Beyond Provenge: Dendreon Is Too Expensive for Value, Growth Investors

| About: Dendreon Corporation (DNDN)
This article is now exclusive for PRO subscribers.

Dendreon (NASDAQ:DNDN) is not an attractive stock for a value investor to buy right now. It’s also not attractive for growth investors who value any margin of safety. While Dendreon has a remarkable technology approved in its Provenge treatment for advanced prostate cancer, its sales and earnings prospects based on this treatment are not enough to justify its current stock price. Investors in Dendreon depend on future drug approvals and successful products for long-term positive returns.

Provenge is the first FDA approved autologous cellular immunotherapy. This therapy is complex and starts with removing some of the patient’s own white blood cells. These white blood cells are shipped to a Dendreon manufacturing facility, where they are combined with a protein found in most prostate cancers. The protein is chemically linked to another molecule that stimulates immune responses. The white blood cells from the patient’s body generate antibodies against the cancer protein. When these blood cells are reintroduced to the patient’s body a few days later, the body uses these antibodies to fight off prostate cancer. This process is repeated three times at two-week intervals for a full treatment.

This fantastic technology costs $93,000 for a full treatment course. In clinical trials, the median survival benefit of patients was 4.1 months. Despite questions as to the cost-effectiveness of this treatment, Medicare recently approved it for full reimbursement. Approximately 100,000 men currently have the late-stage prostate cancer that Provenge is approved to treat, with about 30,000 new cases diagnosed each year. The maximum domestic market for Provenge is therefore 30,000 times $93,000 or $2.8 billion in total sales. Applying a typical multiple of 2–2.5 times sales suggests a reasonable market valuation for Provenge of $5.6-7.0 billion. This assumes 100% market penetration. Dendreon’s current market cap is $6.0 billion.

As to foreign markets, there are very few places that approve and pay for a $93,000 treatment that extends a patient’s life by 4 months. In the United Kingdom, the National Health Service (NHS) has a way to evaluate the cost-effectiveness of new treatments called the quality-adjusted life years measurement (QALY). This takes into account both longer life expectancies and quality of life (including pain, mobility, and general mood).

In general, the NHS will not consider a treatment cost effective if it costs more than £20,000-30,000 per QALY. Consequently, companies often set their prices under this level. In this case, the median benefit in QALY, assuming maximum quality of life (which is probably not too far off, considering the low side effects of Provenge reported), is .34 over placebo. The NHS therefore would approve a treatment cost in the neighborhood of only £10,000—about $16,000. Single-payer health care systems in other countries evaluate cost effectiveness similarly to the NHS, so investors should expect Dendreon’s reception in those locales to resemble the UK’s more than the U.S.’s.

In other articles about Dendreon, debates arise over the difference between the median survival benefit (the number that is reported in clinical trials) and resulting life expectancy after treatment. A source of contention is whether the difference between the two is meaningful. As an exercise I tried to calculate the maximum possible difference between the two. The average age when prostate cancer is diagnosed is 70. While the average life expectancy of all 70-year-old Americans is 17 years, the average prostate cancer patient eligible for treatment with Provenge has a life expectancy no more than 6-8 years. If Provenge extended life expectancy by 20%, it would add 1.2-1.6 years. The true benefit of Provenge is likely between this 1.6 years and the 4-month median survival benefit reported from the Phase 3 clinical trial. Even if there is a difference between the median survival benefit and increase in life expectancy, the difference is small enough that sales of Provenge would not be dramatically different.

One are where there might be a difference is in reimbursement levels abroad. If the life expectancy is increased in Provenge users by 1.6 years, with perfect quality of life, the QALY would be 1.6. This would justify a reimbursement by the NHS of perhaps $50,000-$80,000. This would likely result in much higher sales and profits from international users of Provenge. However, while Provenge itself appears to have side effects of mild flu-like symptoms, even in the clinical trial it was often coupled with chemotherapy, which can have extremely adverse side effects. This would lower quality of life and could lead to lower international reimbursement levels.

As we consider the total market for Provenge, it is unlikely to have 100% market penetration in the United States. Medivation (NASDAQ:MDVN) has the snappily named MDV3100 molecule in Phase 3 clinical trials for the treatment of advanced prostate cancer. Johnson & Johnson (NYSE:JNJ) has completed a phase 3 trial for its drug abiraterone and submitted an application for approval to the FDA, expecting a June, 2011 decision. With these rivals and existing therapies, a more reasonable projection for Provenge is 30-50% of the market. This gives an estimate for eventual annual sales of Provenge in the U.S. between $800 million and $1.4 billion. Overseas markets will likely be 1-2 times the market in the U.S., which puts worldwide sales for Provenge in the wide $1.6 - $4.2 billion range, the upper end of which requires 50% market penetration in the U.S. and huge international sales.

Dendreon has an innovative technology and approval for Medicare reimbursement. Its 2010 sales were $48 million, and 2011 sales are estimated to be $350-400 million. Its eventual sales from Provenge could be $4 billion annually. However, further growth is dependent on FDA approvals. Dendreon is examining the efficacy of Provenge for earlier stages of prostate cancer, which could significantly expand the number of potential customers.

Dendreon also has research underway to extend its active cellular immunotherapy technology to treat patients with breast, ovarian, and colorectal solid tumors. However, the two clinical trials in this area just finished Phase 1. Phase 2 and 3 clinical trials take several years, and so no revenue from this research can be forecast for at least 5 years. With only Provenge to provide growth in revenue for the next 5 years, Dendreon is simply too expensive for wise investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.