Updated from 2:07 p.m. EDT
Last week, reader J.D. emailed to ask about
. 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
(pay attention to that little word) Provenge is approved.
Let's start with a chart of my first of three Provenge revenue models:
Prostate cancer -- Revenue Model 1
|Newly diagnosed PrC patients
|% patients with AIPrC
|Total AIPrC patients
|% patients choosing immunoTx
|Eligible Provenge patients
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.)