I'm writing today in response to another Seeking Alpha article which suggested that Dendreon, the cancer treatment biotech that just got FDA approval for Provenge, a breakthrough treatment for late stage prostate cancer, is overvalued and should be avoided by both value and growth investors.
The writer reaches his conclusion that Dendreon is overpriced -- and thus should be avoided -- based upon a very elementary error. He concedes that Dendreon has attained FDA approval for the first cancer immunotherapy, Provenge, and that future revenues globally from Provenge could be in the $4 billion range. He then evaluates the market cap of the company based upon what he describes as a "typical" 2-2.5 times revenues multiplier to determine a reasonable market cap for the company. Using this faulty premise he warns against buying the shares.
Leaving aside that almost every analyst following the company has a "buy" rating on Dendreon, with price targets ranging from the 40's to 66 -- as the shares are currently trading in the low 40's -- the "typical" multiplier he suggests is simply dead wrong by market standards. It may be true that Bristol Meyers Squibb (BMS) or AstraZeneca (AZN) -- huge, mature drug companies, with slowing revenue growth and for which any single new drug is going to be a drop in the revenue bucket, are valued by the market at 2-2.5 times revenues. It is an entirely different story for biotechs and in particular early stage, fast growing biotechs.
Even Amgen (AMGN), the king of the biotechs, whose revenue growth has slowed tremendously and whose business has pretty much fully matured, still commands a revenues multiple greater than 3, at $15 billion in revenues and a $52 billion dollar market cap.
A much more apt comparison, which truly illustrates how the market values earlier stage biotechs, is Celgene (CELG). Celgene is the company on which Dendreon executives have actually publicly said they are modeling their business plan for Dendreon. Celgene's success is based upon its cancer drug Revlimid. Like Dendreon the company decided to go it alone -- declining multiple offers to partner with Big Pharma -- and instead retained 100% worldwide rights to its lead drug. The Celgene plan succeeded fabulously and the company's market cap currently is 26 Billion dollars, based upon revenues of 3.6 Billion dollars. The market-granted multiplier of revenues for Celgene is thus better than 7 times revenues.
Investors should take note that Dendreon is at a much earlier stage in its "follow Celgene" plan -- just ramping up production of Provenge in its first full year of sales and guiding for revenue this year between $350 and $400 million dollars -- but Celgene shares ultimately reached close to a split adjusted share price of 1000, based upon Revlimid's$3.6 billion in sales.
If the writer's prediction that Provenge revenues could ultimately reach $4 billion dollars annually is correct -- and I think it may even be conservative (see my earlier article), then applying the same multiplier that the market gives Celgene would indicate that Dendreon's current market cap is woefully inadequate -- and that the shares are a screaming buy.
It's kind if funny how beginning with one little tiny wrong fact can produce mountains of wrong conclusions, but in stock analysis it seems multipliers in inexperienced or ill-informed hands can really be dangerous.
Dendreon has accomplished what no other company before it has been able to do -- create a treatment for cancer that trains the patient's own body to recognize cancerous cells and kill them. Provenge has been approved by the FDA and the demand for it is truly massive. Once the company demonstrates that it can produce and market Provenge in the billions -- as it is this year in the process of doing -- the shares are going to skyrocket.