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Ditch Dendreon

Investors may want to move on rather than wait for an FDA approval that may not come.

Prostate cancer advocates are doing the admirable thing by protesting the Food and Drug Administration's decision to delay approval for



prostate cancer vaccine Provenge.

It's a fight worth fighting. But investors shouldn't necessarily join in the battle.

From an investment perspective, Dendreon isn't a very compelling story these days. Its one and only drug was essentially rejected by the FDA; the company loses money and is draining cash; and it now faces a two-year wait for another chance to get Provenge approved and to market.

I'm all for optimism, but I'm also a realist. These efforts to convince the FDA to reverse its Provenge decision aren't going to work. From that perspective, Dendreon shares -- trading around $7 Tuesday -- look like dead money to me.

Let's break it down:

First, how long will the Provenge delay last? Best case is probably two years. The only way Provenge gets approved is if the ongoing IMPACT phase III clinical trial yields positive results.

Dendreon believes that it may have interim data from this study in the middle of 2008. That's a best-case scenario; I won't be surprised to see the trial run longer, but let's take the company at its word.

If the interim analysis is positive in the middle of 2008, it will probably take another four to six months for the data to be gathered, cleaned up and submitted to the FDA. Let's assume Dendreon re-files Provenge toward the back end of 2008. If the FDA then takes another six months to review the new data, an approval decision would come in the middle of 2009.

I've previously

modeled out Provenge sales in the U.S. of about $1 billion peak. The prostate cancer treatment landscape might change between now and 2009, but let's say it doesn't, which means I'll stick to my Provenge forecast of $1 billion, but I'll push back peak sales from 2011 to 2013.

That $1 billion in peak Provenge sales needs a major adjustment to its probability, or risk, as well. Previously, I assigned 75% to 80% odds to my calculation, but now, I'm dropping the odds all the way down to 30%.

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Why so low? Because clinical trial risk has now made a return to the Provenge story in a big way. This IMPACT phase III trial not only has to succeed, but also it has to work at the interim analysis in order for Provenge to be approved in 2009.

The statistical hurdles put in front of interim analyses are tough, and I have no reason to believe that this Provenge study will be any different. Plus, any confidence that investors have in Provenge's survival benefit from previous studies should be dialed back because of the FDA decision.

Whatever you think of that FDA decision, I believe it is a wakeup call to the fact that Provenge is still relatively high risk. This needs to factor into any calculation of the stock's valuation.

So, call me conservative, but I'm going with a 30% probability of success for the Provenge interim analysis.

So, throwing all these numbers and assumptions into a valuation calculator (discounting at 20%) gets me to a net present value for Provenge of just under $90 million. If I give that a reasonable multiple of six times sales, Dendreon's enterprise value works out to $540 million in my model.

At its current stock price and with $77 million in cash on hand, Dendreon sports an enterprise value of $512 million.

The stock, therefore, seems fairly valued.

Just one guy's opinion, I realize. But to me, any scenario by which Dendreon crawls its way out of its current hole without new clinical data hinges on the ability of good-hearted prostate cancer advocates like those behind the new


Web site succeeding in getting the FDA to change its mind. I'm sorry, but I just don't believe that's possible.

Even Dendreon is signaling to the market that Provenge faces a longer and tougher road to approval. The company just fired 40 employees, or 18% of its workforce. That's hardly a vote of confidence in the company's near-term outlook.

I wanted Provenge to be approved. But it wasn't. Dendreon investors can wait for two years, or they can move on and find a better place for their biotech investment dollars (returning to the stock later, if they choose). I believe the latter is a wiser choice.

Adam Feuerstein writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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