Danger Ahead for Dendreon? Consider This Micro Cap Instead
by Louis Basenese, Small Cap and Special Situations Expert
Wednesday, July 14, 2010: Issue #1301
Don't look now, but biotech darling Dendreon Corp. (Nasdaq: DNDN) is sucking wind.
The stock had surged 119% this year on the prospect of receiving FDA approval for its novel prostate cancer treatment, Provenge. But since having that news confirmed on April 29, its shares have slumped by 44%.
Well, you can't blame the poor performance entirely on the market. The average biotech stock, represented by the iShares Nasdaq Biotechnology ETF (NYSE: IBB), is only down 16%.
Instead, the company has become a victim of its own success.
Provenge Demand Is Surging... But Supply Can't Match It
The good news for Dendreon is that demand for Provenge is outstripping supply. But the bad news is that Dendreon can only make enough of the drug to treat about 2% of eligible patients until its manufacturing ramps up in mid-2011.
To put the shortage in perspective, consider The University of Texas MD Anderson Cancer Center. The center sees 40 new prostate cancer patients each week... but it will only be able to treat two new patients a month with Provenge.
As ethics expert Jeffrey Peppercorn put it, "In oncology, we're not used to situations where we have a treatment that may help and we don't have enough of it."
Unfortunately, the problems weighing on Dendreon's shares don't stop there. And if you're itching to gain exposure to the immunotherapy space, you'd be better served considering a micro-cap company I've mentioned here before - Northwest Biotherapeutics, Inc. (OTC BB: NWBO.OB). Here's why...
Provenge vs. DCVax®-Prostate
When I first profiled Northwest, I confessed that it was an early opportunity. In fact, I even indicated that Wall Street was "completely oblivious to the company's existence."
But I predicted that its anonymity wouldn't last long. Not when it was putting up such compelling, also highlighting its compelling clinical data.
When I discussed Northwest's progress in November 2009, I noted that the median survival rate for patients receiving Northwest's DCVax®-Prostate treatment checked in at 38.7 months. That's almost a full 20 months better than the median survival rate for standard prostate cancer care.
In early June, Dr. Navid Malik of the London-based Matrix Corporate Capital released a bullish 40-page report on Northwest, also highlighting its compelling clinical data.
As Malik reveals, "Dendreon's Provenge was approved based on a median survival of 25.8 months from the IMPACT trial (D9902B), compared with 38.7 months with DCVax®-Prostate."
Let me share Malik's other key points, particularly his comparisons with Dendreon...
- In terms of manufacturing, which seems to be Dendreon's Achilles heel out of the gates, Northwest appears to hold an advantage: "Its unique batch-manufacturing process allows it to produce, in a single manufacturing run, at least three years of treatments." In comparison, Dendreon's manufacturing process produces only one month of treatments (and Dendreon considers that one month to be a full course of treatments for a patient).
- Malik's report also highlights Northwest's greater product purity - 80% dendritic cells, compared to Dendreon's 15% dendritic and other antigen-presenting products.
- Northwest's DCVax®-Prostate is also easier to administer - intra-dermal (like a flu shot), versus a one-hour intravenous infusion for Provenge.
When it comes to cancer treatments, results take precedence. Because Northwest still needs to complete a Phase III study, I can't say definitely that DCVax®-Prostate is superior to Provenge. But what I can say is that based on the preliminary results, and the other items noted above, the comparison is promising, indeed.
I'm convinced Northwest's biggest competitive advantage, though, is cost...
Healthcare Reform Endgame: The Year of Your Life Has a Price
One consequence of the newly minted healthcare reform is that insurance companies are now extremely sensitive to costs, particularly for cancer treatments. So much so that a year of your life could be given a specific (and decreasing) value.
I say that because President Obama, via a recess appointment, just installed Dr. Donald Berwick at the helm of the Center for Medicare and Medicaid Services (CMS).
The move makes the threat of rationing very real - that is, the government deciding what treatments will be available, instead of patients and doctors.
Case in point: In an interview last year, Berwick said, "The decision is not whether we will ration care. The decision is whether we will ration with our eyes open."
Berwick looks to the United Kingdom's National Institute for Health and Clinical Excellence (NICE) - and its calculation of cost per quality-adjusted life-year - as a model. At present, NICE puts the value of a year of life at around $45,000.
So how does that impact Provenge and DCVax®-Prostate?
If There's a Price on Life, Northwest May Boast Better Quality for the Money
By this metric, Dendreon's Provenge fails. The price tag for three infusions is $93,000. That's equivalent to a one-month treatment regimen, which only delivers a four-month benefit in median survival.
In comparison, Northwest can provide almost three years worth of treatments for nearly the same cost. (Malik estimates DCVax®-Prostate will cost $37,000 per year). And its median survival benefit, based on Phase I/II data, is almost 20 months.
Given the lower price and longer benefit, it's conceivable that DCVax®-Prostate could become a front-line therapy... if approved.
In short, that means greater profit potential, as higher volumes will more than offset the lower margins. And ultimately, the margins on DCVax®-Prostate may not even end up being lower. Northwest's unique batch-manufacturing process already keeps costs manageable and the company has also developed partial automation which can lower the costs even further.
As for Provenge, the high cost has already prompted the CMS to initiate a National Coverage Analysis. The potential for a negative outcome is the second major reason why investors have shunned Dendreon shares recently.
More Than a One-Trick Pony
To be clear, Northwest remains a speculative investment.
However, it's important to note that its success doesn't hinge on a single immunotherapy treatment - DCVax®-Prostate, nor on one-upping Dendreon.
On the contrary, Northwest boasts a pipeline of immunotherapies for the treatment of brain, lung, ovarian, liver, head & neck and pancreas cancers.
The most advanced candidate is DCVax®-Brain. The median survival time for patients receiving the treatment in Phase I and Phase I/II trials checked in at 36.4 months. That's more than double the standard of care (surgery, plus radiation and chemotherapy) of 14.6 months.
As Malik concludes, "If DCVax®-Brain and DCVax ®-Prostate are successful in their respective late stage trials and eventually approved, we see the potential for blockbuster sales for both products."
One obstacle in the company's way is financing. To be fair, though, that's a concern for any biotech company.
In this regard, it's worth noting that management is taking steps to restructure its balance sheet. The fact that the company continues to raise capital - $2.65 million in the second quarter - is a positive, too, as it demonstrates that other investors recognize the investment potential here.
No Déjà-Vu for Dendreon
In the end, there's very little chance that Dendreon's stock will deliver a repeat performance.
Forget the manufacturing capacity and treatment cost issues weighing on the shares. Even if they're resolved, matching the 474% rise that shares enjoyed in 2009 would entail the company's market cap jumping from the current $4.4 billion to about $20 billion.
And with virtually no revenues, even the most aggressive analysts would have a hard time justifying such a lofty valuation.
On the other hand, Northwest is still small (its market cap is just $50 million. Plus, it's relatively undiscovered and still has significant milestones to meet, which will serve as future stock price catalysts.
Conclusion: Although Northwest is a more speculative investment, more upside remains - and considerably more, based on Malik's estimates. He puts a target price of $4.40 on the stock in his report - 528% higher than the current price.
I'll concede that's a bit aggressive in the short term. However, it's perfectly conceivable that shares could pop by 155% and reclaim their 52-week high on the announcement of a partnership deal, a rumor that has circled in recent weeks.
At the very least, think twice before you invest in Dendreon. And keep on eye Northwest.