Dendreon Provenge Approval
Calms the Waters
DNDN

May 11, 2010

I am, of course, happy that the FDA approved Provenge for the treatment of metastatic, castrate-resistent prostate cancer [See Dendreon Provenge approval Press release]. If Provenge extends some lives, or saves some lives, that is all to the good. Better, Dendreon now has a lot of money to pursue further immunotherapy research. We don't know if the human immune system can be precisely directed to destroy cancer cells, but it is certainly worth further study.

But what my readers want to know is, what is Dendreon stock worth now? If you bought it at $5 a share, should you hold it forever, or sell all or some of it if it goes over $57 again (as it did before the most recent Greece-inspired market meltdown)?

It all depends on your investment time frame and risk management style. No one really know how much profit, exactly, Provenge will generate over the years. No one knows how much money Dendreon will eventually sink into other immunotherapy candidates, or whether any of them will show results even as good as Provenge's. No one knows how successful the competition will be. Anyone can look at the facts and make estimates. Try it yourself.

I've met a number of investors that bought Dendreon for over $40 a share, basically because their brokers or financial advisors told them they should. They did fine. Certainly some people in this class booked a nice profit already, others became long term investors and fretted when the stock fell back down to $42.

I've sold some Dendreon stock, but then I bought the shares I sold in the $5 a share range, and I now have as much Dendreon as I am allowed under my portfolio rules. In ten years I may look back and wish I had sunk every penny I had in Dendreon; then again I may wish I had sold the lot at $55.

Look at a five-year chart of Dendreon prices and you'll see that at any time up until 2009, with the exception of a spike in the spring of 2007, you could have picked up Dendreon stock mostly in the range of abut $4 to $6 per share. If you think your stock broker, financial advisor, or analyst is smart for getting you into Dendreon in 2010, you might want to ask, why not back when?

The clinical data is not really any different, though there is more of it. Provenge is not a cure, on average it only extends the lives of patients a few months. But there is not much you can do for prostate cancer in the category Provenge was being tried on, and the results were statistically significant in the first Phase III trial. The FDA could have saved us all a lot of trouble by approving Provenge back then.

For over a year Dendreon's management had been saying the data is solid and the FDA had in effect agreed to approve the data if they couldn't poke a hole in it. Approval should not have been as large of a stock event as it was. You can argue it either way: approval was priced in, so the stock has gone too high now. Or approval was not priced in, so now the price is right, or close to right.

That is not the way to think about it. The past is past. Start with a basic analysis today. How many patients will get Provenge? That depends on how much capability there is to make Provenge, which is not really a drug, but a trick played with blood. Eventually capability can be built to meet demand. Likely there will be a lot of off-label use by doctors who don't think it is smart to wait until the prostate cancer has become metastatic or castrate-resistant. So pick a number, then multiply it by the price of therapy. Subtract cost of goods sold, then Dendreon's operating expenses, which have historically been gold-plated. That leaves your estimate of annual earnings. Pick a P/E multiplier you like and get your target stock price and market capitalization.

My advice is, sell if the stock price gets above 25% of your estimate. Buy more if it goes more than 25% below your estimate. Re-figure your estimate at least every quarter, and certainly every time you are considering buying or selling. If your broker or financial analyst are capable of that, get them to do it for you. Don't let them just rehash Wall Street analysis that is designed to churn stocks and generate commissions.

And if you make some money, and want to make more, look for other biotechnology companies still looking for their first FDA approvals. Be careful; always consider price.

You can also learn a lot from history. See my Dendreon page for what this situation looked like in the past, when every major Wall Street biotechnology analyst was saying Provenge would never get approved.

Dendreon has issued a lot of shares (diluting mine!) based on investor optimism about Provenge. In return they had about $528 million in cash at the end of Q1. For the latest financials, check out the Dendreon Q1 2010 press release.

William P. Meyers

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