Is the Dendreon Sky Falling?
DNDN

June 22, 2010

When I checked a few moments ago the auction price of Dendreon stock had fallen to $34.70 per share. That gives Dendreon a market capitalization of just over $4.7 billion. It is a big disappointment for all those investors who bought Dendreon during the last minute run up to the announcement that the FDA had approved Provenge for prostate cancer, or even as the stock soared briefly above $57 per share in late April. Dendreon first moved above $34 per share in March 2010.

I listened to the Dendreon presentation at the Goldman Sachs Global Healthcare conference of June 16. You can access audio files of Dendreon presentations at the Dendreon Investor Page.

The number of American patients who fit the label today for castrate-resistant, metastatic, non-symptomatic prostate cancer was estimated at 103,000, with about 30,000 new patients per year. Obviously the global number would be much larger. Dendreon is already treating patients, but this year will be able to treat only 2000. In 2011 they could treat 8,000, if new capability comes along on schedule. Pricing was not discussed at the conference, but rumors are the charge per patient for the 3 treatment course is around $90,000. Given that Dendreon expects $500 million in revenue (that might be an end-of year run rate) the first year, and $1 billion per year in sales from their New Jersey facility when built out, and $1.25 billion in annual revenue by 2012, I think they need a higher price are a larger number of patients served to hit those numbers. Apparently insurers and Medicare are not balking at the price, but I would bet the health agency in Great Britain will. In any case approvals outside the U.S. will probably take at least a couple of years.

Dendreon expects to be cash flow positive in 2011. Which means GAAP, and possibly non-GAAP, net losses due to depreciation and amortization on the vast sum invested to get us to the current day. My guess is the first GAAP profits may be in 2012.

So if you think (and I do) that Dendreon is going to be able to extend its technology to earlier forms of prostate cancer and to other forms of cancer, it makes sense to build gradual a position in 2010 and 2011 if shares are in the $30 to $40 range.

This scenario has happened to other companies, notably Onyx Pharmaceuticals (ONXX). Bullish enthusiasm is tempered when profits don't flow in immediately. What could be profits from Provenge may get spent, in part or maybe even in whole, trying to generate clinical trial wins in other forms of cancers. This discourages short term investors, and only pays off for long term investors if new indications gain FDA approval and have successful commercial launches.

The good news (for investors, not for patients or taxpayers) is that at $100,000 a pop Provenge should have a very high gross margin. The expense is mainly in the research, not so much in the actual operation of immunizing the patients.

We will know a lot more after the Q4 2010 results are reported. We'll see in numbers how much revenue is generated, cost of goods sold, and operating expenses. The reality of building further capacity will also be easier to estimate.

Right now most investors are risk-averse, and most willing to take on risk are doing so in very short time frames. So if you believe we are in a typical, protracted macroeconomic upcycle (I do), you can buy 2012 profits now in a wide variety of growing companies for very attractive prices. Just because there was a market run up in 2009 after the panic does not mean that all stocks are now overpriced. Each stock requires individual analysis.

You can also learn a lot from history. See my Dendreon page for what this situation looked like in the past. For the latest financial numbers, check out the Dendreon Q1 2010 press release.

William P. Meyers

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