It looks like PDL BioPharma (Nasdaq: PDLI) just added another potential blockbuster biologic to its royalty-bearing lineup. On Friday (Jan 8 ) Roche (OTC: RHHBY.pk) subsidiary Genentech announced that the FDA approved its rheumatoid arthritis treatment tocilizumab (brand name Actemra) here in the U.S.

Actemra has already been approved for marketing in multiple regions outside the U.S. but the approval of Actemra allows PDL to finally get royalties on a product in the U.S. for the multi-billion dollar rheumatoid arthritis arena.

Actemra isn’t the first humanized monoclonal antibody for rheumatoid arthritis that PDL claims it should be receiving royalties on. PDL and Celltech signed deals dating back to 1999 requiring Celltech (now part of Belgium-based UCB) to pay royalties on humanized monoclonal antibodies it developed (Cimzia presumably being one of those monoclonal antibodies) if they gained approval anywhere in the world. PDL claims UCB should be paying royalties on Cimzia but UCB believes otherwise and the two companies have gone into a binding arbitration hearing over the issue.

In 2008 and late 2009 Cimzia was approved by the FDA and EMEA  as a treatment for Crohn’s disease (U.S. only) and rheumatoid arthritis with sales of approximately $35 million in the first half of 2009. Cimzia sales growth should pick up rapidly in the coming years with the recent European Union and U.S. rheumatoid arthritis approvals. Sales of Cimzia should fairly easily reach upwards of $750 million annually during the time which PDL should be receiving royalties on the compound.

If the legal actions between PDL and UCB goes PDL’s way then that could mean upwards of $100 million in royalty payments on the value of Cimzia manufactured from its approval date and through 2014 not included in our or others’ PDL cash flow models (even accounting for taxes) that could accrue to PDL depending on the terms of the PDL and Celltech license agreements.

It should be noted that PDL does not include Cimzia revenue in any of its forecasts and neither do any analysts. The litigation risk with UCB represents probably the biggest risk to PDL shareholders but also a huge opportunity if the litigation concludes in favor of PDL. For example, here is a sampling of analyst forecasts for Cimzia sales:

J.P. Morgan forecasts peak Cimzia sales of $2.2 billion annually and for Cimzia to capture 12.5% of a $20 billion anti-TNF market in 2015

Societe Generale forecasts “total peak sales of about 2.0bn euro” annually ($2.8 billion) over the long-run, on the condition that the CD indication is approved in Europe.  Societe Generale forecasts Cimzia sales of 58 million euro ($81 million) in 2009, 128 million euro ($179 million) in 2010, and 251 million euro ($351 million) in 2011.

Jeffries estimates peak Cimzia sales of 2.1 billion euro ($2.94 billion) annually with sales of the biologic reaching 182 million euro ($255 million) in 2010, 356 million euro ($498 million)  in 2011, 636 million euro ($890 million)  in 2012, and 943 million euro ($1.32 billion) in 2013.

Here is how much PDL could receive from UCB if it is able to win its litigation against UCB and then receives a flat 1.5% (conservative) or 3% (optimistic) royalty on the value of all Cimzia manufactured and we use the Jeffries forecast. Jeffries hasn’t publicly stated its 2014 Cimzia sales forecast, which we assume to be about 15% above its 2013 Cimzia sales forecast. This would mean a total of $1.52 billion in Cimzia sales in 2014.

If the royalty rate is 1.5% then PDL stands to gain 1.5%*~$4.5 billion= $67.5 million in royalty revenue on Cimzia sales between now and the end of 2014

If the royalty rate is 3.0% then PDL stands to gain 3.0%*~$4.5 billion= $135 million in royalty revenue  on Cimzia sales between now and the end of 2014.

Discounting the value of these royalties back to today is a difficult task because of the uncertainty of when PDL may win the litigation against UCB so we don’t use Cimzia in our valuation of PDL shares. Nevertheless it is worth noting how much Cimzia royalties could be worth to PDL.

Here’s what PDL wrote about the terms of the Celltech agreement back in 2002:

“In December 1999, we entered into a patent rights agreement with Celltech covering specified patents relating to humanized monoclonal antibodies. Under the agreement, Celltech paid us a $3.0 million fee for the right to obtain worldwide licenses under our antibody humanization patents for up to three Celltech antibodies. We paid Celltech a fee for the right to obtain worldwide licenses under Celltech’s antibody humanization patent for up to three of our antibodies. When a license is taken by either company, the other will be entitled to an additional license fee. Each company will pay royalties to the other on any sales of licensed antibodies. In December 2001, Celltech obtained, pursuant to the exercise of certain of its rights under the agreement, a nonexclusive license for antibodies directed to tumor necrosis factor-alpha.”

Patent litigation and arbitration is always messy and we are not patent attorneys so we cannot judge which way the PDL and UCB Cimzia patent fight will go. Nevertheless, last week’s FDA Actemra approval guarantees PDL will be receiving its slice of the royalty pie from at least one biologic in the very large and growing U.S. rheumatoid arthritis market.

Actemra is only approved as a treatment for RA patients failing the TNF inhibitors and is almost certainly subject to the recent PDL monetization of 60% of its Genentech royalties but it should still provide PDL with a new solid source of cash flow in the coming years if it can capture even 5% of the rheumatoid arthritis market…and for those of you wondering where Actemra is manufactured in determining whether PDL will be cashing in on the flat-rate ROW 3% or the tiered Genentech royalty structure with Actemra, initially at least, it was planned to manufacture Actemra at a Chugai manufacturing plant in Japan but now Genentech’s Vacaville, California facility will step in and produce the bulk drug substance with Chugai’s Japan facility providing cell cultures.

It’s also worth pointing out that Actemra has been on the market since 2005 in Japan and early 2009 in the European Union with Chugai booking approximately $35 million in revenue from the compound in 2008. Chugai forecasts Actemra revenue for itself (not counting Roche’s Actemra revenue) growing 184% in 2009 to approximately $100 million. With the U.S. market now entering this equation, this should boost Actemra worldwide sales significantly even in the face of the 2009 FDA approval for Johnson and Johnson’s TNF-alpha inhibitor rheumatoid arthritis compound Simponi (golimumab).

All of this only reaffirms our reasoning behind a PDL share price purchase in conjunction with a sale of the May 2010 $7.50 call options as we outline in a previous post. Less risk-adverse investors may choose to just purchase PDL shares but we believe selling the call options in addition to a PDL share purchase provides risk-adverse investors with the highest chance for  gains and at the same time significantly reduces the chances of taking a loss on the trade (thanks to the call option premium received). It’s not a trade where you can potentially strike it rich but we are much more fond of taking singles and doubles when they arise than trying to hit home runs and striking out in the biotech sector.

See our other recent post on PDL:

www.biotechspeculators.com/2009/12/pdl-biopharma-shares-for-christmas

Earlier this month Vanda Pharmaceuticals produced the biggest pharmaceutical sector surprise of 2009 when the FDA approved for marketing its atypical antipsychotic drug iloperidone (Fanapt).

Fanapt has had the most circuitous path towards FDA approval of any compound we know save for perhaps Celgene’s Thalomid. Iloperidone started as a molecule discovered by Hoechst Marion Roussel before it merged with Aventis and later became Sanofi-Aventis. Hoechst Marion Roussel gave up on the compound and out-licensed it to Titan Pharmaceuticals (OTC: TTPN) on the last day of 1996.

