Macro Tsimmis

intelligently hedged investment

BUY Dendreon (DNDN)—potential cure for cancer

Posted by intelledgement on Wed, 10 Jan 07

Dendreon (DNDN) are a US-based pioneer in developing immunotherapeutical treatments for cancer. They have a treatment for prostate cancer called Provenge, which is currently in Phase 3 testing that appears to afford a materially significant survivor advantage. We say “appears to” because the first two Phase 3 trials were designed to measure time to progression (TTP) for tumors, and Provenge narrowly failed to show a significant advantage in delaying tumor progression (that is, there was an advantage but it fell just short of statistical significance). However, as time passed and more patients from the study succumbed to prostate cancer, it became apparent that the Provenge arms were being afforded a significant survival advantage.

Dendreon’s approach is designed to stoke the body’s own immune system to fight the cancer. Provenge is designed to counter prostate cancer, but if the approach works here, it should be efficacious with respect to other cancers, too. So far, the FDA have never approved an immunotherapy, and the novelty of the technology may well have worked against it in the design of the first two studies: TTP is typically used to measure the effectiveness of chemotherapies that attack the cancer directly but it may not have been a useful measure of effectiveness for Provenge. Be that as it may, the FDA does not approve drugs that fail their primary end points in Phase 3 studies. The third study, which is still being enrolled, uses survival as the primary endpoint…but final results will not be available until 2009 or 2010, and with prostate cancer killing 30,000 men in the USA every year, there is pressure on the FDA to consider the extant survival data. The current standard of care for prostate cancer is a seldom successful regimen of chemotherapy that is so onerous that about half of patients eschew it preferring certain death to a painful and debilitating treatment with a scant chance of success.

Plus Dendreon (and other companies) have additional promising immunotherapies under development and should the FDA determine that Provenge is efficacious, funding for these will flow faster, which could be a big strategic plus for humanity in general.

To that end, with encouragement from the FDA, Dendreon have applied for fast track approval based on the results of the first two Phase 3 studies, and the FDA have committed to decide whether or not to consider Provenge for approval—and whether or not on a fast track basis—by 12 January, which is this Friday.

Here is our thinking: first and foremost, this is a highly speculative play. Dendreon have no products, and nothing else in their pipeline on which they are actively working. (They were working on Neuvenge for breast cancer but had to pull the plug on it to conserve cash when Provenge failed to meet the primary endpoints of the first two Phase 3 studies and thus was not approved as quickly as the company had hoped.) If the product is not approved, nothing else in their pipeline will have any value, either (it is all immunotherapy-based), and the value of the company will essentially degrade to the value of their cash on hand…perhaps $1/share.

Second, the upside is huge. It appears likely that Provenge does work, and will eventually be approved. With 72.4 million shares outstanding, at yesterday’s $3.89 close, the company has a marketcap of $281MM. The market for Provenge in the USA alone is $1B/year or more—if Provenge works, it would literally be the only choice for 200,000 men each year in the USA—and close to the same in Europe (although they would be likely to take on a marketing partner in Europe and thus split the revenues). Typically, a biotech with a blockbuster product commands a market valuation in the 6x-to-12x revenues range. $1.5B x 6 = a marketcap of $9B, which is like a 30-bagger from here.

We expect the FDA to agree to consider Provenge for approval within the next few days. Given the need for the product, it makes sense that they should, and we doubt they would have encouraged the company to apply for approval if the agency were going to refuse to evaluate the evidence. If Dendreon get the six-month fast track that they have requested (33% chance), that would give us a decision on Provenge approval by June and the stock should react positively. If the FDA accepts the application but does not grant the fast track exception (66%), then there could be a decision by October or so…but it could be longer…and the stock may not move much; this is what The Street is expecting. If the FDA rejects the application (1%), the stock will tank.

So, we like the odds short and long term…the dicey part comes in the middle…should the FDA agree to review Provenge here as we expect, it is not at all clear if they will approve now or require more evidence (completion of the third Phase 3 study presently being enrolled). The difference between approval in 2007 and 2010 is huge; this one will likely need more than normal attention between now and October.

Reminder: the speculative portfolio starts at $10,000, which is one-tenth the size of our model portfolio. We expect the components of the speculative portfolio will be significantly more risky and higher maintenance than those of the model portfolio; consequently, we anticipate a lot of turnover here. It would not be prudent to invest any sum of money that you can’t afford to lose in speculative portfolio components. And if you do invest in any of them, you need to pay attention to what is going on there to optimize your ROI. For our part, the same rules apply here as to the model portfolio: any transaction announced here when the market is open will be settled at the closing price. For announcements made when the market is closed, the next opening price will be used to settle the transaction. Exception: announcements made less than 30 minutes prior to the close of the market count are considered to have been made after the close.

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