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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:

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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