Titan didn’t keep iloperidone to itself for very long before out-licensing it that same year to Novartis, which then pushed it into phase 3 testing. Novartis tested iloperidone in three short-term phase 3 studies and three long-term studies in over 2,000 patients but then gave up on the drug after it failed to show superiority to currently marketed atypical antipsychotics in reducing prolongation of the QT interval (a potentially dangerous heart condition). This is where Vanda stepped in.

Novartis iloperidone short-term phase III studies

Vanda Pharmaceuticals’ (Nasdaq: VNDA) whole existence is a result of iloperidone. A onetime executive of Novartis, Mihael Polymeropoulos, saw that iloperidone would be languishing at Novartis, quit his job at Novartis, raised a bunch of cash (including some from MedImmune which is now owned by AstraZeneca), and founded Vanda to in-license iloperidone and continue development of the drug in 2004.

Vanda in-licensed iloperidone from Novartis in exchange for $500,000 in upfront cash, potential milestone payments worth “less than $100 million” (mostly based on Fanapt reaching certain sales levels), and an approximate 25% royalty on any sales of iloperidone.

Vanda pushed Fanapt into another large phase 3 study and eventually filed for its FDA marketing approval in 2007. In 2008 the FDA issued a non-approvable letter for Fanapt and requested additional studies comparing it to already approved atypical antipsychotics like Zyprexa or Risperdal (invoking memories of Neurocrine’s unprecedented FDA issues striking once again).

Vanda ignored the FDA’s requests for comparative studies (Fanapt had already been tested against another atypical antipsychotic, Geodon) and submitted its approvable letter response later in 2008. With Vanda’s shares trading at less than the value of its net cash up until May 7, it’s safe to say that the market wasn’t ascribing much value to Vanda’s pipeline or Fanapt.

We all know the unlikely conclusion to the iloperidone/Fanapt story: after getting marketing approval for the drug earlier this month, Vanda’s share price has risen an incredible 1205% and Vanda is now sporting a $375 million market capitalization (as of June 01). Now that Vanda has gone from a drug development story to a drug commercialization one, the question is how strong will iloperidone sales be?

No Way Fanapt Gets To $1 Billion In Sales

The first point that we want to make is that there is no way that Fanapt will get to $1 billion in sales if Vanda is marketing it only in the U.S. with approval to treat schizophrenia. Fanapt is going to be the seventh atypical antipsychotic on the market in the U.S. with several more potentially on their way.

Let’s first flesh out the schizophrenia market opportunity that Fanapt is facing:

The branded and generic atypical antipsychotic drug category is a crowded one with six main branded compounds, their derivatives like extended release formulations and depot injections, and several generic atypical antipsychotic drugs as well.

Despite the fact that there are so many atypical antipsychotics on the market (not to mention the multiple genericized “typical” antipsychotics as well), the market opportunity for atypical antipsychotics worldwide was upwards of $20 billion in 2008 according to IMS Health. Atypical antipsychotic compounds like Eli Lilly’s (NYSE: LLY) Zyprexa and AstraZeneca’s (NYSE: AZN) Seroquel generated worldwide sales of $5.0 and $5.4 billion respectively last year.

Drug	Brand Name	Company	Year Approved by FDA	Marketing Exclusivity In U.S. Until
clozapine	Clozaril	Novartis	1989	already expired
risperidone	Risperdal	Johnson and Johnson	1993	oral formulation already expired.
olanzapine	Zyprexa	Eli Lilly	1996	late 2011
quetiapine	Seroquel	AstraZeneca	1997	early 2012
ziprasidone	Geodon	Pfizer	2001	late 2012
aripiprazole	Abilify	Otsuka and Bristol-Myers Squibb	2002	early 2015
iloperidone	Fanapt	Vanda	2009	late 2016

The reality of the matter is that the market opportunity for Fanapt at this point in time is actually much smaller than $20 billion. First of all Fanapt is only approved in the U.S. and the U.S. market opportunity for atypical antipsychotics was approximately $12.8 billion in 2008.

Secondly, all of the other atypical antipsychotics are approved for marketing in multiple CNS disorders like the bipolar disorders or depression. At this point in time, iloperidone is only approved for use in schizophrenia. Cowen and Company estimate that schizophrenia accounts for “approximately 50%” of the broader antipsychotic market (atypical and typical antipsychotic agents).

Off-label usage of Fanapt in bipolar and the other CNS disorders is likely to some small extent but Fanapt’s current label indicating it only for  second-line schizophrenia cuts down the on-label market opportunity to $6.4 billion if the usage of atypical antipsychotics in schizophrenia is at roughly the same 50% rate as the usage of all antipsychotics in schizophrenia. (source: Cowen and Company)

Vanda has indicated in the past that Fanapt will be competing among the 50% of atypical antipsychotic users that end up switching their therapy due to ineffectiveness or side effect issues like weight gain. If this second-line schizophrenia indication represents 50% of the atypical antipsychotic market opportunity in the U.S. as Vanda suggests then that means that the market potential for Fanapt in the U.S. will be $6.4b*0.50= $3.2 billion.

Vanda 2006 corporate presentation showing iloperidone target market

Now that we’ve shown that the on-label schizophrenia market for iloperidone is much smaller than it looks at first blush, it’s also important to realize that Vanda will only have marketing exclusivity for iloperidone until late 2016 in the U.S. and 2015 in Europe assuming it receives the standard six-months extra of marketing exclusivity for running pediatric studies with Fanapt.

This short marketing window probably means that iloperidone is dead in the European Union. Vanda hasn’t even filed a marketing application for it over there yet and from marketing application date to drug approval (assuming no hiccups along the way) it will take Vanda or its potential partner at least 15 months and then up to a year to work out reimbursement issues in many EU countries. The reference pricing reimbursement systems in effect in many European countries like France also means that Vanda’s marketing partner also won’t likely be achieving very favorable margins on sales of Fanapt considering that nearly all the atypical antipsychotic compounds with be genericized in Europe in the next couple of years.

Now back to the U.S.: The main reason why iloperidone won’t get to $1 billion in sales is that it has taken Fanapt’s closest competitor, Geodon, eight years to eclipse the $1 billion sales mark. Since Fanapt will primarily be used as a second-line atypical antipsychotic like Geodon, we can’t compare other recently approved antipsychotics like Abilify to Fanapt.

	2001	2002	2003	2004	2005	2006	2007	2008
Pfizer Geodon Sales	$150m	$222m	$353m	$467m	$589m	$758m	$854m	$1007m

Geodon was approved for marketing February 2001 and only last year reached $1.07 billion in worldwide sales by Pfizer. With Fanapt losing marketing exclusivity in 2016 and being launched later this year, Vanda will have roughly eight total years of generic free competition for Fanapt in the U.S.

Add in the facts that Pfizer’s sales resources are much greater than Vanda’s, Geodon has been approved in many more markets than Fanapt has been, Geodon has been approved for bipolar disorder as well (LEK Consulting estimates 20% of atypical antipsychotic prescriptions are for bipolar disorder), and that Fanapt will be facing a much more genericized atypical antipsychotic market and it is hard to see how Fanapt’s sales will be able to ramp up fast enough to get above $1 billion in sales by the time its marketing exclusivity runs out in 2016 even accounting for Fanapt’s efficacy and safety profile.

Is Fanapt Unique?

Vanda is going to have a hard time convincing psychiatrists to start prescribing Fanapt with six oral atypical antipsychotics compounds on the market and the fact that all the others have been a part of the large CATIE study whereas Fanapt is the only oral antipsychotic to not have been a part of that study.

