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

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….

With less than a month to go until Dendreon (Nasdaq: DNDN) releases pivotal clinical study results for its potential prostate cancer drug Provenge, lets go over a few points to consider when trying to determine the likelihood that its phase 3 IMPACT study will be a success.

1) Dendreon announced during its interim IMPACT study results release in October that there was a 20% reduction in the risk of death in the Provenge arm of the study relative to placebo” and that the final analysis will require Provenge to achieve a 22% reduction in the risk of death versus placebo to hit the study’s statistical significance target (some unknown figure south of 0.05).

Therefore the remaining Provenge patients in the study will have to show something better than a 22% reduction in the risk of death versus placebo for the study to be a success. This is a very important point that should not be lost on Dendreon investors.

Based on when drug developers like Onyx with Nexavar (sorafenib), Genentech with Avastin (bevacizumab) and Pfizer with Sutent (sunitinib) chose to do analyses in their pivotal studies as well as the survival data from Dendreon previous studies, our estimate would be that Dendreon undertook its interim analysis at some time between 65% to 80% of the 304 events in IMPACT.

Dendreon has made the point that in D9901 that the survival advantage seen with Provenge grew over time (i.e. the separation between the Provenge and placebo survival curves grew) so if you believe that Provenge truly does work then this is something to hang your hat on.

Survival curves from Dendreon's D9901 study comparing Provenge (in bold) to placebo (from 29-03-07 clinical briefing documents)

2) The next point that we wanted to bring up was something that some of the analysts on the interim IMPACT study results conference call in October seemed a little confused about. If the final analysis requires a 22% survival advantage to hit statistical significance then unless Dendreon went completely crazy and allocated the majority of its alpha (0.05) to the interim analysis, the p-value hurdle to overcome for the interim analysis had to have been harder than for the final analysis.

There are three key variables that affect the odds of the IMPACT study’s final analysis being successful:

• The p-value hurdle: This is normally 0.05 but since Dendreon allocated some portion of that alpha to the interim analysis then the final   p-value hurdle will be something south of 0.05

• The number of events in the analysis: The more data points there are, the more precise the data produced will be.

• The size of the treatment effect

The three variables above that will determine IMPACT’s success are why we are upset with Dendreon’s decision to move up the expected date of its final analysis from 2010 to 2009. Last year Dendreon decided to give up some of the alpha that was intended for the interim analysis and allocate it for the final analysis (a good decision) but then in order to get the final analysis sooner than 2010, Dendreon allocated fewer events (304 versus 360) to the final analysis, which strikes us as bad and not a very conservative thing to do when Dendreon could have just kept the 360 events for the final analysis and thereby improved the power of the study.

3) One thing that always raises the chances of something going wrong is when study enrollment criteria gets changed after a clinical trial has already begun.

Dendreon had valid reasons to change its enrollment criteria for IMPACT back in 2005 (two years after the start of the study) and the use of a Cox  model to analyze IMPACT’s data does provide an added measure of safety against possible enrollment imbalances. We’ll also note that Dendreon’s CRO appears to have done a good job of balancing D9901 and even D9902A despite those being much smaller studies.

Nevertheless, it has been our experience that the unexpected often seems to happen when data results day comes up or FDA review time rolls around after studies have been amended multiple times.

4) Shares of Dendreon rose 38% last Friday on news that the American Urological Association saved a spot in its annual meeting for Dendreon to present the final IMPACT results if they are ready in time for the meeting. This adds nothing new to the Dendreon story and the fact that a medical meeting saved a spot for the IMPACT data does not increase the odds that IMPACT will be a success, nor does it hint that IMPACT has already produced good results.

What the AUA placeholder does tell us is that if IMPACT hits its survival endpoint, it will be extremely significant news worthy of headlining a major medical meeting. This is something that everyone should know already though, considering that Sanofi-Aventis’ (NYSE: SNY) Taxotere (docetaxel) is the only FDA-approved therapy that has shown an overall survival benefit as a treatment for metastatic prostate cancer.

If Dendreon knew the IMPACT data already, they would have to release at least the top-line results to the investment world or face the investor class action lawsuits. That’s why the AUA placeholder does not alter the odds we ascribe to IMPACT’s success.

5) With most upcoming clinical trial results we have to worry about not just the efficacy data but the safety data as well. Due to the terminal nature of androgen independent prostate cancer and Provenge’s relatively benign safety record in previous studies, we are not too concerned about what sort of adverse event data Provenge might produce in IMPACT.

There was some cerebral vascular events seen with Provenge but since it is not being proposed for an early stage of prostate cancer yet, we can discount these safety issues being a potential impediment to Provenge’s marketing approval.

6) Our final point of concern is that so much about how prostate cancer is treated has changed since 2000 (when D9901 began enrolling patients). Prostate cancer survival times have been improving quite a bit (although data from the 21st century is not out yet) and with treatment and so much else surrounding prostate cancer changing in the time span between IMPACT results and D9901  study results, the odds of the unexpected happening are higher than if IMPACT data was coming out closer to when D9901 survival data was announced (back in 2004).

Now here’s the part where we put on our investor hats and ignore the fact that we are always rooting for new medical advances: we wouldn’t feel comfortable going long or short Dendreon’s shares at its current $6.30 share price (April 10). If Dendreon hadn’t changed the study enrollment criteria for IMPACT, if Dendreon had chosen to raise the final powering of IMPACT when it lowered the interim analysis powering, and if IMPACT’s results weren’t so far removed in time from Dendreon’s previous Provenge phase 3 studies then we would have more comfort in forming our expectations for IMPACT’s final results.

While we believe the odds favor IMPACT failing its primary overall survival endpoint, perhaps a 70% probability based on the above factors and the general stochastic nature of clinical trials*, the payoff to being right on IMPACT failing is not large enough (at Dendreon’s current share price) to compensate for the still very real possibility that IMPACT does hit its primary endpoint when top-line results are released later this month. In other words, we feel that Dendreon is in its fair valuation range at its current $630 million enterprise value (accounting for its convertible notes) ahead of IMPACT’s study results.

If Dendreon’s shares reach the $8.15 mark (an approximate $810 million enterprise value) we would feel comfortable enough to recommend a short bias (with hedges) towards Dendreon ahead of IMPACT. If its shares fall below $3.60 (an approximate $360 million enterprise value) , we would be comfortable saying that Dendreon’s upside potential outweighs its downside risks. Unless Dendreon reaches either of those two points ahead of IMPACT we’ll be happy to recommend following the IMPACT final results release from the sidelines. In our opinion the payoff for being right on IMPACT just doesn’t justify the risks at this point.

* Even a study powered 80% to show statistical significance on its primary endpoint (if a drug’s effect is real) will fail  an average of 1 out of 5 times and that also assumes the powering assumptions are accurate (which they may or may not be for IMPACT)

For further reading click below:

www.fda.gov/ohrms/dockets/ac/07/briefing/2007-4291B1_2a.pdf

www.biotechspeculators.com/archives/235