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Saul Kerpelman
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I am an attorney in Baltimore, Md., representing children with lead poisoning. I have been investing in biotech for over a decade. I have an A.B. from Vassar College '76, Phi Beta Kappa; J.D. from Duke Law School '79; M.S. from Johns Hopkins University '08.
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  • VirnetX Holding Corporation: Wireless Security Giant or Mere Troll?
    VirnetX Holding Corporation (NYSEMKT:VHC) has had some good news to report lately that has many investors interested in the future of wireless salivating at the prospect of having discovered an "under the radar" gem that claims--and for sure hopes--to have cornered the technology market for 4G wireless network security.

    First, they have battled Goliath and, according to the company, Goliath blinked.  That is to say the company had sued Micrsoft alleging that the software giant was infringing upon VirnetX's patents in multiple security applications in Microsoft products with wireless components.  The case recently settled with Microsoft agreeing to pay VHC $200 million and enter into an agreement for future licensing of its security technology.

    VirnetX CEO Kendall Larsen said that the agreement highlighted the need for the company's Secure Domain Name Initiative and would allow it to focus on an upcoming pilot of the system.

    In March, a jury had awarded VirnetX nearly $106 million after determining Microsoft violated two of its patents.

    The patents cover ways to establish virtual private network, or VPN, connections.

    The connections are used to protect Internet and other data traffic from hackers and thieves.

    Next, the company's patents were validated in a review by the US patent office.

    After the settlement with Microsoft, the company declared a special dividend and presented each shareholder as of the July 1 record date with 50 cents per share.

    The company touts its technology as imperative for the success and safety of the soon to arrive 4G network that, according to wireless experts, will render the current 3G standard a fossil--in terms of speed and capacity.  Its software and technology solutions are claimed to provide the security platform required by next-generation Internet-based applications, such as instant messaging, voice over Internet protocol (VoIP), mobile services, streaming video, file transfer, and remote desktop. The company offers  what it has named  "GABRIEL Connection Technology" that encrypts data allowing organizations and individuals to establish communities of registered users and transmit information between various devices, networks, and operating systems. It focuses on licensing its products and services to original equipment manufacturers within the IP-telephony, mobility, fixed-mobile convergence, and unified communications markets; communication service providers; and system integrators.

    Congress is also weighing in in a manner that the company asserts will render it the premier security provider of 4G: 

    “The Cybersecurity Act calls for the use of a secure domain name system, which is what VirnetX’s technology provides. VirnetX and our SDNI [Secure Domain Name Initiative] partners can deliver what the government is mandating for a secure Internet using secure domain names. Existing domain names will be able to move to a new secure domain name and devices will have their own secure domain name so owners and operators can transmit data securely and in real time – safe from hackers and thieves,” says CEO Larsen.

    So what's not to like?

    Don't know the answer yet, and the means to get the answers are not immediately readily available--but the due diligence questions one would want answered before diving in with both feet are apparent (with grateful acknowledgement of poster StevieRayJon on the VHC IV message board for his gracious permission to share from his list):

    1. Reverse merger to obtain an Amex listing. (usually a red flag)
    2. No real Venture Capital money obtained to be able to launch their products, even though they reside in the Venture Capital capital of the world (Scotts Valley, California).
    3. No revenues or contracts (except MSFT now-- a big plus) in over 4 years.
    4. Gigantic competitors for everything they plan on doing in the future.
    5. Nothing but the CEO's word that "they own the technology" and have "no competition".
    6. The only analyst who seems to be covering the company is an unknown whom they had to pay to publish a report. The report basically just regurgitates their annual report and contains no real analysis.
    7. No employees other than the engineers. No sales support. 12 employees far as can be discerned from public documents.
    8. Hundreds of thousands (or maybe even millions) of 4G devices already sold, with no apparent need for their technology?
    9. They are Beta testing their Gabriel product with a tiny .OB company. If the technology is so promising, why no bigger players? 
    10. SAIC, the company from whom they licensed their patents, seemingly gave away the patents for next to nothing. If this technology is so important, why did they do this?
    11. In spite of the recently trumpeted good news the share price is lower than it was 2 years ago.

    The Next Big Thing for 4G, or irritating internet troll whose first Billy Goat Gruff was Microsoft?

    $200 million is a mighty steep toll to cross the bridge--and it's hard to imagine Microsoft not fighting further tooth and nail to not license into the future--unless the patent infringement threat is the real thing.