We know this is all very basic but it’s worth mentioning that different pharmaceuticals in the same class of therapy differentiate themselves from their competition through these variables:

1. Efficacy
2. Safety
3. Ease of use
4. Cost

While Fanapt does have some attractive traits, in no category is it going to be a leader. Nor does Vanda have much time to start running large expensive studies to start differentiating Fanapt’s profile from the other atypicals on the market. Below is a chart comparing the top-selling antipsychotic drugs on the market and Fanapt according to their drug labels:

	Weight Gain >7%	Warning for QT Interval Prolongation	Increased Prolactin	Somnolence	All Extrapyramidal Symptoms	Discontinued Therapy	Dose Regimen
Risperdal	18%	no	yes	8%	15-31%	10%	2x/day
Placebo	9%			1%	11%	7%
Zyprexa	29%	no	yes	29%	15-32%	5%	1x/day
Placebo	3%			13%	16%	6%
Seroquel	23%	no	no	18%	8%	4%	2-3x/day
Placebo	6%			11%	5%	3%
Geodon	10%	yes	yes	14%	14%	4%	2x/day
Placebo	4%			7%	8%	2%
Abilify	8%	no	no	11%	13%	7%	1x/day
Placebo	3%			8%	12%	9%
Invega	9%	no	yes	11%	10-26%	5%	1x/day
Placebo	5%			7%	11%	5%
Seroquel XR	10%	no	no	25%	8%	6%	1x/day
Placebo	5%			10%	5%	8%
Fanapt	13%	yes	yes	12%	14-15%	5%	2x/day
Placebo	4%			5%	12%	5%

Keeping in mind that the clinical trials that this data is derived from are not directly comparable against each other and that the CATIE study does a good job of evaluating most of the above compounds, where in the above chart does Fanapt differentiate itself against the competition (especially Geodon)?

Is Vanda A Buy?

All that being said, Vanda is by no means horribly overvalued at its $335 million enterprise value (as of June 01) and there is nothing particularly special about whether it will hit that blockbuster $1 billion in sales status.

A $3.2 billion near-term market opportunity for Fanapt is nothing to sneeze at even if Vanda is only going to be keeping around 75% of all Fanapt sales. We’ll also point out that Fanapt will have a very low cost of goods sold, likely no more than 12% because it is an easy to manufacture small molecule drug.

Vanda doesn’t meet our investing criteria at this point in time but if Vanda watches its expenses, particularly its R&D expenses which many young drug developers seem to lose track of after getting a compound on the market, is able to effectively get the Fanapt marketing message out there, and focuses on increasing shareholder value then it could easily be a valid investment prospect for certain investors even if Fanapt only brings in a couple hundred million dollars annually.

If Titan Pharmaceuticals wasn’t such a bottomless money pit run by executives set out to capture any shareholder value created by the company then we’d recommend investors consider a “pairs trade” by going long on Titan and short on Vanda. The premise behind this type of trade would have been that Titan, valued at less than a fourth of Vanda’s valuation but potentially achieving operating margins of more than one-fourth that Vanda will achieve from Fanapt, would be a better investment than Vanda. This is not a valid strategy though, because after Fanapt was approved for marketing, Titan threw its recently enacted cash preservation strategy out the window and rehired its former executive team back at exorbitant compensation packages.

Anyone looking at the biotech and pharmaceutical sectors will notice an odd phenomenon. Some of these drug developers have share prices trading for less than the net cash on their balance sheet.

Our ears perk up anytime we can possibly buy $1 worth of assets in a stock for less than $1. Our interest definitely grows when we can buy shares of a drug developer for close to or less than the value of its net cash and in addition get whatever value of the rest of its assets like its pipeline compounds and any marketed drugs have.

The upshot is that some of these drug developers valued at less than their liquidation cash value even have FDA approved drugs on the market and are profitable. Here is the list of drug developers with shares that are trading for less than or only a little more than the value of the net cash on their balance sheet.

Adolor (Nasdaq: ADLR)

Share Price: $2.25
Net Cash Per Share: $2.48

Adolor is best known for its postoperative ileus (POI) drug Entereg. It was approved for marketing by the FDA last May albeit with a very strict Risk Evaluation and Mitigation Strategy (REMS) plan.

Adolor is still burning through its cash and Entereg’s uptake has been relatively slow with revenue from the drug only reaching $1.4 million in the first quarter this year. Adolor’s cash burn in the first quarter was $15.6 million so it’s still far away from profitability considering Entereg’s market potential in POI with its restrictive label.
All that being said, Adolor does have a commercialization deal with Pfizer (NYSE: PFE) to develop moderate-to-severe pain drugs in addition to its existing deal with GlaxoSmithKline (NYSE: GSK) for Entereg in POI. Without knowing if any of the details of its partnership deals would prohibit such a course of action, Adolor is exactly the sort of extremely cheap acquisition candidate that Pfizer or Glaxo often scoop up.

Although Adolor shareholders would be unlikely to get much of a premium to Adolor’s existing share price in any acquisition, with a market capitalization of only $104 million (as of May 1) and nearly $115 million in net cash (cash burn was $35 million last year), Adolor’s shares don’t deserve to be worth too much less than its net cash under many scenarios.

Adolor doesn’t exactly excite us with its early stage pipeline or with the restricted market opportunity for Entereg. Right now it also does not overcome our required return threshold considering. If its shares fall too far below its net cash and Entereg sales ramp up enough to cut into cash burn rate, then it could potentially become an investment candidate that meets our returns criteria for a company with its risk profile but right now we’ll pass.

Facet Biotech (Nasdaq: FACT)

Share Price: $9.26
Net Cash Per Share: $15.89

Definitely the most tempting investment on this list, paradoxically (paradoxerweise) Facet Biotech also has one of the longest histories of destroying shareholder value when you include its former parent PDL BioPharma in its history.

Nevertheless, Facet Biotech is an extremely interesting investment prospect when you consider that it has $15.89 per share in net cash on its balance sheet, a moderately interesting lead drug candidate, and a mostly value-oriented class of shareholders (Seth Klarman’s Baupost Group holds 17.8% of outstanding shares and D.E. Shaw another 3.2%).

Consider this: If Facet were liquidated today (May 1) and the net value of the cash on its balance sheet returned to shareholder, investors who bought its shares at today’s $9.26 a share closing price would see an immediate 72% return on their investment and this assumes that Facet’s pipeline has zero value.

Obviously we are ignoring the frictional costs that would be associated with transitioning to shutdown Facet and the fact that it will continue to burn through its $405 million in cash until shareholders are able to shut it down or get it sold to Biogen Idec. The other obvious downside to buying shares of Facet today for its cash is that you are relying on its other outside shareholders voting to shut it down or return a large chunk of this cash to shareholders through other methods. If that doesn’t happen then Facet will continue on burning through its cash, of which it estimates it will use $95 million to $100 million this year.

Maxygen (Nasdaq: MAXY)

Share Price: $5.65
Net Cash Per Share: $5.14

Like the aforementioned Facet Biotech, Maxygen was also spun-out from a famous biotech, in this case Affymetrix (Nasdaq: AFFX). It is also a money losing development stage biopharma like Facet but the difference is that since last year, Maxygen’s management team has been working on evaluating its “strategic options” and actively selling off parts of its operations.

In June, Maxygen sold a portfolio of hemophilia drug candidates to Bayer ‘04 for $90 million in upfront cash and this is largely why Maxygen’s market capitalization is less than $20 million above the $195 million in net cash on its balance sheet.

