."

However, in my opinion, the analyst's mother (and anyone else's for that matter) ought to wait until some of the risk is shaken out. I need to be blown away by data in order to get behind a small-cap biotech with no history of bringing products to the market. At a steep valuation, with a dilutive event coming and phase II data conducted outside of the U.S, I need a much deeper discount to offset the significant risk.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Medivation to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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