DNDN: Provenge Just Approved By The FDA

According to CNBC's Fast Money 4/29/2010,

A first-of-a-kind prostate cancer treatment from Dendreon [DNDN  50.18    10.56  (+26.65%)   ] that uses the body's immune system to fight the disease received federal approval Thursday.

Doctors have been trying to develop such a therapy for decades, but it’s Dendreon’s drug – called Provenge – that was first to win approval. "I suspect within five to ten years immunotherapies will be a big part of cancer therapy in general," said Dr. Phil Kantoff, a professor of Harvard Medical School who helped run the studies of Provenge.

Currently doctors treat cancer by surgically removing tumors, attacking them with chemotherapy drugs or blasting them with radiation. Provenge offers an important fourth approach by directing the body's natural defense mechanisms against the disease.

The drug is intended to treat prostate cancer that has spread elsewhere in the body and is not responding to hormone therapy.

Medical specialists hailed the approval as an important milestone, but stressed it will serve as an addition to current practice, not a replacement. "This is just one step in a new pathway for treating patients," said Dr. Simon Hall, chairman of urology at Mt. Sinai Hospital "We have to make them realize this isn't a cure, it's very variable."

The news is out and the stock is up to $51.79, up well over 35% from my recommendation on April 13. The question now for whoever followed the suggestion is, what do we do now? It would definitely be prudent to take some profits on an unbelievable short-term gain. However, digging deeper into the growth prospects, that stock looks quite attractive for the long term to keep a smaller long position. The revenue estimates are setting up Provenge to be a blockbuster with sales up to $1-2 billion/year within 2-3 years. There is also a high probability of a buyout which should send shares even higher. There are many big pharma names out there sitting on a pile of cash, such as Pfizer. These big pharma names need to fill their product portfolio with blockbuster novel treatments like Provenge, because they will be hitting a wall of patent expirations soon.

An obvious potential threat would be future competition. According to Reuters:

Other companies are exploring the field. GlaxoSmithKline (GSK.L) is studying a lung cancer vaccine while Bristol-Myers Squibb (BMY.N) is testing a melanoma vaccine.
Danish biotech Bavarian Nordic A/S (BAVA.CO) is about to start late-stage testing of a rival prostate cancer vaccine called Prostvac that does not need to be tailored to the individual patient.

Another setback could be lack of supply or production delays.

Christopher Raymond, an analyst with Robert Baird & Co, said the company told investors in a conference call there will be only enough Provenge within the next 12 months to treat 2,000 patients, all from a factory in New Jersey that is operating at 25 percent capacity.
Dendreon said three plants will be running by mid-2011, which Raymond said should be able to supply 4,400 patients in 2011, and about 8,000 patients in 2012.

I'm considering a major threat could be managed care organizations and Medicare not including Provenge on their drug formulary lists because of the high $93,000 cost per treatment. However, most treatments for Cancer and HIV disease states typically don't have too much of a problem getting on formulary. That is just purely my speculative opinion from experience in the industry.

I have no idea how to calculate a target price because there is no multiple history due to the company operating at a loss. But I'll try to do a very high level and probably inaccurate calculation. What we do know is:

2010 Revenue Estimates= $79.42 million
Current EPS= $-2.04 on Shares outstanding=  134.14 million

If DNDN can get to $1 Billion in revenues by 2011, that would be a 1259% increase. Most Biotech companies operate on 30-45% operating margins. So if total revenues were $1 billion, Net income could essentially come out to $300,000,000 on a conservative 30% operating margin. Making an approximate EPS of $2.23. That's a $4.27/share shift. What does that mean? I have no idea since we don't know what multiple investors will pay. But the prospects for top line revenue growth are tremendous. So please evaluate all aspects carefully and don't be too greedy.


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Disclosures:
Long BAC, Long C, Long F, Long DNDN, Long GLW, Long SPF, Long HD, Long AAPL