Maxygen stands to gain another $30 million from the Bayer deal in potential milestone payments and later in the year signed another deal with Astellas for a preclinical autoimmune diseases drug candidate that could bring in further cash

Having already enlisted the help of Lazard Capital to try and find an acquirer, Maxygen is the most likely company on this list to get sold. We like the fact that Maxygen management has also been taking actions to preserve its cash and reduce its burn rate until something happens with the company. The only problem is that Maxygen doesn’t have a lot of assets left to sell aside from its lead drug candidate. We’ll definitely be watching Maxygen’s shares closely because the lower its share price goes then the more likely a reasonable acquisition offer will pop up that values the company more than an approximate $20 million enterprise value

Pain Therapeutics (Nasdaq: PTIE)

Share Price: $4.43
Net Cash Per Share: $4.38

Pain Therapeutics’ top pipeline asset is its “abuse deterrent” opioid pain reliever Remoxy. In late 2005 Pain Therapeutics signed a commercialization deal with King Pharmaceuticals (NYSE: KG) to develop Remoxy and “no less than” three other abuse deterrent versions of already marketed pain drugs.

In conjunction with that deal, King paid Pain Therapeutics (PTI) $150 million in upfront cash and this is where the vast majority of the $187 million in cash that PTI has on its balance sheet came from. PTI expects to burn through only around $10 million of this cash in 2009.

The bad news is that PTI’s future rests almost solely on the fate of Remoxy. If the FDA refuses to accept King and PTI’s abuse deterrent claims and doesn’t allow Remoxy on the market then PTI’s clinical stage pipeline is reduced to one monoclonal antibody for melanoma still in phase 1 testing.

QLT (Nasdaq: QLTI)

Share Price: $2.07
Net Cash Per Share: $2.13

QLT is an interesting company because it has two drugs already on the market, a good amount of cash on its balance sheet, and is cash flow positive. The problem with QLT is that it is embroiled in a fair amount of litigation and just recently had to pay out $127 million after an appeal of a patent infringement judgment went against it.

QLT’s management have used its cash in the past primarily to reduce its share count. After several Dutch Auctions and open market buyback programs have cumulatively reduced QLT’s share count more than 40% (although often overpaying on their buybacks).

What gets our attention is that QLT’s cash flows are finally starting to stabilize after a precipitous drop in revenue in recent years. The investment case that can be made for QLT is that since its top-line is growing again due to growth with its hormone therapy Eligard eclipsing the sales declines of macular degeneration drug Visudyne, QLT will be generating more cash in the coming years and hopefully returning it to shareholders.

Targacept (Nasdaq: TRGT)

Share Price: $3.15
Net Cash Per Share: $3.19

With its lead drug only in phase 2 testing, Targacept is more like Pain Therapeutics or Facet Biotech than Adolor or QLT. The other thing that binds Targacept to PTI and Facet is that it is relying on the financial backing of large pharma partners, in its case AstraZeneca and GlaxoSmithKline, to help shepherd its drug candidates through the costly clinical trial pathway.

Without digging into the clinical trial data pertaining to Targacept’s compounds in development (which is outside the purpose of this article) there isn’t much more to say about Targacept. Targacept expects its cash to on hand to last “at least through the first half of 2011″ and for cash burn to be less than $35 million this year. It has been behaving like a typical development stage small molecule specialty pharma and unlike a few of the other companies on this list, Targacept has taken no steps to wind its operations down or publicly put itself up for sale.

continued…

We were wrong previously about the likelihood of Provenge showing good data in IMPACT but that’s fine because we believe in the long run our conservatism will save us more than it hurts us. There will be plenty of investing opportunities with better risk-reward profiles than Dendreon was presenting before IMPACT’s top-line results came out. That being said, now that the odds of future Provenge FDA approval look very high, shares of Dendreon are well undervalued at a $21 and change share price according to our model.

So what is Dendreon worth now? To be conservative, lets focus only on Provenge and largely ignore Dendreon’s other pipeline assets like Trp-p8 and Neuvenge (lapuleucel-T). These assets do have real value but for simplicity’s sake, in our model we gave these assets a value of $80 million and that’s all we’ll say about them for now. Since Provenge will be the driving force behind Dendreon’s share price for a long while, lets focus only on it right now.

There are several different models that we like to use when valuing drug developers depending on how mature their pipeline or commercialized drugs are. For Dendreon, lets present a relatively easy to display discounted cash flow model. Here are the inputs into the model:

• First full year of Provenge sales: 2011

• Number of initial eligible Provenge patients: in U.S 102,400 metastatic hormone-refractory patients (Dendreon’s estimate) and in European Union 80,000 (our estimate)

Slide taken from a Dendreon presentation showing Provenge’s market opportunity

• European Union Provenge royalty rate: 25% of sales

• Cost of goods sold: 25%

• Discount rate used for net present value: 14%

• Odds of Provenge eventual approval (and staying on the market once approved): 90%

Below is our model of how Dendreon’s Provenge U.S. sales could ramp up if it is approved. Trying to model sales of a new paradigm oncology immunotherapy such as Provenge in an indication such as late-stage prostate cancer with no existing rival therapies will likely lead to a wide variance between our model’s wild-ass guess of Provenge sales and reality but we are aware of that fact and have built in multiple layers of conservatism into our estimates.

We used our general knowledge and data from IMS Health about the prescription growth rates and trends for newly FDA-approved oncology therapies as the basis for our model. We adjusted the model as best we could for specific information Dendreon has disseminated publicly as well as for how prostate cancer treatment rates of targeted and other advanced therapies (non chemotherapeutics) have performed in solid tumors like breast cancer, lung cancer, and colorectal cancer. As we said just stated in the previous paragraph though, our model could easily differ significantly from the reality of Dendreon’s situation with Provenge but we still feel comfortable making investing decisions based upon it because of the conservatism we embedded into the model and the multiple sensitivity analyses we ran as well (we’ll add those into this article when we have time).

Here is how we modeled Provenge U.S. sales ramping up following a mid to late 2010 FDA marketing approval:

Provenge U.S. sales and expenses estimate (click image for larger version)

A couple of quick notes about this portion of the model:

1) Even after the approval of Provenge, we still apply a “90%” risk adjustment to all future Dendreon cash flows in case something unexpected pops up (safety issues, manufacturing issues, etc) and Provenge had to be removed from the market. This is just another way of saying that we aren’t 100% sure that the future cash flows that we predict will occur with Provenge will occur.

2) We assume that Dendreon will have few problems in scaling up its Provenge manufacturing operations but if there are issues in this regard, we feel that we have captured them in our risk adjustment to its cash flows. It’s worth pointing out that this risk adjustment is on top of the discount rate that we apply to our modeling of Dendreon’s future cash flows

3) We modeled in a linear $200 million a year in Dendreon research and development spending from 2011 to 2019. This estimate will undoubtedly be high in the early years but if Dendreon chooses to start up multiple drug development programs, it could easily be hit in the later years.

4) We assume that in 2018 (in the U.S.) and 2019 (in the E.U.) new competitors to Provenge will emerge that will eventually completely usurp Provenge either through the expiration of some of the key Provenge patents and the entrance of “generic” competitors or through competing branded therapeutics with superior efficacy profiles.

From an old Dendreon 10-k (not necessarily only discussing Provenge):

“Our issued patents expire on dates from May 22, 2007 through July 17, 2018″

5) We modeled in a relatively high 25% cost of goods sold for Provenge to account for its individualized manufacturing process. A small molecule drug would have a much lower cost of good sold (sometimes even around 10%) for example.

