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What's Dendreon Worth Now?

What's Dendreon worth today, given Provenge's success in prostate cancer patients?

What is



worth today now that its prostate cancer vaccine Provenge has


that it can prolong survival of prostate cancer patients in a closely watched phase III clinical trial?

Based on my conservative projections, which assume only U.S. sales for now, Provenge sales could easily top $1 billion at peak.

Using that sales forecast, Dendreon would be worth about $26 a share today in my simplified valuation model. The stock has considerable upside opportunities if Provenge is priced higher than I assume, and, of course, I'm leaving out Dendreon's commercial strategy for Provenge outside the U.S., mainly because the company hasn't provided much detail on what it plans to do in Europe, for example.

Clearly, Provenge and Dendreon will be worth more if and when the drug is approved outside the U.S.

On the other hand, I'm valuing Dendreon based on a simple multiple of Provenge sales, which doesn't take into account the costs of manufacturing and marketing the vaccine. These expenses will be considerable given that Provenge is a personalized cancer vaccine that is more complicated to make than other biotech drugs.

Also consider that Dendreon is very likely to raise additional money between now and when Provenge might be approved by the FDA next year.

I first went through the exercise of estimating Provenge sales and fixing a valuation to Dendreon in March 2007. That original column, published before the U.S. Food and Drug Administration first reviewed and turned down Provenge's approval, is republished below.

Even though the numbers are two years old, the valuation I pegged to Dendreon back then -- $27 a share -- is essentially the same as my updated projection today.

The following was originally published March 22, 2007

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:

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.)

Disease Prevalence

Now, with many diseases, including most cancers, you can also look at disease prevalence, which is the total number of patients at any one time. Prevalence numbers will be larger than incidence numbers because it takes into account more than one year.

For the purposes of my model, I found finding prevalence figures for prostate cancer difficult, so I chose to use incidence. That's me being conservative, a stance I'll take throughout this model because I'd rather underestimate than overestimate.

Provenge, at least initially, will not be given to all prostate cancer patients. Instead, use will be restricted to patients who have metastatic, androgen-independent (hormone-refractory) disease, which means their cancer has spread beyond the prostate and it is no longer being controlled by hormone treatments. These patients will also be asymptomatic, which means they won't have any outward symptoms, such as bone pain, which could signal new growth of their cancer.

Here comes the hard part -- figuring out the percentage of prostate cancer patients who fit that category, which is labeled "AIPrC" in my model above. After a lot of Googling and research, including looking back at some old analyst notes, my best guess is that 35% of prostate cancer patients are no longer responding to hormone treatments. That's what I used in my revenue model to come up with a total population of AIPrC patients -- the target group for Provenge.

Not all eligible prostate cancer patients will choose to take Provenge. How many will? Frankly, this is an educated guess, especially since Provenge is a first-in-class cancer immunotherapy without precedent.

But again, after some research, I learned that about 65% of hormone-refractory prostate cancer patients choose to move onto chemotherapy treatment for their disease. Provenge, if approved, would slot between hormone therapy and chemotherapy, so for my modeling purposes, I decided to assume that the same 65% of patients would choose Provenge. Given the excellent side-effect profile of Provenge, this percentage might actually end up higher, but again, I like to be conservative.

Applying this 65% to the total AIPrC patient pool gets me to a total number of eligible Provenge patients. I estimate that number to be 49,823 in 2007, growing to 61,930 in 2012.

Marketing a new drug is not like turning on a light in a darkened room -- results aren't immediate, and not every eligible patient will take a drug, for a variety of reasons. Again, calculating a penetration rate, or market share, is a mix of art and science. In the real world, the best drug with the best marketing will likely top out at 80% market share.

In this case, I start Provenge at a 2% market share because approval, if it happens at all, would come late in 2007. This is a new kind of therapy for cancer and until additional clinical data is gathered and disseminated, I think some doctors might be reluctant to try it. For these reasons, I have peak market share topping out at 55%. I hate to repeat myself, but this is fairly conservative modeling.

In my model, then, I assume 996 Provenge patients in 2007, growing to 34,062 patients in 2012.

Product Pricing

Next consideration is pricing. Dendreon hasn't publicly discussed its thinking on Provenge pricing, but various analysts and commentators have pegged the price in the range of $20,000 to $45,000 a year. I'm using a $30,000 annual price (with a 4% hike per year) in my model, which is in line with other targeted cancer therapies.

That gets us to the end: My 2007 Provenge sales estimate is just under $30 million, rising to $1.24 billion in 2012.

Now, at the top I said my peak sales forecast for Provenge was $1 billion. The lower, final estimate results from the average of three revenue models, each looking at the Provenge market in a slightly different way. I don't always build multiple sales models, but in this case -- given all the unknown variables -- I thought it prudent.

Here's model No. 2:

In this model, I start with the number of prostate cancer patients diagnosed with Stage III and Stage IV disease. These numbers aren't easy to find, but are derived from database estimates collected by the National Cancer Institute. These patients more closely represent likely Provenge patients because their disease is more advanced at the time of diagnosis.

I assume that 85% of these patients fail hormone therapy, which makes them eligible for Provenge, based on its likely initial approval. In this model, then, my "total AIPrC patient" estimate is lower than in model No. 1.

After that lower patient base, everything else in the model remains the same. At the end, I derive an estimated U.S. 2007 Provenge sales of $20.5 million, rising to $916.3 million in 2012.

Lastly, let's look at my third model:

This model is the most conservative because it starts with only the number of prostate cancer patients who die each year, as estimated by the American Cancer Society. This is a much sicker and narrower patient population than will likely receive Provenge, but it does provide a minimum revenue floor for modeling purposes, which is why I like it.

You'll also notice that because this model is based on prostate cancer deaths, I assume a much higher penetration rates for Provenge, maxing out at 85% to 90%. This model comes up with 2007 Provenge revenue of $51.6 million, rising to $850 million in 2012.

When you average all three revenue models together, you get the following Provenge U.S. revenue forecast, with sales topping out at $1 billion:

In one of my previous Dendreon columns, I said that it was easy to get to peak Provenge sales of $500 million. Obviously, I've easily surpassed that guess with this more rigorous forecast.

Briefly, let me discuss valuation. In the beginning of this article, I peg Dendreon with a $27 share price based on my revenue projections (and assuming, of course, that Provenge is approved.) This valuation underscore why Dendreon, currently at $3.74 and significantly shorted, is a great story to follow.

I derive my valuation using a fairly simple, discounted revenue valuation model. Peak Provenge sales of $1 billion in 2012, risk adjusted by 85% and discounted back just under five years gets to a net present value for Provenge of $355 million. At a reasonable six-times-sales multiple, you get an enterprise value for Dendreon of $2.1 billion. With 82 million shares outstanding and its cash on hand, Dendreon would be worth about $27 per share.

Of course, all these projections are moot if Provenge can't get a positive nod at the FDA advisory panel meeting. We'll see what happens next week.

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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