Dendreon Corporation (DNDN) has something devoutly to be wished for, a truly novel cancer therapy that is approved for advanced prostatic cancer. Aside from skin cancers, prostate cancer is the most common cancer type in the United States, with over one million people affected, and despite many treatment options, it is the second leading cause of cancer deaths.
The standard treatment for most cancer types is chemotherapy. Chemotherapy is rough on patients. It uses various chemical agents that kill rapidly growing tumor cells; unfortunately it kills all rapidly growing cells. Among these are blood cell stem cells, hair follicle cells, and those that line the gastrointestinal tract. Thus chemotherapy patients become anemic due to loss of red blood cells, become immunodeficient due to a loss of white blood cells, lose their hair, and suffer gastric distress. Many chemotherapy agents are actually carcinogenic; they reduce the size of the current tumor at the risk of producing cell mutations which result in later tumors.
Dendreon's Provenge treatment uses the body's own immune system to fight the tumor. The company isolates antigen-presenting cells from the patient. These are immunized in vitro with the prostate cancer antigen prostatic acid phosphatase (PAP), while being stimulated with a hormone that causes the cells to become active. The cells are then reintroduced into the patient, where they activate the cancer fighting T cells of the immune system. Provenge has been shown to prolong the life of patients, although it is still a treatment, rather than a cure. In the last quarter of 2011, Dendreon managed to show a profit on sales of Provenge, although it lost money for the year as a whole.
Beyond Provenge, Dendreon is developing a similar therapy based on the antigen HER2/Neu, which is expressed on many breast, ovarian, and colorectal tumors. The drug is in phase II trials.
Dendreon is also developing therapies based on TRPM8, a calcium ion channel highly expressed in the prostate. Its drug candidate, D-3263 HCl, induces apoptosis by activating the ion channel. It is in Phase I trials for patients with solid tumors.
A glance at Dendreon's yearly stock chart shows a dramatic drop last August of about 75% followed by a spate of shareholder suits, most of which claimed that financial forecasts regarding sales of Provenge were inflated and that the company had not adequately explained how costs for Provenge would be reimbursed by insurance companies. Provenge has a rather hefty price tag of about $93,000 per treatment cycle, but is covered by Medicare.
Another unstated factor in the shareholder suits was the approval of Johnson & Johnson's (JNJ) drug, Zytiga, earlier in 2011, which many felt would prove to be a formidable competitor. Indeed, sales of Zytiga already exceed those of Provenge. Zytiga works by blocking the production of androgens, like testosterone, on which many prostate tumors are dependent.
Dendreon's stock price has never recovered, even though sales of Provenge have continued to increase. Fourth quarter sales were about 25% higher than the previous quarter, and the CEO expects "modest" growth to continue.
What investors may be missing is that Zytiga is not a direct competitor with Provenge. The two treatments work by completely different mechanisms. Thus, they could be used concurrently, with potential synergistic effects. There are no results on a combination protocol that have been released to the public.
Another drug in the mix is Medivation's (MDVN) enzalutamide. This is an oral androgen receptor inhibitor being developed as a treatment for early and late stage prostate cancer. The company's stock price jumped 140% when its Phase III AFFIRM was so positive that the trial was stopped early so that patients on placebo could avail themselves of the drug. Enzalutamide would be a direct competitor to Zytiga as both target the actions of androgens. The drug has yet to be approved by the FDA, although approval seems likely.
With its current price hovering around $9 and change versus a 52-week high of $44, is Dendreon now a buy? Its market cap is about 1.45 billion, but it is currently losing money. The company has $600 million cash on hand, but considering liabilities, total equity is only about $350 million, so the share price is still four times book. Sales of Provenge should be close to $400 million this year, and it has the potential for being a $1 billion per year drug. Rollout for a biotech therapy like Provenge is more complicated than for an oral pharmaceutical like Zytiga. Johnson & Johnson can just make more pills, but Provenge uses the patient's own cells as an essential part of the process and requires access to laboratory facilities.
I do not believe that either Zytiga or enzalutamide will cannibalize Provenge sales. By increasing patient lifespans, these drugs may actually increase the patient pools eligible for Provenge treatment (so far reserved for those with advanced prostate cancer).
At a price to book ratio of 4, Dendreon is about in the middle of the range of biotech stocks generally. It is much cheaper by that measure than peers like Immunogen (IMGN) with a $1 billion market cap or Seattle Genetics (SGEN) with a $2 billion market cap. Neither of those companies is yet profitable. Seattle Genetics has one monoclonal antibody drug on the market, while Immunogen has yet to receive approval for any of its drug candidates. Medivation has a market cap of $2.7 billion and a price to book ratio of 2,000, even though it has yet to get a drug approved.
Though analysts do not foresee a profit for Dendreon anytime soon, with $600 million in working capital, the company is in no danger of running out of cash. I recommend buying Dendreon.