Dendreon’s Provenge Gets FDA Approval - Now What?

| About: Dendreon Corporation (DNDN)

We have been closely following Dendreon (NASDAQ:DNDN) since back in 2003 when they had their first successful Phase 3 results for their immunotherapy treatment for prostate cancer, then known as sipuleucel-T.

Provenge, as it is now called, was finally approved by the FDA Thursday. Provenge is a whole new paradigm for treatment: instead of directly attacking the cancer, it "trains" the body's own immune system to do the job. So far, Provenge has only been tested in men with advanced cancer (and weaker immune systems) and the fact that it positively effects survival in that population could be an indication that it may be even more effective when given to earlier-stage patients (with stronger immune systems).

One unusual aspect of Provenge is that the company is patenting their “antigen delivery cassette” process used to do the “training” of the white blood cells drawn from each patient. If and where the patent holds up, it would be extremely difficult to create a “generic” version of Provenge without licensing technology from Dendreon. Thus they have potentially stronger intellectual property protection for Provenge (and any future immunotherapeutical treatments developed using the same ADC process) that is typical for most drug company products.

Provenge will be Dendreon's first product and another unusual aspect of the situation is that they retain all the rights for the immunotherapy worldwide. It is rare for a biotech company with no revenue stream to get a drug to FDA approval without having been constrained to sell off some of the marketing rights to raise funding along the way. The company has long planned to handle sales and distribution in North America itself, and until today, was thought to be negotiating a rest-of-world (ROW) rights agreement (or agreements) with a company(ies) who can manage European and Asian approvals, sales, and distribution...but at their teleconference yesterday afternoon, they announced they have suspended those negotiations and instead will be opening direct discussions with Euro and Asian regulators themselves. This means that while the company will have to come up with the funding for trials, marketing, and production on their own, they will not have to share the revenues—which in Europe alone are estimated to be potentially up to two times the US numbers—nor the profits. While this may slow the process of expanding beyond the USA initially, in the long run it could mean the potential for Dendreon to grow—and the resources they have to develop new products—is significantly greater.

Speaking of which, the company is expected to use the Provenge revenue steam—which is expected to ramp up from $180M in the next 12 months to $1.2B-to-$2B annually for the USA alone—to fund development of immunotherapeutic treatments for other cancers such as breast, colon, ovarian, and others leveraging the biotech behind Provenge. And on the subject of revenue streams, another piece of news from the teleconference was the pricing: $93,000, which tops the estimates most analysts had been using. (We had been using $75,000 in our revenue models.) While this likely (barring insurance reimbursement issues) means more revenue for Dendreon, it does not necessarily mean greater profitability; that will depend on the costs of providing these unique treatments for each individual patient and it will be at least a year before we have a firm handle on those (and probably more like two years).

So…what’s next? Thanks to all the publicity and the willingness of more conservative investors to get aboard now that Provenge has been approved by the FDA, we could see some short term gains. However, with the prospect of an ROW marketing partnership deal—and the concomitant cash infusion that would have resulted—now off the table, there is not much immediate gratification to look forward to. We can expect the company to beef up their development effort both with respect to work on other cancers and to expand the label for Provenge (e.g., trials to use Provenge in concert with other therapies to treat earlier-stage prostate cancer patients which, if the results are good, will expand the potential market), but none of those developments will engender any immediate revenue. We can expect some progress on the ex-US approval trials front, but for the near term, this means more red ink, not black. And we can expect a gradual ramp up of patient treatments and revenues in the US (the company projects 2000 men will be treated in the first 12 months starting next week). Depending on market demand, they could be processing patients at an annual rate of up to 15,000 or so by mid-2012. But with a limited prospect for fireworks anytime soon—and the probability of some production teething problems which could make new investors jittery—we may not see a lot of share price appreciation between now and the end of the year.

Another consideration going forward is that sans the cash windfall and expenses sharing that would come along with an ROW partnership, Dendreon will have to fund the ex-US trials, marketing, and production for Provenge themselves. This is in addition to their R&D costs for developing new immunotherapy products. Higher-than-anticipated expenses combined with a hole where the ROW signing bonus cash was anticipated may necessitate a dilutive secondary offering. Of course, now that Provenge is approved, with interest rates low it may be possible for the company to borrow the cash they need on favorable terms, thus avoiding issuing more stock, but servicing debt would impinge on profitability, which would make the stock relatively less attractive.

If you purchased DNDN stock back on 14 Apr 09 when we recommended it, you now have a gain of nearly 200% in 54 weeks. You may want to sell a third of your position—taking a long-term capital gain at 2010’s advantageous rate—to get back your initial investment and then let the rest ride “for free.” This is an alternative requiring particularly serious consideration if your DNDN position has grown to be more than 30% or so of your entire portfolio, as concentrating that much money in one company’s stock—regardless of how good the prospects are—is risky.

Having said that, for our part, we are holding onto every share here. We will be ready to pull the rip cord in the event of a market-wide meltdown (to which Dendreon would not be invulnerable), but short of that…good grief, we have a potential cure for cancer here, and the company retains the world-wide rights. How often does an investing opportunity like that come along?

Disclosure: Long DNDN common and $5 Jan 2011 LEAPS