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Dendreon: Parsing Provenge's Problems

The more important calculation and question is what happens to Wall Street's estimation for Provenge peak sales, since this is the figure upon which investors value Dendreon.

The company insists the commercial opportunity for Provenge remains the same while acknowledging that it will take longer to get there. Investors and analysts are going to be more skeptical, which means the current peak sales consensus of $1.5 billion to $2 billion will be reduced -- perhaps dramatically.

Citibank biotech analyst Lucy Lu, in a July research note that correctly cautioned clients about Dendreon, laid out a scenario in which peak sales of Provenge could be just $500 million to $750 million.

"If peak sales were to fall in the range of $500-750M, we believe Dendreon could trade down to [approximately] $25-30 (5-6x peak sales of $750M)," Lu wrote.

Thursday, Lu reduced her 2014 Provenge sales estimate to $540 million, which cut her price target on Dendreon to $14 a share.

Deutsche Bank biotech analyst Robyn Karnauskas drew an equally grim valuation picture for Dendreon in an email to clients Wednesday night in which she threw out some "back of the envelope sensitivities" on peak Provenge sales.

Based on discounted cash flow, Dendreon could be worth as little as $9 a share if Provenge peak sales are $1 billion and peak gross margins are 60%. On the more optimistic side of the equation, Dendreon could be worth $27 a share, assuming peak Provenge sales of $2 billion and peak gross margins of 74%, according to Karnauskas.

ISI Group biotech analyst Mark Schoenebaum cut his Provenge peak sales forecast by 50% to $1.2 billion, which translates to a Dendreon valuation of $17 a share.

The ill effects of the Dendreon debacle will unfortunately spread beyond the company's stock price and its shareholders to infect the entire biotech sector.

Investors already wary about new biotech drug launches, generally, will only grow more wary, more skeptical now that Dendreon has royally screwed the pooch. Dendreon's blow up could not come at a worse time, with the overall markets on shaky ground and concerns about new cuts to Medicare re-surfacing in the wake of the debt ceiling and budget battles in Washington.

Is lack of patient demand for Provenge the real reason behind the shortfall? The important question was asked on Dendreon's conference call. Dendreon denies any drop in the number of prostate cancer patients who want to be treated with Provenge, yet it is curious and troubling that the reimbursement issue that now plagues the drug was only discovered in July when manufacturing supply constraints began to ease.

Dendreon says the problem with reimbursement was only discovered in July as the company began signing up increasing numbers of community and private practice doctors who are more susceptible to reimbursement challenges than doctors who work at large academic medical centers.
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