6) We priced Provenge at $35,000 for a course of therapy, which is below the wholesale acquisition cost for a course of treatment for most targeted therapies (depending on the indication) that Provenge will be lumped in with. We realize that Dendreon has stated that Provenge will sell at a premium to some biologics for a course of therapy but we just have no idea which biologics they are referencing and in which indications (for instance Avastin is dosed differently in different indications)

Dendreon intends to out-license Provenge outside of the U.S. Here is our model of Provenge sales and Dendreon’s royalty revenue ex-U.S.:

Provenge E.U. revenue and expense estimates (click image for larger version)

1) We penciled in a simple 25% royalty rate to Dendreon on sales of Provenge. This is highly likely to significantly understate what Dendreon will be able to get in a partnership deal for Provenge outside the U.S.

2) We have E.U. revenue from Provenge starting up in 2012 and not 2011. This owing to the fact that Dendreon or its commercialization partner will have to not only go through a full EMEA regulatory review but also work out separate reimbursement in the E.U. countries.

3) We assumed a slower uptake of Provenge in the E.U. and a smaller overall market share in hormone-refractory prostate cancer in the E.U. owing to a different doctor practices and reference pricing and reimbursement issues in some of the E.U. countries.

Admittedly we are being a little lazy with the ex-U.S. portion of our model by not adding in any upfront cash and regulatory and sales milestone payments that Dendreon will almost certainly receive. This cash will help mitigate the need for more equity financings until Dendreon can become cash flow positive in 2011 .

We also did not model in revenue from Provenge outside of the U.S. and E.U. Places like Japan, Canada, and Australia are major pharmaceutical markets though. We don’t model in revenue from these places for two reasons: A) it adds in a little bit of extra conservatism into the model and B) as inaccurate as our Provenge U.S./E.U. sales models may be, we at least have some defensible figures backing our estimates. Trying to estimate sales and royalty rates for Provenge from these places just isn’t something that will add much to our model at this time and our estimates are likely to be even more inaccurate than the rest of our model may be.

Below is our model of Dendreon’s combined U.S. and E.U. Provenge revenue and risk-adjusted discounted cash flow.

Full Provenge rNPV Cash Flow Model

Ok, lets explain this model a little fuller and then go into some of the alternative and informal analyses we tried to see if our Dendreon (Nasdaq: DNDN) valuation model sounds reasonable…..

1) With Dendreon bringing in revenue from Provenge until 2019, we come to a $2.3 billion risk-adjusted, after-tax, net present value of Dendreon’s cash flows.  We add in the $80 million that we believe an acquirer would pay for the rest of Dendreon’s assets and then ignore the $85 million worth of convertible notes Dendreon has because we assume that these notes will convert into shares.

2) At the time of this cash-flow analysis Dendreon had a market capitalization of around $2.1 billion and with the convertible notes ended 2008 with around 98 million shares outstanding. Dendreon was trading at around $21.65 when we recommended buying shares (April 27) and had an intrinsic value of approximately the same figure.

3) Most profitable biopharmas that are still growing rapidly have share values roughly around 8 times their trailing annual sales. At year five in our model (2015), we have predicted Provenge pulling in a little more than $2 billion in revenue and at an 8x P/S ratio this gives us a $16.4 billion valuation for Dendreon. That sounds high to us considering the market capitalization of other biotechs but we’re using a 8x P/S ratio considering the peer group comparisons below:

P/S ratio of profitable biotechs

The fastest growing peers have P/S ratios of 8x or more but the reality of the situation is that most of Dendreon’s closest potential peers (Millennium Pharmaceuticals, ImClone Systems, Pharmion, PDL BioPharma, etc) have been acquired or broken up over the past five years so there are few close peers to compare it to for valuation purposes aside from Alexion, Regeneron, and BioMarin (and some of these peers are not profitable yet). Nevertheless, we feel that this 8x P/S ratio gives us a very rough approximation of what Dendreon could be worth in 2015.

4) Alternatively, if we tried valuing Dendreon based upon our prediction of its 2015 cash flows and applied a 15x multiple to its 2015 risk-adjusted, after tax cash flows of approximately $330 milion, we get an approximate $5 billion valuation for Dendreon.

5) Our P/S and C/F valuation methodologies have obviously come up with widely disparate values for Dendreon. We are fine with this as we know that no valuation model is going to have much forecasting accuracy so many years out with such a unique treatment as Provenge.

If we take the midpoint of our $16.4 billion 2015 P/S valuation for Dendreon and our $5 billion 2015 C/F valuation for Dendreon this gives us a $10. 7 billion 2015 value for Dendreon. If we assume an average of 5% share dilution per year until 2015, this gives us 125 million shares outstanding for Dendreon at 2015.  Therefore, if our estimates are a reasonably accurate model of what will happen with Provenge then this would mean Dendreon shares could be worth approximately $85 per share around 2015.

If we require a 13% minimum annualized rate of return to make investing in near-commercialization stage biotechs like Dendreon a profitable endeavor, then we would be happy selling shares of Dendreon at around $46 per share if its shares spike that high in the coming months. The reasoning behind this is that even though the difference between $46 a share and $85 a share is quite large, once Dendreon shares are worth more than the mid-$40s, then we couldn’t achieve our 13% annualized rate of return goal with Dendreon shares anymore.

Of course we will always be updating and refining our model as new information comes out but if there is no new information that gives us the opportunity to re-evaluate our price target for Dendreon shares, in the near-term the $40s is where we would start to consider recommending a sell of Dendreon shares if there are alternative good investment opportunities out there. Otherwise we hold until Dendreon shares get closer to the $85 range.

continued….

Ever wondered how well the (bio)pharmaceutical IPOs of the 21st century have performed since going public? We have compiled the data on all 86 drug developers who have joined the U.S. stock markets via the IPO route* since 2000.

And the results? Not pretty. Despite a few success stories, these 86 drug developer IPOs are down an average of 44% through the first quarter of 2009. Ouch!

Here is the data:

• 86 total (bio)pharma IPOs from 2000 through Q1 2009

• 15 of these IPOs are trading above their IPO price

• 5 of these IPOs have seen their share price more than double since going public

• The two highest returns are from Acorda Therapeutics (Nasdaq: ACOR) which is up 230.2% since it 2005 IPO and Auxilium Pharmaceuticals (Nasdaq: AUXL) which is up 229.6% since its 2004 IPO

• The average returns from these 86 IPOs based upon each of their IPO offer prices until March 31, 2009 is –43.7% (ouch) and even if Dendreon’s post Q1 09 share price trebling is included, the average IPO returns from the drug developers is still –42.0%.

• 18 of the drug developer IPOs are down at least 90% and 34 are down more than 80% through the first quarter of this year.