    Without the answers to the above questions and more, it is definitely a speculative play--but one that could provide spectacular returns if the story plays out positively.

    I plan to dig deeper and report what I find in a future piece.



    Disclosure: No position
    Tags: VHC
    Jul 19 4:38 PM | Link | 11 Comments
  • Dendreon, The Fabled "Next Amgen"
    In the Biotech oncology space immunotherapies are red hot.  The hottest of the hot--and actually the probable reason for all the heat of its brethren-- has been Dendreon (NASDAQ:DNDN), the Seattle oncology biotech that received the first FDA approval in history for a "therapeutic vaccine".  In common understanding a vaccine is given to prevent disease--by training the patient's immune system to recognize and defeat invading organisms.  A therapeutic oncology vaccine puts kind of a twist on this idea:  the patient already has cancer and the therapeutic vaccine trains the patient's immune system to kill the cancer. 

    For over a hundred years doctors and cancer researchers of every stripe have been trying to stimulate the patient's immune system to fight cancer, and have failed.  A key difficulty in the fight against cancer is that the "invaders" causing the illness are the patient's own cells--run amok and wreaking havoc to be certain--but "us" in the eyes of the immune cells charged with fighting disease--so they leave it alone.
    Finding a way around this problem is the Holy Grail of cancer research--and has been for these past hundred years.

    Dendreon has succeeded where all others failed.

    Provenge, the autologous therapeutic vaccine for late stage prostate cancer, approved by the FDA on April 29, 2010, demonstrated in clinical trials the ability to significantly extend the lives of the sickest of the sick men with prostate cancer.  It demonstrated the largest survival advantage EVER in the late stages of this disease, improving three year survival by a gigantic (in the world of late stage prostate cancer) 40%. 

    Provenge works by a process in which the patient's blood is drawn, immune cells are isolated, and then combined with Dendreon's patented antigen delivery cassette.  What this really represents is a "school for the immune system":  the antigen delivery cassette is made up of an antigen that is present on the surface of almost every prostate cancer cell, fused to an immune stimulating protein.  It's kind of like holding up a mug shot to the immune system and saying "Look--these are the bad guys!"  The infusion bag of "activated" immune cells (trained in what the bad guys look like)is Provenge.  The activated cells are infused back into the patient (3 times over the one month course of treatment) and treatment is done--and the process produces a MASSIVE immune response against the patient's cancer.  All with a very benign side effects profile--none of the usual ravages of chemo.

    Unbelievably awesome, right?  Success where all others have failed.  Minimal side effects.  And in the second most common cancer of all.  

    How big is that market and what could the revenues look like for the company? There are over 100,000 men currently diagnosed.  30,000 new cases every year and the company has priced Provenge at $93,000 for a complete course of treatment--competitive with current chemos--and with a brand new decision by Medicare to provide coverage.  You can do the math, but since approval men have been clamoring for the treatment, waiting lists have been forming, and the company has been hustling to bring three plants online by mid 2011 that will have the capacity to process $2.5 Billion worth of Provenge a year.

    And the story gets better.  Dendreon somehow limped, and begged, and dragged itself across the FDA approval line without partnering (please see my earlier article--Dendreon Learned From Icos' Mistake) and having maintained 100% rights to the well protected cassette technology--and process technology that is behind Provenge.  Not only does the company own it all--and as of April 2011 have almost One Billion dollars in cash to execute the launch of Provenge, with Hans Bishop, a top gun hired away from Bayer, to oversee it--but there is the real prospect that the same technology that has been validated with Provenge will also prove successful in follow on treatments for bladder cancer and renal cancer, for which the company plans trials beginning this year and next.

    What about the rest of the world?  I'm glad you asked.  The company owns 100% rights there too, and plans to keep it that way.  They've shown they're serious there by publicly admiring Celgene's go alone success with Revlimid and following up with meetings with the EMEA--the European equivalent of the FDA.  They have already reported that those meetings indicate that Europe is unlikely to require new trials for Provenge, given the rigorous gauntlet the company has already run with the FDA.  The company is expressing its optimism in Europe by contracting for a gap producer of Provenge to support an application for European approval late in 2011 or early in 2012, and by planning a new Provenge factory for construction in Germany.  European and Rest of the world revenues could easily equal or exceed those of the U.S.

