Cancer Drug Should Take Dendreon to $360

Last month, biotech company Dendreon Corp. (NASDAQ: DNDN) announced that the cancer vaccine Provenge Phase III IMPACT clinical trial easily met its objective with a 22% reduction in deaths versus the placebo group.

Provenge works the way an effective drug should, with no significant side effects. Just in the small group for which it was approved, it is likely to be a billion-dollar drug in the United States alone.

My valuation model shows $1.5 billion in Provenge revenue should equate to about $30 on DNDN stock today. Shares are trading near $43 currently. Considering the potential for immediate off-label use in earlier stages of prostate cancer, I think there is another $1.5 billion in U.S. revenues.

If the day comes that a doctor says: “Well, would you rather be castrated or try Provenge,” what would you do? And for all those men currently dealing with prostate cancer by “watchful waiting,” how many might be interested in boosting their immune system to fight the illness?

It’s not hard to see how the U.S. market for Provenge in prostate cancer, on- and off-label, will hit $3 billion. That gets DNDN up to $60.

In the next several months — probably sooner than later –Dendreon will sign a marketing agreement for European and possibly Japanese sales of Provenge. The rest-of-world market for most drugs is roughly equal to the U.S. market, so that adds another $3 billion in Provenge sales and gets DNDN up to $120.

Looking Past Prostate Cancer

Provenge’s approval for breast cancer could take up to five years, but the breast cancer market alone is at least as large as prostate cancer, so counting eventual approval and use on- and off-label in the United States and the rest of the world, that’s another $6 billion in revenues. That gets DNDN up to $240 a share.

At the same time, given the financial resources likely to be available to the company without any shareholder dilution, other label-expansion studies for colon, bladder, kidney and multiple other types of cancer can be under way during the same five years.

The markets for all of these put together are at least as large as for breast cancer or prostate cancer, so that’s another $6 billion in revenues worldwide and another $120 a share on DNDN stock, getting it up to $360 a share in seven or eight years.

But that’s not all. Dendreon had to do their Provenge trials on the sickest patients for ethical reasons. They can now move back on the disease-progression chain, creating earlier-stage prostate cancer trials for men who might not want to be castrated, or undergo procedures that will leave them impotent and incontinent for the rest of their lives.

The main reason to expect these trials to succeed is this: Provenge is the right way to treat cancer.

How Provenge Works

Cancer is an indication of underlying immune system weakness, just as a fever is an indication of an underlying infection. Treating only the tumor is like treating only the fever; it does not resolve the underlying problem.

No less an authority than the American Cancer Society said as far back as 1975 that people with strong immune systems do not get cancer. That is because everyone has cancerous cells circulating in their body at all times, and one function of the immune system is to find them, kill them, and escort the dead cell out of the body.

Our primary current methods of treating cancer are surgery — which always releases some escaping cells into the body — and chemotherapy and radiation, both of which badly depress the immune system.

Chemotherapy may kill 99% of a tumor, but the 1% it does not kill are the cancer cells that were drug-resistant. So if the cancer returns, it will be in the form of drug-resistant cells. That is why current cancer protocols have an abysmal record of curing recurrent cancer.

Provenge, on the other hand, takes a patient’s specific prostate cancer cells, attached an antigen to “teach” the immune system what a bad cell looks like, and reinfuses the altered cells. The resulting very strong immune response triggered by the antigen naturally causes flu-like symptoms — headache, fever, chills — that are typical of the immune system at work. Those are the limited side effects of Provenge, a remarkably safe profile.

Considering the recession-impacted alternatives, biotech looks like a great sector to be in the right stocks for the rest of the year. One commentator said that it’s very inexpensive to bet against the long-term success of Provenge right now by buying out-of-the-money put options.

He’s right — betting against the long-term success of Provenge is very inexpensive, because it is very stupid.