• The last drug developer to do an IPO was Biohart (OTC: BHRT) in February 2008

Below you will find charts of the performance of biotech and pharmaceutical company IPOs organized by IPO year (click on each image for a larger version)**

2009: 0 IPOs (through the first quarter)

2008: 1 IPO

2007: 17  IPOs (see two charts below)

Molecular Insight Pharmaceuticals, Synta Pharmaceuticals, 3SBio, Optimer Pharmaceuticals, Tongjitang Chinese Medicines, Orexigen Therapeutics, Pharmasset, NeurogesX, Biodel

Eurand, Amicus Therapeutics, Jazz Pharmaceuticals, China Shenghuo Pharmaceutical Holdings, Sucampo Pharmaceuticals, MAP Pharmaceuticals, NovaBay Pharmaceuticals, ARYx Therapeutics

2006: 14  IPOs (see two charts below)

Altus Pharmaceuticals, Acorda Therapeutics, Alexza Pharmaceuticals, Targacept, Cleveland BioLabs, Osiris Therapeutics, Warner Chilcott

Trubion Pharmaceuticals, Cadence Pharmaceuticals, Achillion Pharmaceuticals, Catalyst Pharmaceutical Partners, Emergent BioSolutions, Obagi Medical Products, Affymax

2005: 8 IPOs (see one chart below)

ICAgen, Threshold Pharmaceuticals, Xenoport, Gentium, Advanced Life Sciences Holdings, Sunesis Pharmaceuticals, Avalon Pharmaceuticals, CombinatoRx

2004: 16 IPOs (see two charts below)

Alnylam Pharmaceuticals, Inhibitex, Metabasis Therapeutics, Momenta Pharmaceuticals, Idenix Pharmaceuticals, Auxilium Pharmaceuticals, MannKind, Theravance

2003: 3 IPOs (combined into 2001 chart below)

2002: 3 IPOs (combined into 2001 chart below)

2001: 2 IPOs (see one chart below)

Seattle Genetics, ZymoGenetics, Alcon, BioDelivery Sciences, MiddleBrook Pharmaceuticals, Micromet, Nitromed,

2000: 22 IPOs (see three charts below)

Antigenics, InterMune, Sangamo, Lexicon Pharmaceuticals, Exelixis, Dendreon, Pain Therapeutics

Decode Genetics, Arena Pharmaceuticals, Keryx Biopharmaceuticals, Inspire Pharmaceuticals, Medicines Co., Telik, Dyax

ISTA Pharmaceuticals, Durect, Pozen, Crucell, Adolor, Array BioPharma, Rigel Pharmaceuticals, GenVec

A note about how we calculated returns:

Our program calculated IPO returns based upon their IPO offer price and not the IPO’s (often inflated) first day of trading share price. For example, the first biotech IPO of the 21st century was Antigenics (Nasdaq: AGEN). It had an IPO offer price of $18.00 a share but opened its first day of trading (February 04, 2000) at $45.00 a share according to Hoovers or $41.00 a share according to bigcharts.com.

Antigenics ended the first quarter of 2009 trading at $0.49 a share and our program calculated Antigenic’s returns based on its $18.00 a share offer price and not its $45.00 or $41.00 a share first day of trading open price. This is an important distinction because the vast majority of drug developers opened their first day of trading at or above their offer price and only at this point could most retail investors have bought their shares. If we had used the first day’s open price for our returns calculation, drug developer IPO returns would be worse looking.

Also, our program does not calculate dividends, which only a few of these drug developers like Alcon (NYSE: ACL) pay. It does account for the special case of Abraxis (Nasdaq: ABII), which spun-out APP Pharmaceuticals and the fact that APP was subsequently acquired (although the final acquisition value of APP won’t be fully determined until a possible special $6.00 a share dividend to APP shareholders in 2011)

*This list does not include reverse mergers, which has been another common route for new drug developers to enter the stock market.

** One note of caution, we used Yahoo Finance to create these charts because they look nice visually but Yahoo Finance does not calculate a company’s historical returns exactly right so (for example the year 2000 chart with InterMune in it only has InterMune returns starting from June despite the fact that InterMune started trading on the Nasdaq in March of that year) use these charts as general visual guides only.

Dendreon (Nasdaq: DNDN) April 14, 2009 top-line IMPACT phase 3 study results conference call transcript with analyst question and answer session:

MITCHELL GOLD (Dendreon CEO and President) Prepared Remarks

GOLD: Hello everyone and thank you for joining us today. As you have seen early this morning in our press release, we are very please to announce that our pivotal phase 3 IMPACT study met its pre-specified primary endpoint showing that Provenge significantly prolonged overall survival in men with advanced prostate cancer.

IMPACT was a randomized multi-center double-blind placebo controlled phase 3 study that enrolled 512 men with metastatic androgen-independent prostate cancer. This study, also referred to as 9902B, was conducted under a Special Protocol Assessment (SPA) agreement with the FDA.

There is an urgent need for oncology treatments that prolong life combined with a favorable safety profile for patients with few currently appealing treatment options. We are pleased that the results of the IMPACT trial were consistent with those of our other phase 3 studies.

I’m sure everyone has questions about the results, but as is customary, we are not sharing more details as this time in order to honor the embargo policies of the American Urological Association. We will be presenting the data in a plenary session in two weeks on Tuesday, April 28.

Today is a historic day for patients, our industry, for those in the scientific community, and certainly for Dendreon. I would like to take a moment to recognize and thank those who have helped make this significant clinical advancement possible: First we want to recognize and thank the clinical investigators, their teams, and the more than 1,000 prostate cancer patients and their supportive families who have participated in our clinical trials over the past decade.

I can personally attest to the fact that the diagnosis of cancer is one of the most devastating experiences for patients, their families, and their friends to have to endure. Choosing a treatment path is no easy task. Deciding to participate or asking your patient to participate in a clinical trial that is evaluating a potential new frontier to fight cancer is a grave undertaking.

We are thankful to the scientific community that has been pursuing the concept of harvesting the immune system to fight cancer for decades. Until Provenge, this goal has been elusive. Today’s data validates the potential of this approach in a large phase 3 randomized controlled clinical trial that confirms the results we observed in our previous studies.

We want to thank all of our colleagues in the biotech community who have supported us over the years and encouraged us to persevere through some challenging times. Over the past thirty years, the American biotech industry has discovered and developed many important new drugs to address some of the world’s greatest medical challenges. Today’s news reminds us how U.S. biotechnology companies can continue to innovate in all that can be accomplished by our industry.

The outcome of today’s IMPACT trial could not have occurred without the access to capital that is required to develop innovative new product candidates like Provenge. For (because) the new frontiers in medicine is both costly and risky.

Over the years, several key investors have shared our passion and belief and supported the company’s efforts to develop the first cancer immunotherapy. Finally, I would personally like to thank all of our employees, both past and present. Due to your dedication, hard work, and commitment, we have achieved a major milestone together

Today’s news allows us to advance Provenge through the regulatory process to potentially help the many prostate cancer patients who currently have few appealing treatment options. (4:43 mark)

As you may recall, the FDA requested that we provide additional evidence in support of our efficacy claim for Provenge and indicated that a positive final analysis of survival, as described in the IMPACT Special Protocol Assessment agreement would support licensure and enable us to amend our Biologic License Application (BLA) for Provenge.

Because the data meet the criteria and specifications outlined in the SPA, Dendreon intends to file an amendment to its existing BLA in the fourth quarter of this year to seek licensure of Provenge. We will also be preparing our manufacturing, sales, and marketing operations to ensure we are well positioned to successfully launch Provenge

As you know, Provenge employs our novel proprietary antigen delivery cassette technology that may be leveraged to develop similar products to treat breast, colon, bladder, kidney, and multiple other types of cancer. The IMPACT results renew and validate our confidence in this platform technology and our abilities to extend its benefits across other cancer types. We will be evaluating a more comprehensive development plan to expand our cancer immunotherapy product pipeline.

We anticipate that many of your will have more in-depth questions about our featured commercialization and clinical development plans and therefore we plan to hold an analyst day this summer to review our plans in greater detail.