    Has your calculator exploded yet?
    There's more.  It will be tough, because it's harder to run trials in prostate cancer victims in earlier stages of the disease--with their longer life expectancies and the FDA not yet accepting any surrogate endpoints for survival--but if Dendreon can expand the Provenge label to earlier stage disease the revenue prospects are tremendous--multiples of the figures we have already discussed.  And of course since Provenge works by stimulating the immune system, there is every logical reason to expect that having succeeded in the sickest of the sick PC sufferers, with immune systems already so compromised that they had allowed their cancer to spread, it will work even better in men with earlier stage disease and healthier immune systems.  One researcher, who participated in Provenge trials, even expressed the hope at an analyst's day held by the company that in earlier stage disease Provenge might prove to be--(Let's whisper it, since for some reason some people get upset when I quote her here--remember I'm quoting--I'm not saying it--the research doctor is saying it) a cure.  That's right, a possible cure for early stage prostate cancer.

    One aspect of the recent Medicare decision to cover Provenge that has not been fully appreciated is its handling of off label use of Provenge.  The label indication is late stage metastatic disease. So far everyone's analysis of the market potential of Provenge has been limited to labeled use.  As above, patients are going to be eager to receive Provenge in earlier stage disease, before the cancer has spread and their immune systems are even weaker.  Medicare did not--as many expected them to--forbid coverage for off label (earlier stage) disease.  Instead they left that decision to the local regional Medicare contractors.  Dendreon has trials going on in earlier stage disease, and while success in those trials might not suffice for FDA approval--they are not registration trials for approval--there is still the chance that if the results are good the various treatment Compendia, which CMS looks to in addition to the FDA in making coverage decisions, may list Provenge in earlier stage disease as a treatment recommendation, and thus open the door for off label coverage.  That would be absolutely HUGE and could push the U.S. Provenge market into the 10 Billion dollar range.

    Sound good?  Sound like it could be the "Next Amgen"?.  Do all the due diligence you care to--and for sure, as always, there WILL be bumps in the road--from here on execution will be everything--but all the bureaucratic obstacles have finally been removed and it sure looks like the best candidate out there for "Next Amgen" status to me.

    So where are they selling this?  It's over at the NASDAQ under the symbol DNDN, and guess what?  Right now it's on sale--because of the "Tempest in a Teapot" fears about the CMS review (see my earlier article Dendreon: Fear is Our Friend) and because analysts have yet to dig deeply enough into the story to be even including the European and Rest of the World markets, or the chance of off label revenues, into their models.  Not to mention other cancers which may be treatable by the patented technology behind Provenge.  The shares are currently well off their immediate post FDA approval highs (57's)--but they won't be for long as the Market learns and believes the full story. 

    Long term investors should load up.  I predict you'll be very happy you did.

    Disclosure: I am long DNDN.
    Tags: DNDN, AMGN, CELG, biotech
    Jul 08 7:52 PM | Link | 35 Comments
  • Dendreon: Fear is Our Friend
    Shares of biotech Dendreon (NASDAQ:DNDN) have been battered down recently because of an announcement by CMS, the review board for Medicare coverage, that it was going to look at Dendreon's lead product, Provenge, to make a national determination whether it should be covered by Medicare.

    This announcement, without explanation of the process involved in CMS review and without any explanation of the limitations of CMS review, caused virtual panic selling of Dendreon shares--down more than 20% within one after-hours session.  Shares have rebounded from that low, but are still more than 50% below the high attained after FDA approval of Provenge.

    The thesis of this article is that Dendreon is at this point a screaming buy--that the ill-informed panic has created an unbelievable buying opportunity in the company that has every chance to become the fabled "Next Amgen". 

    Some background is necessary:  Dendreon, a Seattle based oncology biotech, has spent the last fifteen years getting its lead product, Provenge, to market.  Provenge is a treatment for prostate cancer that uses the company's patented antigen delivery cassette technology to train a patient's immune system to recognize cancer cells as foreign invaders and attack them.  The treatment uses the patient's own immune cells--separated out after a simple blood draw--and mixes them with the proprietary cassette, a combination of an antigen that appears on almost all prostate cancer cells and an immune stimulating fusion protein, and activates the immune cells.  The activated mixture is then infused back into the patient and causes a massive immune response against the patient's cancer.  In clinical trials Provenge has shown the greatest survival advantage EVER in late stage prostate cancer.

