Michael Demaray

How Would Warren Buffett Value Dendreon?

BTW, my comments were with respect to Adam's original estimates, not Henry's

How Would Warren Buffett Value Dendreon?

There is a hidden, but major flaw in Adam's model. His forecast period of 6 years is arbitrary. A forecast period should equal the length of time for which the Return on Incremental Invested Capital exceeds the cost of capital. For a biotech therapy this complex, where Dendreon retains all the manufacturing knowledge, this period will be long and will be significant. The relevant question is, will a competitor be able to substantially replicate or replace Provenge six years after approval? If the answer is no, the forecast period should be longer. Each additional year of forecast adds additional value to the share price, albeit discounted at a greater factor. If we believe Provenge will be defensible for 10 years, we ought to extend our forecast period to that length. If 15, then 15 years. Only when ROIIC = WACC should we apply a terminal value, assuming returns can be sustained at capital costs. Though I haven't stepped through the numbers, the share price forecasts listed above, assuming Provenge is approved and cannot be substituted within 6 years, are inadequately conservative.