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Why Is Medivation at a Premium on an EV-to-EBITDA Basis?

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Is Medivation fairly valued on an EV-to-EBITDA basis?

On April 11, 2016, pharmaceutical company Medivation (MDVN) was trading at a forward EV-to-EBITDA[1. enterprise value to earnings before interest, taxes, depreciation, and amortization] multiple of 14.7x.

The company was trading at a premium against Roche Holding (RHHBY), Merck (MRK), and Pfizer (PFE), which were trading at forward PE (price-to-earnings) multiples of 9.3x, 9.7x, and 9.9x, respectively.

Merck, Pfizer, and Roche are value stocks while Medivation is a growth stock. Medivation’s business became profitable in fiscal 2014, and its revenues are growing in double digits. During fiscal 2015, Medivation’s reported revenues grew annually by 32.8%.

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EV-to-EBITDA metric performance

Medivation’s (MDVN) average forward EV-to-EBITDA multiple was ~11x over the past year. The enterprise value of the company has ranged from 7x to 17x of its forward EBITDA. The current forward multiple of 15x seems to be at the higher end of this range.

The pharmaceuticals and biotechnology businesses are growth-driven. With rising revenues and pipeline success, Medivation’s valuation multiple should continue to rise, resulting in a potential jump in its share price.

Medivation’s adjusted EBITDA margin stood at 31.3% during fiscal 2015. It is expected to rise to 34.5% and 35.8% in fiscal 2016 and 2017, respectively. With rising sales, Medivation could experience operational efficiencies leading to expanded margins.

The success or failure of any pipeline drug can result in the stock’s volatility. To avoid this kind of risk while getting exposure to Medivation’s equity, investors can choose options such as the VanEck Vectors Biotech ETF (BBH). Medivation comprises 4.0% of BBH’s portfolio.

In the next article of this series, we’ll explore the analyst recommendations for Medivation and its peers.

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