Thursday, April 12, 2007

What Price Dendreon? (DNDN)

Nobody knows today what, exactly, the correct price for Dendreon is because nobody knows what the FDA will decide on May 15. I'm not one of those people who believes that the market price is always right. I believe much of the time the market is out of equilibrium for one or more of several reasons, the prominent one being human miscalculation. With sell-side (brokerage) analysts and even the great Cramer miscalculating just about as often as the rest of us.

I called Dendreon right, which you can see in my blog of March 30, 2007 and from my coverage on my analyst conference summary pages (See DNDN). But before I update my thoughts, let me tell you a different biotechnology story.

There is a company called Genta (GNTA) trading today for $0.34 per share. That gives it a market cap of $62.5 million. They have $29.5 million in cash to support that, plus a drug candidate tradenamed Genasense. But they aren't a small startup that is going to use the cash hoping to get some good clinical results. Genasense had major Phase III clinical trials for 3 types of cancer. They had a larger pipeline. They had a market capitalization of about $2.8 billion five years ago. They were a "next big thing" based on some early results for Genasense. They told investors that Genasense had great results in the first completed Phase III trial, for malignant melanoma. They claimed they met primary endpoints and showed prolonged survival of patients.

Only when the FDA looked at the data, they tore it apart. The study as not double-blind and there were solid reasons to believe there was investigator bias. The FDA decided there was no positive significant result that outweighed a side of the studies that Genta press releases avoided: some "adverse reactions" (side-effects) that included, in a different indication, an almost doubled death rate from adverse reactions.

If you look at the success rates for drug candidates, the statistics are grim. Lots of promising test tube drugs fail when given to animals (pre-clinical studies). The FDA requires three phases of clinical (people) studies: I, II, and III. At each phase far more candidates bomb out than go on to the next phase. It is not real surprising to have an apparently favorable (apparently to investors, based on information released by drug companies) drug with good Phase III results turned down by the FDA. Then there is always the question of whether an approved drug will actually sell. Finally, when widely distributed, the drug could cause adverse reactions not seen in the studies, resulting in the FDA requesting that it be re-evaluated or pulled from the market.

Each drug costs a lot to develop and test. Larger companies know they are in a crap shoot; with lots of candidates, some work out and some don't. Biotech investors should know it is a crap shoot. No matter what the merit of a drug candidate, it is going into an extremely complex machine, the human body, and something could go wrong.

When I bought Dendreon I knew the odds were against approval of Provenge. In fact, the FDA can still gut Provenge, despite the positive recommendation of the advisory committee.

So why am I holding on to Dendreon stock when I could sell it today for three times what I bought it for? Well, for one thing I cut back my holdings; I did take some profit on the run up after the good news.

The main thing is the odds. Given my knowledge of the FDA (I first worked for a biostatistics firm some 30 years ago, but I only started looking closely at these types of decisions recently) my guess at the odds is: 50% chance of outright approval; 40% of getting a "letter" (requiring more study for full approval); and 10% of outright rejecting Provenge. This range of odds is based on the proven safety of Dendreon plus some fair indications that it is effective. That is good enough for dying cancer patients without other options, and it may be good enough for the FDA.

The 40% spectrum leaves us in the broad price range we are in today, $12 to $25 per share, depending on the exact wording of the letter. The 10% chance puts us back at $2 per share. The 50% approval chance puts us over $25. How much over in the short run depends on investor enthusiasm, something I have been weak at predicting. In the long run the price depends on if Provenge is successfully marketed. More important, can Provenge's success in a particular type of prostate cancer be extended to other types of prostate cancer and to other cancers as well? If the answer is yes, then the sky is the limit for Dendreon. If they can make cancer immunotherapy work it may take years to get approval for other types of cancer, but the long-term value makes it more than worth the risk that the FDA will fail to approve Provenge in its coming meeting.

The market is often wrong, and that can be in either direction. Back in 2000 Dendreon traded in the mid-20's, before it even had anything much more than a theory to work with. In the summer of 2002 it traded below $2 per share. For the last few years it has mostly been between $4 and $6 a share. That isn't just volatility. That is risk. More peculiarly, it is a difficult-to-quantify risk. So decide how much risk you want in your portfolio before you decide what your buy and sell prices are for Dendreon.

1 comment:

  1. Nice writeup. What do you think of the near-hysteria on the Yahoo and Investor Village boards for Dendreon? Are you following the minute-to-minute commentary or are you still confident with your assessment?