Medarex, Inc. (MEDX)

Medarex develops human monoclonal antibodies. Lots of ‘em. When it comes to drug development there’s a gradient from having tons of drugs in your pipeline/lots of partners to having few drugs in your pipeline/little or no partners (see ITMN). It’s up for debate as to whether one way is better than the other, but MEDX clearly falls into the far extreme of many drugs/many partners. MEDX has over 50 (!!!!) different development partners, including Pfizer, MedImmune, Amgen, Centocor, Eli Lilly, Human Genome Sciences, Abbott Laboratories, Novartis, Novo Nordisk A/S, and Schering AG. They have 37 drugs in various stages of clinical development – as of today their website says they have 7 drugs in Phase III, 4 drugs in Phase II, 2 drugs in Phase I/II, 23 drugs in Phase I, and 1 drug listed in preclinical studies.

Modeling MEDX is particularly difficult, as the pipeline drugs fall into such categories as co-promote/profit share, milestones/royalties, equity interest, co-development, and wholly-owned. Each of these collaborations was cut as a separate deal with different terms, the specifics of which are not disclosed publicly, making it virtually impossible to come up with an accurate picture of MEDX’s revenue stream or R&D expenditures in the future, even if you could accurately predict which drugs are likely to come to market and which aren't (you can't). On top of that, with so many projects in its pipeline MEDX is constantly bombarding anyone trying to follow it with a steady stream of press releases. Of the 5 drugs wholly-owned by MEDX, 1 is in Phase II and 4 are in Phase I. I don’t like the Phase II drug already, as it’s an anti-CD30 antibody being developed for treatment of Hodgkin’s and anaplastic large cell lymphoma – Seattle Genetics is developing a naked anti-CD30 antibody which is in Phase II, as well as an auristatin-conjugated anti-CD30 antibody which is in Phase I. MEDX currently has double the market capitalization as SGEN, but has 37 drugs under development vs. SGEN’s 6 drugs in development for 9 total diseases.

With such a dizzying array of antibodies in development, the market is likely to focus on whatever MEDX has in Phase III at any given time. In my opinion this company is one of the least efficiently digested by the market, which tends to overreact to a lot of news about the company because with such a large number of projects that have unknown terms there is no realistic way to model MEDX and come up with a starting value which could then be adjusted based on changes in estimates. For example, in December MEDX reported that its anti-CTLA-4 antibody (MDX-010, or ipilimumab) failed to achieve complete or partial shrinkage of tumors in at least 10 percent of 155 patients in the study. A bummer for sure, blown primary endpoints can mean more trials or the complete shutdown of a project, both of which represent significant losses of time, money, and effort. The market responded by chopping 21% off of MEDX’s share price the next day on about 8X normal volume. This is a drug they have been developing in collaboration with Bristol-Myers Squibb, under a co-promotion/profit-sharing agreement. It’s one drug of 7 in Phase III trials, and 37 drugs overall in clinical studies. Did anyones model really warrant a 20% drop on bad news about this trial? Prior to the news analysts had next years EPS at -1.38; now it’s at -1.44, not much difference. There are a few ways to explain this, but as I said above personally I think the market just doesn’t have a handle on how to value a company like this so it trades until it feels like it’s in the right spot. In light of the other drugs in their pipeline and their platform (see below), I think the 21% (it’s now down 29% relative to this announcement) was overblown, which is the main reason for my entry - disclosure: my model is just as hazy as the next guys, this is based on my gut. Stephen Colbert would be proud.

The reason MEDX has so many developmental partners is that it has an excellent technology platform for generating human monoclonal antibodies. Their patented UltiMAb Human Antibody Development System consists of a mouse strain with the antibody genes replaced with human antibody genes, meaning that hybridomas isolated from these mice generate fully human monoclonals, skipping the time and effort required in the old days of humanizing a promising monoclonal. If you think this sounds like a one-trick pony, believe me, it’s a great trick. This platform will ensure that MEDX has a constant stream of companies willing to partner with them, and would serve as an enticing stimulus should things go horribly and the company go up for sale.

Finance-wise, MEDX is on solid footing for now. I calculate their burn rate at about $12.5M/month. With $395M cash on hand as of their last quarterly report, that gives them about 32 months worth of cash. Their financial situation has improved significantly over the past few years, with big increases in their total assets to total liabilities ratio and a 4-fold increase in total stockholder equity from Dec. ’04 to now. Their revenue comes from milestones and licensing payments, and eventually royalties or direct sales assuming they get something approved soon, and most of their operating loss comes from R&D spending. To break even at this stage they’d need to achieve about $200M in annual revenues, and with a 1.2B market cap they’d need an annual profit of $81M to put them in line with major drug companies on the basis of their PE ratio. More realistically, I’d expect a huge bump in share price if/when analysts start to predict MEDX will achieve profitability, regardless of how much profit analysts are predicting.

*As I mentioned earlier, I don’t think the market, or analysts for that matter, can realistically put together a model that gives a fair value for MEDX that is even remotely accurate because of the way the company does business. Because of this I think the market tends to overreact to news, such as the beating MEDX took on releasing bad news about their Phase III trial for MDX-010. Yes, a beating was deserved, but 21% in one day was excessive. I consider this a high-risk position, and as such will only put 5% of my bankroll into it. Having established a position, I’m hoping that the market overreacts in the case of positive news as well, and may elect to dump some or all of my shares if I think it has overreacted far enough to the upside, but ultimately I think holding until it’s clear that they will or won’t turn a profit provides a decent risk:reward ratio. If I hold this position until the company begins collecting revenue for drugs brought to market I need to keep in mind that in the future as things become clearer the way the market responds to news about this company will probably become more refined, as models give greater resolution as to how much revenue MEDX will generate the following year.