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Dendreon's Risks Will Yield Rewards

The biotech firm's bold strategy with the FDA on its cancer vaccine is likely to pay off.

This column was originally published on RealMoney on Nov. 14 at 7:13 a.m. EST. It's being republished as a bonus for readers.



is taking a risk that I believe will pay off, both for the company and for investors who have a high tolerance for the speculative thrills of small-cap biotechs. The latest news out of the company should prompt investors to weigh the risks and the rewards for themselves.

The company made headlines last week with the latest data on Provenge, its controversial first-in-class vaccine, which is in the final stages of development for use in patients with advanced prostate cancer. Dendreon released interim clinical data reported from the PROvenge Treatment and Early Cancer Treatment, or PROTECT, study. The data were constructive in terms of safety, and would mark a much larger potential market opportunity for use in earlier-stage cancer patients as early as 2007.

In the near term, the company continues to move forward with its questionable regulatory strategy in the pursuit of Provenge as an initial indication in androgen-independent prostate cancer (AIPC) patients. This rolling Food and Drug Administration submission is expected to be completed by year-end, and is the key controversy for the stock.

Dendreon has chosen to pursue a high-risk regulatory filing strategy in this AIPC indication: pooling the observed survival data from two separate Phase 3 studies to support the regulatory filing with the FDA. This type of retrospective analysis is considered a high-risk approach to meeting regulatory standards because it's a departure from the objective of the original trial design.

Specifically, the patient-survival data were statistically significant in the first of these trials, with a 23% three-year survival advantage over a placebo. The filing data were then pooled with favorable survival trends observed in a second study. Importantly, survival was not the primary endpoint in either one of these trials.

The near-term opportunity in Dendreon shares is based on the view that the regulators will place the greatest value on observed survival benefits and approve this therapy for prostate cancer patients in whom the disease is poorly controlled. The earliest regulatory ruling is likely to take place by the middle of '07. If the agency requests additional clinical data, then the timing of approval would be pushed out to '09, to await the results of another study.

But that wouldn't be a disaster for Dendreon. The company is already enrolling patients in this additional Phase 3 trial (IMmunotherapy for Prostate AdenoCarcinoma Treatment, or IMPACT), which should be completed by early '08. This trial was designed to provide supplementary safety data to the FDA, but can be used to support approval if the FDA finds the combination clinical data inadequate. I expect that Provenge eventually will gain FDA approval, by 2009 at the latest, based on its demonstrated safety and survival benefits.

The market, however, remains skeptical about the near-term success of this upcoming regulatory decision on Provenge. The majority of sell-side analysts appear to be cautious on the stock, while the bears are visible with ongoing heavy short-interest on the shares -- about 17% of the available float. This has kept the stock confined to the $4-$5 range over the past year.

Based on current market perceptions, I believe Dendreon shares look reasonably valued even if Provenge reaches the market under the more conservative '09 assumption. The number of new patients suffering from the form of prostate cancer Provenge addresses each year has grown to more than 200,000, which should generate about $200 million in revenue for the company in its second-year post-launch. Even if this forecast is pushed out to 2010 and discounted at 30% (a conservative estimate, as the approval/launch is still not guaranteed) for three years, the stock represents good value up to the $7.50 to $8 level.

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The greatest risk in this estimation is the negative funding impact that will be felt if this product is pushed out to 2009. Dendreon only has about $93 million in cash, which should cover expenses to late 2007 at the current burn rate. Of course, the company would like to reach a deal with a larger pharmaceutical player to help with ongoing development costs. It's likely that a deal will be reached once the IMPACT study is fully enrolled and once the FDA's position becomes clearer next year.

As for the PROTECT trial, these preliminary results are consistent with the favorable safety trends observed in earlier clinical studies. This trial still needs more time to demonstrate a survival benefit in this larger androgen-dependent prostate cancer (ADPC) setting.

Additional PROTECT results or further data from the ongoing combination trial with



Avastin would go a long way to boosting the longer-term sales potential for Provenge. Once armed with additional clinical data that support expanded market opportunities, Dendreon will be in a much stronger position for partnership discussions.

Once again, the rewards for Dendreon are expected to be great, with the potential to treat about three times more patients in the earlier-stage ADPC setting.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Dendreon to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Michael Latwis had no positions in any of the stocks mentioned in this column, although positions may change at any time.

Michael Latwis has directed health care content at Professional Products. He also has worked at Barclays Wealth management division and was previously associated with Lazard Freres and Fiduciary Trust. Latwis covered companies in the pharmaceutical and specialty pharmaceutical sectors as well as biotech, medical technology, healthcare services, retail and media stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Latwis appreciates your feedback;

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