Dendreon Redux

by: Michael Shulman

I clearly ruffled some feathers with my write-up of Dendreon (NASDAQ:DNDN), mostly those of Dendreon bulls, many of them traders who know little if anything about the company. They accused me of everything from being a moron to a child molester because I said an approval for Provenge was not a slam dunk. So let me make myself very clear.

•I am not short or long the stock, and it is not a short recommendation in my service, ChangeWave Shorts.
•I have followed the company for six years, was in attendance at the FDA panel when it first got a thumbs up from the FDA, and have recommended the stock in my service at the time, ChangeWave Biotech Investor (no longer being published). I got subscribers out of the stock soon after the meeting as I sensed the FDA staff would, for the first time in memory, overturn the panel decision. They did.
•If it were not for the politics of Provenge and the need for the first immunotherapy to get on the market and jumpstart the industry, the FDA would not give Dendreon an approval. The trial data is too weak - the trials, in my opinion, too small.
•That being said, I am convinced Provenge works on a subset of the population of advanced prostate cancer patients and if approved, even a company as poorly managed as Dendreon will certainly perform new trials to further define the proper audience for the treatment and to use healthier patients in earlier stages of the disease in these trials. They had better; the problem with many new cancer drugs in trial is that medical ethics requires that patients receive, at a minimum, the accepted standard of care, and so the trials often have the sickest patients who have already been shown to fail with the accepted standard of care.
•When I take shots at management, I am not alone; they were poorly prepared for the panel meeting, the trials are mediocre in construct, and the CEO sold stock after it rose the panel meeting, eliminating the ability of the company to issue more shares for a period of time that extended beyond the reversal of the decision by the FDA staff.
•I stick with my belief there is 2 to 1 possibility Provenge will be approved based on the trial data released to the public. Some people believe that because they have an agreement with the FDA on required end points, this translates into an automatic approval if they hit those end points. The process does not work that way. The FDA promises nothing - it provides guidance, but it is always free to walk away.
•If approved, market adoption will be slow for traditional reasons: insurance reimbursement issues and the ability of the company to meet demand. Given the projected costs of the treatment and its limited impact - life extension measured in months, not years - my guess is it will not be approved for use anywhere but the U.S. and possibly Canada for the foreseeable future.
•I hope, for the sake of thousands of current and future prostate cancer victims Provenge gets approved.

If Provenge is approved, and the stock moves, the larger question for investors (other than options traders buying calls) is how high can it go? A double would be extreme, or if the market totally loses its mind, a triple - and it fails to get approval, a 90% haircut, and if sales are not as robust as expected, at least a 50% haircut. That risk reward profile for a non-revenue producing biotech is distinctly unappealing. Check out my write up of Curis if you want to read about a company with a much better risk reward profile - a potential ten to twenty bagger with Genentech (Private:DNA) as their primary partner and 15 trials underway.

Author's Disclosure: None