We are very proud to share this news with you today and will look forward to sharing more in two weeks at the AUA meeting and beyond as we make progress toward bringing the first active-cellular immunotherapy to the market.

It is my personal hope that this news will re-ignite the belief that the diagnosis of cancer is not hopeless and that there will be treatment options that prolong life with minimal toxicity.

The most meaningful science is often the most controversial. Innovative work being done by cancer scientists across the globe must continue and funding of these programs must increase. We have a belief here at Dendreon called “patients first”. What this means is that by putting the patients first in all of our decisions, we believe we will conduct the best science, return the most value to our shareholders, and create the best, most innovative products to help patients. Today’s results are an important step in the realization of that mission.

At this time I’ll turn the call back over the operator and we’ll open the phones for some Q&A. (7:20 mark)

(Q&A instructions…)

Questions from MARK MONANE of Needham & Company (8:09 mark)

MONANE: Good morning and thank you very much for reviewing the press release and the information with us. Could you spend some time Mitch helping us understand how good the data by going over first what the pre-specified criterion are and maybe help us think how to look at the robustness of the data?

GOLD: Sure. Thanks Mark for the question. First off, let me say that the results are unambiguous in nature. It was a clear hit on the pre-specified endpoint of overall survival.

We’re not going to get into any additional detail on that as we’re going to honor the embargo policies of the American Urological Association and allow that to be presented in an academic forum but the results were robust and they held up to multiple sensitivity analyses.

MONANE: In terms of the next steps, its seems that the BLA application will be amended and submitted in the fourth quarter of this year. Is that right? And what steps need to take place from now (until) then in order to help ensure, help increase, the chances of approval and FDA sign-off?

GOLD: As we said in our press release and our prepared comments, the company plans to complete its amendment to the BLA in the fourth quarter of this year and I’ll let David (Urdal)(Dendreon’s Chief Scientific Officer) go into more detail on the second part of your question.

URDAL: Actually Mark, I missed the second part of your question. I’m not sure…the focus of the company is going to be to really get the application complete response letter wrapped up by the fourth quarter of this year and I think we have all aspects of that well in hand.

MONANE: I’ll let my colleagues proceed but I want to say that we’ll look forward very much to hearing about the prostate cancer results at the AUA meeting and we recognize the enormity of suffering of patients. We look forward to the full dataset release.

Questions from RENI BENJAMIN of Rodman & Renshaw (10:34 mark)

BENJAMIN: Let me first congratulate you guys on obviously an effort and results…(mumbling) Clearly a long time coming so congratulations.

GOLD: It’s been a long row to hoe (a long journey) and we’re very pleased with the results we saw today.

BENJAMIN: It’s terrific and we look forward to the final results. Just building on Mark’s earlier question, could you just review what the pre-specified…and from what I understand it’s overall survival but I’ve forgotten… is it a p-value of .05? Has it been modified at all to some other p-value of .04? Could you just remind us of what that pre-specified value is?

GOLD: Just to remind you, the overall alpha for the study was .05 as defined in the SPA. The company spent a very small amount of alpha on the interim analysis so the majority of the alpha was reserved for the final analysis of overall survival.

As I said to Mark, we’re not going to get into details of that but it was an unambiguous hit on the primary endpoint of overall survival in terms of statistical significance. And I think importantly Rem, the results that we’re seeing here are very consistent with what we’ve seen in our other phase three trials of Provenge in other studies so we’re seeing a consistent result in IMPACT as we’ve saw in our other phase 3 clinical trials.

BENJAMIN: You mentioned that the safety as well was very consistent with the previous trials. Did you see anything unusual at all from this trial?

GOLD: No we’re not seeing anything in the primary analysis that looks different from our previous studies.

Questions from JOEL SENDEK of Lazard Capital Markets (12:30 mark)

SENDEK: A couple of questions maybe with the same idea, maybe asked a different way. On the trial design, you mentioned that it’s an unambiguous hit on statistical significance. I was wondering if you could say the same thing on clinical significance.

GOLD: The trial met its pre-specified design criteria Joel and I think that in terms of the median survival benefit, it was very consistent with what we’ve seen in our other studies and also when you look at look at kind of the landmark analyses, it is consistent with the other studies.

So I think we are very please with what we’ve learned from the results from the IMPACT study. There’s no doubt in the clinical community that overall survival is the most clinically meaningful endpoint, the one that is the most reliably (effective), and the one that is most meaningful to the patients.

SENDEK: When you’re mentioning other studies, is it safe for us to refer to the Taxotere improvement, which was 15% in overall survival? Is that a good benchmark?

GOLD: You know, I think we’ll let the data speak for itself as it’s presented at the American Urological Association meeting. I think to get some color on it (the data), it is consistent with what we’ve seen in our other phase 3 clinical trials.

SENDEK: Can you speak on a different topic? Can you speak to whether was any crossover in the IMPACT study?

GOLD: Yeah, there was crossover in the IMPACT study just as there was in our two previous phase 3 studies. The crossover rate was roughly the same as we saw in those studies but keep in mind that even if a patient is eligible to crossover, we still have to include them in the placebo arm of the study, which may dampen the overall effects of survival. So we were able to show a survival benefit even in the face of a crossover arm.

I’ll also remind you Joel that the crossover product is not identical to Provenge. It’s a frozen version of the product that is basically like three infusion ones. You do one apheresis, it gets broken down…one-third gets infused into patients and two-thirds get frozen down for the re-infusions for the salvage protocol…It’s not an identical product to Provenge.

SENDEK: Ok and then my final question is: On the original complete response letter you have some 483s, some CMC (Chemistry, Manufacturing, and Controls) issues. I’m wondering if those are all resolved at this point?

GOLD: Yeah, we’ve substantially addressed most of the CMC issues. We won’t get final resolution on those until we complete our license application with the FDA and get feedback from them.

Questions from DAVID MILLER of Biotech Stock Research (15:05 mark)

MILLER: The first question I have is on the manufacturing side of it: How are you going to handle the scale-up plans? Are you going to start that investment process now or are you going to wait until after the CMC part of the BLA is wrapped up?

GOLD: Let me take the first part of that and then Dave or Greg can add anything on it if they’d like. So I think the company is in a fortunate position first off. We’ve already built out the initial phase of our commercial manufacturing facility in New Jersey and that was part of our pre-approval inspection we went through as part of our license application we went through in 2007.

We are fortunate in that we’ve processed over a 1,000 patient samples through our clinical trials and that was advanced prostate cancer and the New Jersey facility has been processing those samples over the last several years. This is a facility that we have a lot of experience with and it’s a facility that we feel we could expand very readily.

The CMC issues which I think that you are referring to. We believe we have substantially addressed. We’ve had preliminary discussions with the agency on most of those issues but you won’t get final resolution of that in writing until you complete your license application to the agency.

MILLER: Right…

GOLD (interrupting): And the plan on build-out is…As I’ve said in my prepared comments, we plan to begin building out our sales and marketing infrastructure as well as looking at the commercialization plans going forward and we’ll get into that in a lot more detail in our analyst development day this summer.

MILLER: Can you talk a little bit about the steps you’re going to need to do until the fourth quarter over the next six months or so to get this ready to go? The only surprise that I have is that the BLA will take until the fourth quarter to amend.

GOLD: I’ll let Mark (Frohlich) chime in if he likes but I don’t think that should be a big surprise. This is a study that enrolled 500 men with metastatic advanced prostate cancer. It’s been going on now for almost six years so there’s a tremendous amount of data for us to compile and include in this application.

