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Dendreon: Fear is Our Friend

|Includes: Dendreon Corporation (DNDN)

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