Macro Tsimmis

intelligently hedged investment

Dendreon (DNDN) update #9

Posted by intelledgement on Thu, 26 Apr 07

As expected, there is really no new news here. We are still expecting the FDA to rule on Provenge, Dendreon’s prostate cancer immuno therapy product, by 15 May or shortly thereafter. Of course, there is no guarantee they will follow the lead of their advisory committee—who voted last month 17-0 that Provenge was safe and 13-4 that there was substantial evidence of efficacy—and approve the product. However, they generally do not overrule advisory committees. Either way, we will know soon.

There is a high level of FUD with respect to this looming decision, in part due to the dramatic range of possibilities. With Provenge approved outright or conditionally requiring the company to complete the 9902B study as a Phase 4, Dendreon is conservatively worth $25-to-$30/shr. A rejection or approvable letter that requires the company to submit results of the 9902B Phase III trial for reconsideration when it is complete around 2010 would tank the stock back down as low as the $2 range, as there is insufficient cash to last that long, and there are the risks that by then there will be competition and, of course, that Provenge really doesn’t work.

As the DNDN bears—there were 33MM shrs short out of a float of 83MM as of 10 Apr; there are a lot of bears—incessantly point out, the FDA likes to be 99%+ confident in the efficacy of a product. FDA biostat folks estimated in March that there is a 2.5% chance that Provenge’s impressive survivor advantage is a false positive, given that the number of patients in the first two studies was relatively small, and that survival was not the primary endpoint.

The thing is, rationally, when you have a disease that is killing thousands of people each year for which there is no viable alternative treatment, it makes sense to bend the rules a tad. To paraphrase poster TMFTinkerBreaker from the Motley Fool DNDN board, if this were a toe fungus remedy, there is no way it would get approved because the evidence is not strong enough. But it would be both irrational and morally wrong to consign three years of prostate cancer victims to certain death when there is a treatment that has a 97.5% chance of enabling them to live longer…just to dot some i’s and cross some t’s, statistically speaking.

And if approved, Provenge is a $1B product for the target market (prostate cancer victims for whom hormone treatment has ceased to be efficacious) given pricing equivalent to other treatments. But that does not consider the likelihood that Provenge might even be more effective if given to prostate cancer victims at an earlier stage (a larger market). And it doesn’t count Europe. (Dendreon has exclusive rights to the North American market and will conclude a partnership for Europe after approval.) And it doesn’t consider potential other applications of Dendreon’s antigen immuno therapy mechanism (such as breast cancer or cervical cancer…once Dendreon researchers identify the most appropriate antigen target expressed in any type of cancer—presuming it is one of the several the company has patented or licensed—the same procedure used in administering Provenge immunotherapy can be applied).

But let’s just stick to $1B to be conservative. A reasonable valuation for biotech companies with a $1B product would be 6x revenue (check out the history of CELG or DNA). At $15/share, the company has a market cap of $1.23B. A 6x rev multiple gives you a share price of $73. Discount that for the two years it will most likely take Dendreon to ramp up to that level of sales, the risk there will be production issues, the risk 9902B will produce bad results, the risk of dilution as the company raises cash to fund additional R&D…a 50% discount? Let’s say 60% to be even more conservative. $73 x .4 = $29/shr.

Of course, if and when any of the upside events—European partnership, expansion of the label to increase the potential market for Provenge, progress on other immuno therapy treatments—come to fruition, then the $1B of baseline sales goes up, and so do the valuation numbers. Plus there is always the wildcard possibility of a Big Pharma buyout.

In that light, you can appreciate why we will be holding on to our $4.01 basis DNDN position throught 15 May (or whenver the announcement is made)…and may be tempted to add some more in the $14s if we get the chance. Stay tuned.

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