Dendreon Highlights The Best Of The Web

 |  About: Dendreon Corporation (DNDN), Includes: GSK, JNJ
by: Steven Bulwa

The Internet has democratized the availability of information and Seeking Alpha is a microcosm of the best aspects of this change. Independent analysts without the prejudice of the financial entanglements of Wall Street bankers are now just as able to offer opinions and disseminate information as that long-standing establishment. For investors, this is a welcome change and an opportunity to identify more opportunities and make better-informed valuable independent investment decisions. Dendreon (NASDAQ:DNDN) has long been a polarizing proposition for investors, a company with a potentially blockbuster drug that has as many adamant supporters as inexorable dissenters. A series of recent articles on Seeking Alpha have pushed me firmly into the bull camp.

Dendreon Polarizes Investors

Dendreon is a biotechnology company focused on the discovery, development and commercialization of novel therapeutics for treating cancer. The company's product portfolio includes active cellular immunotherapy and small molecule product candidates to treat a wide range of cancers. Provenge (sipuleucel-T) is its first commercialized product, for which it received a license to market from the U.S. FDA in April 2010. Provenge is an autologous cellular immunotherapy for the treatment of asymptomatic or minimally symptomatic metastatic, castrate-resistant (hormone-refractory) prostate cancer. Prostate cancer is the most common non-skin cancer among men in the U.S., with over one million men currently diagnosed with the disease, and the second leading cause of cancer deaths in men in the U.S. Dendreon owns worldwide rights for Provenge. This treatment is unique in that it is the first to use a patient's own cells to combat the disease. From the FDA press release detailing the approval:

Provenge is an autologous cellular immunotherapy, designed to stimulate a patient's own immune system to respond against the cancer. Each dose of Provenge is manufactured by obtaining a patient's immune cells from the blood, using a machine in a process known as leukapheresis. To enhance their response against the cancer, the immune cells are then exposed to a protein that is found in most prostate cancers, linked to an immune stimulating substance. After this process, the patient's own cells are returned to the patient to treat the prostate cancer. Provenge is administered intravenously in a three-dose schedule given at about two-week intervals.

The effectiveness of Provenge was studied in 512 patients with metastatic hormone treatment refractory prostate cancer in a randomized, double-blind, placebo-controlled, multicenter trial, which showed an increase in overall survival of 4.1 months. The median survival for patients receiving Provenge treatments was 25.8 months, as compared to 21.7 months for those who did not receive the treatment.

Heading into the FDA decision date, opinion on the fate of Provenge was skewed toward the negative as the stock traded in the $6/share area. According to an article by Michael Murphy for Seeking Alpha at the time:

Not one of the seven analysts who published a rating on Dendreon's stock recommended buying it ahead of the release of the positive results, and not one has raised their rating to buy since the conference call. ... That's remarkable, not just because this is the first cancer vaccine that will be approved by the FDA, but because Provenge works the way an effective cancer drug should work with no significant side effects. Just in the small group for which it was approved, it is likely to be a $1.5 billion drug in the U.S. alone, as I will show in the model below.

Based on Murphy's assessment at the time, shares of Dendreon were significantly undervalued even after the post-approval rally of over 100% into the $20/share area, speculating that Provenge sales of roughly $1.5 billion in the U.S. alone translated into a stock price of $30/share. Here we are three years later and Dendreon shareholders have had a bumpy ride up to over $50/share and back down to pre-approval levels below $10/share. The shares currently sit around $10/share, with a $1.5 billion market valuation and the average 2013 revenue estimate eclipsing $500 million. Provenge is clearly a hit, but the shares have languished as investors are skeptical of the future and disappointed with profitability. This could be a tremendous opportunity to buy shares in a revolutionary cancer treatment therapy company on the cheap.

Efficient Market Theory Be Gone

Back in my school "daze," which are becoming more a faded memory of archaic process than fond recollection of any empowering foundation, we were posited with a theory called efficient market hypothesis (EMH). Said resultant conclusion of academic resolve without the encumbrance of practice or fact states that:

…it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.

Given the conclusions of this "theory," one might think the resulting increase in the speed and breadth of the dissemination of financial information facilitated by the Internet would have moved stocks and markets to levels incorporating all available information, current and future, and frozen them there, where investors were unable to add any performance to their portfolios beyond general market returns. This is obviously a stupid theory; the markets haven't done anything in over a decade but lots of investors and portfolio managers have found opportunities to outperform the markets by exploiting "undervalued" or mispriced securities. See below as evidence that it is clearly possible to beat the averages with independent thought and asset allocation.

Source: Lipper.

I might even argue that the higher levels of information made available by the Internet have caused more mispricings of equities and greater volatility and opportunity than in previous, more analogue investment eras. One of the critical errors in the EMH is the assumption that information will be accurately processed by larger numbers of market participants arriving at correct conclusions. Why would this be? I disagree with most things I read and most opinions I hear on a daily basis. I would more subscribe to the opposite theory being the "inefficient market hypothesis," where the more participants in a market the greater the divergence in opinion, the greater the volatility, and the more abundant the opportunity to benefit from mispricing. This following chart of Dendreon clearly suggests a lack of efficiency in the market's ability to accurately price available information in a security.

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Source: Yahoo Finance.

