Putting a Value on Provenge

Updated from 2:07 p.m. EDT

Last week, reader J.D. emailed to ask about Dendreon (DNDN). Specifically, he wanted to know how I came up with a valuation for the company's prostate cancer vaccine Provenge.

"I'd like to learn more about how to value a company's pipeline," he wrote. "I'd like to gain some insight into how you might determine how much a successful drug could actually add to the bottom line."

Great question, J.D., and timely with Dendreon set to go in front of a Food and Drug Administration advisory panel on March 29. Prompted by J.D.'s email, I sat down this week and built a revenue model for Provenge.

Based on my conservative assumptions, if Provenge is approved (and that's an "if" still very much up in the air), peak sales in the U.S. could top $1 billion.

Based on this Provenge sales forecast, Dendreon would be worth about $27 a share today in my valuation model. Upside to my conservative sales forecast would, naturally, lead to a higher stock price.

Now, I'm not teaching J.D. or anyone very much by simply giving you my estimates. So let's walk through the process of building a Provenge revenue model. It's a really helpful skill and one that can be used for any drug or biotech company, in case you don't give a hoot about Dendreon.

Before I get started, I want to make one thing perfectly clear. I remain on the fence about Provenge's chances at next week's advisory panel meeting, so please don't construe that this Provenge revenue model has me somehow leaning toward a positive outcome.

This revenue forecast, then, is helpful if (pay attention to that little word) Provenge is approved.

Let's start with a chart of my first of three Provenge revenue models:

Provenge Prostate cancer -- Revenue Model 1
	2006	2007	2008	2009	2010	2011	2012
Newly diagnosed PrC patients		219,000	222,285	225,619	229,004	232,439	235,925
% patients with AIPrC		35%	35%	35%	35%	35%	35%
Total AIPrC patients		76,650	77,800	78,967	80,151	81,354	82,574
% patients choosing immunoTx		65%	68%	70%	72%	75%	75%
Eligible Provenge patients		49,823	52,904	55,277	57,709	61,015	61,930
Provenge penetration		2%	10%	20%	40%	50%	55%
Provenge patients		996	5,290	11,055	23,084	30,508	34,062
Cost/year		30,000	31,200	32,448	33,746	35,096	36,500
Provenge sales		$29,893,500	$165,059,950	$358,723,818	$778,975,944	$1,070,686,207	$1,243,237,996

To start a drug revenue model, you first need to define the target patient population that will be eligible to receive the drug. With Provenge, it's a bit tricky. For starters, we're obviously talking about prostate cancer, so that's not very hard. According to the American Cancer Society, there will be 219,000 men diagnosed with prostate cancer in 2007. That's the incidence figure, or the number of men who will newly diagnosed this year. (I have that number growing 1.5% each year to account for an aging population.)

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