Many have noticed Friday's remarkable price movement in Dendreon Corporation (NASDAQ:DNDN) and are wondering what the upside from here is. In the report below, I will run a back-of-an-envelope analysis for DNDN's current evaluation and will discuss its longer term potential.
Let me start with a basic valuation model:
Leading therapeutic vaccine candidate, Provenge, is currently being evaluated by the FDA for AIPC (androgen-independent prostate cancer), the terminal stage of the disease also known as hormone-independent prostate cancer [HRPC]. Patients diagnosed with AIPC typically have a 16 to 18 month life expectancy. Market size: ~150,000 current prevalence, with 50,000 newly diagnosed patients every year (US only) Treatment cost: est. $15,000-$20,000 per infusion - 3 infusions are needed for the treatment, administered two weeks apart; cost not specified yet Competition: Taxotere, a very strong chemotherapy drug, is the only drug approved by the FDA for AIPC that has a proven survival benefit. Over 50% of asymptomatic (without bone pain) AIPC patients prefer NOT to use Taxotere due to its relatively severe side effects. Note that in its pivotal clinical trial, Taxotere showed a median survival [MS] benefit of 3.2 months in the asymptomatic subgroup (in comparison to Provenge's 4.5 month MS benefit). Market potential – I'll be conservative to assume 65% penetration rate and a cost of $45,000 per patient (in line with the modern cancer biologics - Avastin, Herceptin, Erbitux etc). Which doctor will not recommend that his patient try a drug that has a markedly less severe side effect profile than Taxotere and that has shown a greater MS benefit in both of its Phase 3 trials?
As evidenced by the prostate cancer patient advocacy groups at the March 29 Cellular, Tissue, & Gene Therapy Advisory Committee as well as by physicians interviewed on every media outlet in the recent days, the demand for Provenge seems to be very high right off the bat, so assuming a 65% penetration rate 3 years after approval could be a fair assumption here.
Peak revenues (US market): 65% x 50,000 * $45,000 = $1.462 billion
Discount the peak revenue by 12.5% per year for 3 years and one arrives at $1.0 billion.
Biotechs with promising pipelines typically trade at 7 to 20 price/sales, so by taking the low end of the above range we can conservatively assume that after Provenge's approval, the price per share of Dendreon will eventually reflect a market cap of at least $7 billion.
DNDN has 82 million shares outstanding, ~$100 million in cash as of 3/31, and can sell up to $200 million worth of its common stock on its current shelf. Assuming another dilution round (possibly as part of a RoW partnership deal), another 10-15 million shares could then be added to the float for a total of around 100 million shares.
Hence, a price per share of $70 within several months post approval is not out of the question.
Based on its current price per share of around $13, one could easily argue that DNDN's share price is very undervalued, considering that Provenge is highly likely to be approved by May 15. The FDA usually follows the recommendation of its Advisory Committees, and especially so when the indication is a terminal one and the advisory panel has recommended that the therapy is both safe and substantially effective. Thursday’s CTGTAC voted 17 to 0 that Provenge was safe and 13 to 4 that it showed substantial evidence of efficacy.
The efficacy vote came with a great deal of excitement because the efficacy question, as originally written in the FDA's briefing documents, was unusually stringent and did not follow FDA guidelines. The question originally worded by the FDA was “Did the treatment establish efficacy?” When the term “establish” was interpreted and vocalized by the first three advisory panel members to mean “100% conclusiveness,” the committee chairman, Dr. James Mule, halted the voting and asked the FDA attendees if the question was worded properly, noting that “substantial efficacy” is the language in the FDA’s own guidelines for drug approvals. The two high-ranking FDA officials attending the meeting agreed with Dr. Mule and corrected the overly stringent terminology. The revised question was re-asked, “Does the product demonstrate substantial evidence of efficacy?” The first three panel members immediately reversed their votes, and the final panel vote on efficacy was 13 Yes and 4 No.
More to Follow
The price per share calculation above was based only on revenues in the US market. Provenge sales from the rest of the world [ROW] could eventually match US revenues. DNDN has stated that it would like to partner Provenge with a larger biopharma company. Signing a lucrative ROW partnership agreement with a healthy upfront payment and sales milestones, in addition to 20-25% royalties is certainly conceivable post-US approval. Hence, another 25% pop in the pps can be expected when a ROW is announced.
ADPC (androgen-dependent prostate cancer) indication: The market size of this earlier stage of advanced prostate cancer comprising patients who are still responding to androgen blockers is estimated at two to three times larger than the AIPC market. In mid-2005, Dendreon completed enrollment in a Phase 3 clinical trial that randomized patients to the treatment arm of Provenge plus Lupron or to the control arm of Lupron plus sham Provenge (saline solution). Final data is still years away, but initial results from the earliest enrolled patients have so far shown that Provenge appears to be delaying the rise in PSA from the 0.0 level to the 3.0 level.
Neuvenge, etc: Dendreon was forced to suspend its follow-on immunotherapy drug, Neuvenge, for breast and ovarian cancer patients who are HER2/Neu positive, in order to conserve its cash. The relentless short selling of DNDN shares blocked the ability of the company to raise enough money without significant dilution. The Neuvenge Phase 2 results showed excellent promise, so it is hoped that this program can be restarted shortly after approval, three years after its suspension.
21st Century Medicine
By approving Provenge (PDUFA date is May 15), the FDA jumpstarts cancer therapy into the 21st Century—this is a personalized treatment called autologous immunotherapy—using the patient’s own cells and it is based on Dendreon's patented Antigen Delivery Cassette platform. It is important to note that Dendreon holds numerous patents, as well as exclusive and nonexclusive licenses to use over 20 other antigens for future therapeutic vaccine development. In other words, once DNDN scientists find the most appropriate antigen target expressed in any type of cancer, the same procedure used in administering Provenge immunotherapy can be applied.
What are the odds of approval? Based on the Advisory Committee [AC] vote of 13 to 4, the odds seem to be quite high. Moreover, surveying the outcomes of the recent FDA Advisory Committees, the FDA has approved 37 of the last 38 treatments following a positive recommendation from an Advisory Committee. The current FDA commissioner is a urological oncologist and prostate cancer survivor whose father passed away from AIPC, who has publicly stated more than once that FDA will serve as a “bridge” to new cancer therapy and not an obstacle, and has gone on record as saying that cancer can be conquered by 2015. If he were to reject this innovative therapy after such a strong positive AC vote and after such passionate and emotional appeals from prostate cancer patients and advocacy groups, his words will ring hollow. What cancer patients are asking is that they have a choice; that they make the final decision about their therapy and that a 1 in 40 chance that the statistically significant survival benefit seen in Provenge’s pivotal 9901 trial was a false positive (as stated in the FDA biostatistical briefing document) does not bother them, especially when the treatment has such a mild side effect profile.
It may very well be that the CBER division of the FDA (biologics) has decided to move forward into the 21st Century, leaving the CDER division (drugs) in the dust and rendering its 1960s-1970s mentality of preferring 800 to 1,000-patient cancer trials featuring toxic chemo regimens obsolete. CDER's "vision" of extending survival by two or three more months but making the participants feel miserable (or killing or hospitalizing them) is 20th Century thought, not 21st.
Dendreon is weeks away from pioneering the "21st century medicine" and based on their robust technology, they could very well turn into the next Amgen (NASDAQ:AMGN) and Genentech (Private:DNA).
Disclosure: Author has a long position in Dendreon
DNDN 1-yr chart