Divergent Opinion

For an example of how the same information can be interpreted completely differently by different people, look no further than the following two articles published on Seeking Alpha on April 10, 2012, roughly one week after Dendreon reported fourth-quarter 2011 earnings.

In "Competition Will Drive Dendreon's Stock Down," Ry Frank wrote:

What is more disturbing are the reports that Zytiga, the prostate cancer drug being developed by Johnson & Johnson (NYSE:JNJ) is poised to be a major threat to Provenge based on later stage studies, and the trial has been terminated early so that patients on placebos are denied the drug. ... Unfortunately, because the treatment has to be tailored for the requirements of each specific patient, it can cost up to $100,000 per patient, inclusive of doctors' fees. These kinds of costs have the effect of diminishing the return to the investor.

While on the same day, in "Dendreon: Healthy Competition Will Boost Profits," Dividend Kings wrote:

Both Zytiga and Provenge work to help patients with prostate cancer fight the disease, but in different ways. Zytiga is intended to work for patients after going through chemotherapy, while Provenge works for patients that have yet to undergo chemo. ... With all of this in mind, Dendreon is a very, very good company to invest in at the moment, for several reasons. The stock price is currently low, and if investors take advantage of this fact, the risk is even lower than before. The low price combined with the potential that the market holds makes it an almost irresistible investment.

Clearly both can't be right, yet both offer compelling and reasoned explanations for the divergent interpretations. The market cannot accurately price securities for which there is complete disagreement for the prospects, so there must be great profit and opportunity for the correct analysis in what is likely a zero-sum game.

More recently, Seeking Alpha contributor Theodore Cohen went on the offensive, defending Provenge against what he claims are unsubstantiated scientific attacks from Marie Huber et al. in a report titled "Interdisciplinary Critique of Sipuleucel-T as Immunotherapy in Castration-Resistant Prostate Cancer," published in the Journal of the National Cancer Institute (JNCI). According to Cohen and others, Huber et al. attack Provenge's efficacy with the same theory of "immunodepletion" previously offered by Dr. Bart Classen in an anonymous paper submitted to CMS, which was summarily disproved by Dr. James Gulley, director of Clinical Trials at the National Cancer Institute. Mr. Cohen states:

Thus debunked, the 'theory' lay dormant until recently when, for reasons unknown, it was resurrected in a paper published by Huber et al., as noted above, in the JNCI. ... The conclusion must be, then, that Provenge showed a significant survival benefit, Frovenge not quite as good, and the placebo ... well, it was a placebo. This is a logical contradiction to the assumption of a Provenge placebo by Huber et al.

Cheers to Theodore Cohen, Seeking Alpha and the Internet at large for facilitating open analysis of potentially biased and market-altering information.

A Premium Franchise At A Discount

The recent buzz around Dendreon, generated by a declining stock price in contrast with accelerating revenues and an investor community at odds over its future, has placed us at an impasse where opportunity is rife but the direction unknown. I believe at current prices the opportunity is on the long side. It must be recognized that Dendreon is the first company to gain approval for a cancer vaccine that utilizes the body's immune system to combat this devastating disease. Provenge is a success on that achievement alone, and given that it is expected to generate over $500 million in revenues in 2013, it is difficult to find grounds to judge it a failure. The company is not resting on its laurels and is pursuing a broad pipeline of indications based on variations of its technology. Given its success gaining approval for Provenge, one must give the company some future advantage for gaining approval for other products and indications. See the company's pipeline from recent investor presentation:

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Addressing Market Concerns

The company recognizes the challenges it faces as a new emergent in a competitive market with a potential blockbuster drug. To meet these challenges, the company has addressed a most critical need by recruiting experienced leadership and replaced its CEO with John Johnson. Johnson was most recently CEO at Savient Pharmaceuticals, and previous to that CEO of Imclone Systems, another biotech innovator that was eventually acquired by Eli Lilly (NYSE:LLY). The company is currently looking drive growth to expand into new markets like Europe and Japan, and to reduce the costs of producing Provenge by creating greater process efficiencies and automating manufacture.

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Comparisons Are Favorable

I have to acknowledge that the prior week's announcement of GlaxoSmithKline's (NYSE:GSK) offer to acquire Human Genome Sciences (HGSI) for $2.6 billion was the primary stimulus for my revisiting Dendreon as an investment prospect. The two companies will forever be associated in my mind by their similar trajectories. Both companies languished for long periods until unexpected FDA approvals sent their respective shares soaring, only to crash back to earth after disappointing initial sales of their drug franchises.

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Source: Yahoo Finance.

Look at that! The timing and patterns are impossibly similar. The only thing left to complete the coupling is the spike at the end brought on by a hostile acquirer. The interesting thing is Dendreon's fundamentals appear at least as attractive -- if not more favorable-- than those of Human Genome Sciences. Both expect losses for 2013, but Dendreon expects higher revenues and has similar cash on hand (but less debt). A $2.6 billion buyout for Dendreon would be a 75% premium to today's stock price, and given a $500 million and growing novel cancer vaccine and a promising pipeline, I believe this outcome far more likely than any further stock decline.

Regardless of the outcome of the Dendreon saga, I am thankful we can have this discussion and that I have access to the wide variety of opinions currently made available by the Internet and sites like Seeking Alpha. Stock market Information is abundant, perspective is unique; harness both for profits.

Disclosure: I am long DNDN.