One of the important things to remember about IMPACT, this is a landmark study. Not just because it’s the first cancer immunotherapy to show an overall survival benefit but this is probably the longest follow-up that we’ve ever seen in a randomized phase 3 clinical trial of men with advanced prostate cancer, so it’s very meaningful in terms of how this disease population behaves.

So it’s very important that we put together a high-quality amendment to the FDA and we’re committed to doing that by the fourth quarter of this year.

MILLER: Are you still planning on making a presentation on the 28th at AUA?

GOLD: Yes…today was obviously top-line data…

MILLER: (interrupting) I’m just talking more about the date. I know you are going to be at AUA. I just want to make sure what the date is to make our travel plans for Chicago.

GOLD: Just to be specific, it’s April 28. I believe it’s at 2:20

MILLER: And the last question I have is talking about how your sales scale up: A) Have you talked to Jim yet? And B) How are you looking about the European partnership side of it?

GOLD: So our plan is obviously to commercialize this product ourselves in the United States. We’ve carried the lion’s share of the risk for this product going forward and to continue our discussions seeking a commercialization partner for Provenge outside the U.S.

Certainly Jim has got a lot of experience with a product like Provenge. In today’s world, the ability to launch a first in class product is going to attract a lot of interest from a lot of talented sales professionals. We’re going to look at the full gamut of potential leaders for that organization as we go forward.

MILLER: Right. So what stage is European partnering at this point?

GOLD: As is customary, we are not going to comment on those discussions.

MILLER: Ok, alright. Well, gentlemen, congratulations again. David, Greg, Mark, Mitch, it’s been an interesting time over the last few years and I couldn’t be happier that IMPACT got across the finish line.

GOLD (and others): Thanks David

Questions from AARON RINGS of Wachovia Securities (19:36 mark)

RINGS: Thanks for taking my questions and congratulations on the results. As a follow-up on the manufacturing side, I was wondering if you could provide us with some sort of range or clarity as to what might it be to cost…err what it might cost to manufacture the therapy on a per-patient basis? And then, what we should think about in terms of pricing for the therapy? I know it’s very early on but I was wondering if you could provide us some ranges or some other examples as to what types of therapies we should think about since the (Provenge infusion) process is more extensive?

GOLD: Well first off Aaron, it is early on and a price for Provenge has not been determined yet. When you look at Provenge as a product, it is a product that in clinical trials has shown that it prolongs survival and it has, what we think, is an appealing safety profile…and represents what patients are looking for, which is a high therapeutic index.

Just to reinforce, we haven’t determined a price for the product yet but we would expect it to be priced similar to other biologics in the oncology space.

RINGS: In terms of the cost of manufacturing on a per-patient basis, I know that you aren’t at scale, but can you provide a way to think about that because I’m sure it’s a lot more entailed than even some of those biologics.

GOLD: We’re not going to get into that on any detail now. We may go into that in a little more detail in our upcoming analyst event this summer.

RINGS: Ok and then since we just had top-line results, and I know you haven’t had a whole lot of time with the data, can you point us to the types of patients that benefited the most and the best way to think about the market in its entirety? Both those (patient groups) studied and in other areas of prostate cancer based on the results that you have?

GOLD: So one of the interesting parts when we looked at the data and one of the most important analyses you can do is see if the survival benefit you are able to show in the intent-to-treat population is consistent across subgroups. So when you look at the subpopulations, we see that survival benefit is consistent across all subpopulations in the study. I think that was very reassuring to us.

Questions from JOHN SONNIER of William Blair & Company (21:59 mark)

SONNIER: I just wanted to see if we could look forward a little bit, recognizing that we’re going to get the full data set and also recognizing that you’re going to have the analyst meeting this summer. Can you at least talk a little bit at a top-line level about how this plays out?

So you file the amendment Q4. Talk about when you might anticipate approval and against that, I’m trying to gauge, what size (of) a commercial scale-up will be necessary? I think it’s going to be relatively specialized commercial skill-set you’re looking for. I’m just trying to get a sense in my mind of just how much time you have to really get the organization ready to launch (Provenge)?

GOLD: That’s a process John…the commercial readiness of the organization…is a process that we started several years ago when we were filing our application with the FDA and it’s something that we are now going to invest in a lot more aggressively as we go forward.

That being said, the application will go in (during) the fourth quarter of this year. It will be what’s called a “Type 2” resubmission so the FDA will have six months to review the application once we submit it to the agency.

Follow-up questions from MARK MONANE (23:43 mark)

MONANE: Mitch, can you help us define who you think is the optimal population…we’ve seen a lot in the literature about metastatic, hormone-refractory, castration-resistant… who is the optimal patient that could benefit from Provenge in the real world and how many (of those) patients are there?

GOLD: I think we have to look at, Mark, the patients we studied in our clinical trials. And those are men with metastatic androgen-independent prostate cancer. So they have metastatic lesions, either a soft-tissue lesion or a bony lesion, and they have rising PSAs (Prostate-Specific Antigens) in the face of castrate levels of testosterone.

There is an emerging term coming out, changing “androgen-independent” into “castration-resistant”, they’re really one and the same but the nomenklatur is important because it suggests you may still have certain patients that are slightly responsive to hormonal treatments…that are not totally androgen-independent.

We look at them (the androgen-independent and castration-resistant terms) as one and the same but we look at it as an important concept to understand physiologically that some of these patients are still responsive to hormonal manipulation.

We see this as a…when we conduct our clinical studies…and we talked about this in our corporate presentations. This data supports Provenge being used as front-line treatment in men with metastatic androgen-independent prostate cancer.

So if you look at the continuum of care: They (prostate cancer patients) would have surgery or some form of local therapy as their primary form of treatment, if they recurred they would go on some form of androgen ablation therapy, and once their PSAs are rising (then) Provenge would come into play as a potential treatment option for them.

MONANE: Got it. And then I know that you are a card-carrying urologist (to Mitchell Gold) and this (the IMPACT results) is going to be presented at the urology meeting. Maybe you could spend a moment…is this an oncologist’s drug? Is this an urologist’s drug? How are you thinking about positioning Provenge in the future?

GOLD: We position Provenge as an important potential new treatment modality for men with metastatic androgen-independent prostate cancer. It turns out that both the oncologists and the urologists are important caregivers of that patient population.

If you look at our clinical studies, about 50% of our clinical trial sites were urologists and about 50% of our clinical trial sites were oncologists. So we see a kind-of evenly spread amongst the two patient populations.

And I’ll use this an opportunity to answer another question that John Sonnier had: When you look at the commercialization requirement from a sales force perspective, it’s not a huge sales force. You need about 100 sales reps total to commercialize a product like Provenge to those two physician segments.

So there really is an optimal scenario where you have a very large patient population being taken care of by a relatively small physician segment that is easy to target through a modest sales force.

MITCHELL GOLD final remarks (27:00 mark)

GOLD: Thank you all again for joining us today. We believe this is truly a break-through for the prostate cancer community and a testament to the promise of the field of cancer immunotherapies. Thanks again for joining us and we look forward to seeing many of you in the near future.

If you enjoyed this post then please click below:

The accompanying IMPACT Top-line study results press release from Dendreon can be seen here:

investor.dendreon.com/releasedetail.cfm?ReleaseID=376922

Copious amounts of information and data from Dendreon’s two previous phase 3 studies, d9901 and d9902a, can be seen below:

www.fda.gov/ohrms/dockets/ac/07/briefing/2007-4291B1-00-index.htm