Medivation -- Does the Tsar Have New Clothes?

Medivation's (MDVN) stock spiked last week due to a deal with Pfizer for Alzheimer's and Huntington's disease treatment Dimebon, currently in late-stage trials that are due to be completed in 2010.

At one time I had recommended MDVN in my service, so I am quite familiar with the company and its products. I closed the position based on some nasty management obfuscation (at best) about trial results.

Right after I recommended the stock, the lead investigator for the company pulled back on some of the claims for its Alzheimer's drug in trial -- claims I had heard in investor conferences.

Specifically the company failed to deliver on the publication of Phase II trial data it had promised investors. This principal investigator in its trials (an independent physician) gave its Alzheimer's drug, Dimebon, a lukewarm endorsement in the British medical journal, Lancet, when everyone was expecting a lot more.

Obviously Pfizer saw something different. But it also saw something in torcetrapib, the next generation of Lipitor it bought for billions of dollars, and that failed in trial. PFE is, or should be, near desperate to boost its paltry pipeline as the Lipitor patent expiration approaches in 2010, and the actual financial commitment to MDVN and support of the trials is chump change for cash-rich PFE -- $225 million up front and shared development expenses.

Many analysts are down on Dimebon because the mechanism of action is unclear and it was born as an antihistamine used primarily in Russia. Phase II results seemed strong but that was true for other Alzheimer's drugs that recently failed in late-stage trials. More importantly, it provides mild symptomatic relief and does not seem to attack the disease itself. This is not a problem for the FDA, given the paucity of Alzheimer's treatments on the market, but it is another turn off for many analysts.

In addition to my biotech service I write a shorting service -- puts only -- and after the spike in the MDVN stock price last week I recommended buying MDVN puts for technical and fundamental reasons.

I can't get past how management misled the public and how slick the CEO is in presentations -- and this may have had some impact on PFE. Companies do make mistakes. Even if this proves out for PFE and MDVN, the stock is overbought and should pull back. And if there are any problems with the trial it will be worth a heck of a lot less than it is now.