Dendreon: An Even Better Risk vs. Reward Scenario

| About: Dendreon Corporation (DNDN)

In my April 23rd article, "Dendreon: Revisiting the Risk/Reward Scenario", I noted that at $15, there was $2 to $3 of downside risk for Dendreon (NASDAQ:DNDN), with possibly $15 to $20 of upside. Given a 50/50 chance of FDA approval, I fully expected the stock price to rebound and trade in the $21 to $24 range as the May 15 date approaches.

After further research into Dendreon's situation and discussions with industry sources, it is evident that the medical community and the FDA are in the midst of a paradigm shift in the way cancer treatment is viewed. The lack of safe cancer treatments currently available is a direct reflection on the FDA's conservative approach toward approving treatments for cancer patients. In addition, the slow process defined by the FDA over the years has resulted in a lack of investment in R&D for cancer therapies.

However, recently, members of the FDA and the scientific community have begun to view cancer as a chronic condition like AIDS or diabetes, and have begun to take steps to promote approval of safe treatments and boost investment in R&D. Commissioner of the FDA, Dr. Andrew von Eschenbach has made specific references to immunotherapies and making them available to patients who need them. It is behind this agenda that I believe the FDA is changing its tone toward cancer treatments.

Specifically, the FDA's rewording of the efficacy question and the Advisory Committee's vote in favor of the safety and efficacy of Provenge are examples of this shift in policy. I admittedly overlooked the significance of the rewording of the efficacy question. After the efficacy question was reworded, the committee was asked to begin the voting process all over again and subsequently voted 13-4. Of the 4 members who voted against the efficacy of Provenge, Dr. Howard Scher has been the most vocal. He argues that "even if one accepts the posthoc survival analysis results from the larger 127 patient trial... the second trial of 98 patients was not confirmatory." The larger trial showed overall survival was prolonged 4.5 months whereas survival from the second trial was prolonged 3.3 months. However, 3.3 months was not considered statistically significant.

If one follows the conservative FDA process, additional trials to replicate the results from the first trial would be needed. However, if one focuses on the patient with 12-18 months to live, 3.3 months becomes very significant. While his opposing comments regarding questionable data from the trials and the need for further data are valid, his arguments focused on the process not being up to past standards. The 13 members of the committee who voted in favor were aware of this, but they chose to look through the process and focus on whether Provenge was safe and prolonged life. From the committee members asking for interpretation of the question, to the director of CBER Jesse Goodman's favorable rewording of the question, to the 13-4 vote of the committee, each action demonstrates there is momentum at all levels of the FDA to support a more practical policy toward immunotherapies.

Moreover, the public is becoming more aware of the general need for more treatment options. The highly publicized case of Elizabeth Edwards living with cancer has begun to reshape public perception of the issue!s regarding cancer therapy as opposed to a cancer cure. The committee's recommendation of Provenge and the media attention associated with it has furthered the public's awareness and has given a tangible treatment for the public to identify with.

In essence, Provenge has become the name associated with this shift in FDA policy. The FDA and the medical community have changed their OWN primary endpoint for cancer policy, with quality of life and prolonging life being the goal rather than curing cancer. If the FDA were to go this far to promote the idea of a new policy toward immunotherapy with Provenge and not go through with an approval, the FDA would lose credibility in the public's eye. The reality is that an approval would certainly promote the FDA's agenda to make more treatments available to patients and encourage investment into R&D for cancer therapy.

For the reasons above, I have revised my probability-adjusted trading range target to better reflect my belief that more than 50% chance of approval exists. I, now believe there is at least a 66% chance the FDA approves Provenge in May (resulting $35 price) with a 33% chance that the FDA issues an approvable letter ($15 price) resulting in a 28.05 probability weighted value. I do not believe an outright rejection is a possibility at this time.

I would further note that while I believe DNDN will receive an approval, an approvable letter would only be a near term setback, as I would expect the price to climb steadily as progress is made to meet the conditions in the approvable letter. Lastly, I would point out that the short interest in DNDN has increase from 26.4mm shares in March to 33.9mm shares in April. The short interest represent over! 40% of the float (81mm shares). With the risk/reward skewed to the long side, expect significant short covering as May 15th approaches.

Disclosure: Author has a long position in DNDN

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