    This is the Holy Grail of cancer research!  For over a century cancer researchers have been attempting to get the human body to attack cancer and kill it--and Dendreon has succeeded with Provenge.  Even though the men in the pivotal study were the sickest of the sick--late stage cancer trials are the only hope for an expeditious study since the FDA only accepts survival as an endpoint and in earlier stage men the study would take decades--Provenge produced the largest survival advantage ever.

    So why are the shares down so far?

    Simple answers:  Ignorance about statistics and Fear (with a capital F).

    The general media and many lazy analysts have belittled the "only 4.1 months of extra life" provided by Provenge in its large study, and have questioned whether this "small benefit" justifies its $93,000 course of treatment cost. 

    First, the "4.1 months of extra life" statement is simply wrong and displays a lack of understanding of statistical concepts.  The stated 4.1 month figure is not the "average" extra life, as has been widely reported, but is the "median".  The "median" is the halfway point in a series of numbers.  This means by definition that half of the men in the study who experienced a survival benefit lived more than an extra 4.1 months--many for years longer.  Eduardo Garcia, one of the patients who allowed the company to tell his story, lived an extra 9 years after being told he had 18 months left to live.  He got to see his grandchildren born.  A more accurate and telling statistic is that Provenge increased the chances of surviving three years--in these desperately ill men, most of whom were expected to live about 22 months--by a whopping 40%!

    Second, repeating the "4.1 months extra is not worth the money" derisively ignores that the actual benefit of Provenge is even greater than a 4.1 month median.  In the Impact study Provenge was not compared to a pure placebo, but to a control group that was offered frozen Provenge after their disease had progressed.  It turns out that frozen Provenge also seems to confer a survival advantage, so the true beneficial effect of Provenge in the real world is likely to be even greater than the 4.1 month median.  Compared to the men who elected not to cross over to frozen Provenge in the Impact study the treatment group had a 14.2 month survival advantage.

    Next is Fear.

    When  the CMS announced it was going to review Provenge to establish a national coverage standard, the market freaked out.  This is totally understandable against the background of all the reporters ignorantly questioning the price tag for Provenge since it "only gives 4 extra months of life", the climate of fear surrounding healthcare reform, and worries about rationing of healthcare.

    But a wise investor will look behind the fear and dig deeper for the facts to determine if the fear is justified.

    The key factor here is the applicable law.  I am an attorney with 30 year's experience, so trust me I have gone and looked up the controlling statutes.  And here is the absolute payoff--Medicare is prohibited by law--repeat that in caps:  PROHIBITED BY LAW--from considering cost when making a determination whether an FDA approved treatment is "reasonable and necessary".  Now here's where fear still holds sway.  Skeptics still say "Yeah, but I'm still afraid that they'll say $93,000 is not reasonable".  Read the statute further:  "reasonable and necessary" has a precise definition in the statute.  The treatment must be safe and effective--the FDA has already determined this.  The treatment must be furnished in accordance with accepted medical standards, in an appropriate setting, ordered and furnished by qualified personnel, meet the patient's medical need, and be at least as beneficial as an existing available alternative.  (Taxotere, the only other FDA approved treatment for late stage prostate cancer, provides only 2.4 month median survival benefit and has horrible chemo side effects, while Provenge just causes flu-like fever and chills for 2-3 days)  

    Provenge is going to be found to be "reasonable and necessary"--there's no choice.

    The demand for Provenge is massive.  Men are clamoring to get treated and Dendreon is hustling to put the finishing touches on three plants that will be able to produce up to 2.5 Billion dollars worth of Provenge annually.

    The success of Provenge validates the technology on which it is based--and there are follow on treatments based upon it for bladder cancer and renal cancer that will be entering the clinic this year and next.

    If Provenge can move into earlier stage disease--and the researchers have expressed the hope that Provenge given to men with healthier immune systems can transform prostate cancer into a chronic treatable disease--the revenues will be multiples of the $2.5 Billion for which capacity will exist within one year.

    Dendreon has not partnered and holds 100% rights to Provenge as well as to all its well protected technology.

    So what do you do when you see the market acting from ignorance and fear and panicking about the prospects of the company which truly could turn out to be the fabled "next Amgen"?

    You recognize the buying opportunity of a generation, and buy all you can get.

    Disclosure:  I have a large position in Dendreon.

    Disclosure: long Dendreon

    Tags: DNDN
    Jul 07 1:18 PM | Link | 45 Comments
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