The following is part of our week-long Rule Breaker series, where we Foolishly examine several companies and ask, "Is it a Rule Breaker?" Hey, even better, we'll answer the question for you.
While at a wedding a couple of weeks ago, I sat across from another guest who happened to be an analyst at a New York hedge fund. We were at a rehearsal, um, barbecue (this was a Texas wedding), discussing stocks in general and biotech specifically. A veteran investor, my friend was pretty dubious about the sector, saying that his involvement with biotech usually amounted to talking his portfolio manager out of buying any.
But then I asked about Dendreon (Nasdaq: DNDN ) , and his expression changed. "I actually own that personally," he said. "I've got to admit, I'm a believer."
That's Dendreon in a nutshell. In working to bring the first therapeutic cancer vaccine to market, the company has faced numerous unknowns and challenges. At this stage, it has produced a fair bit of data that investors can use to size up the firm's prospects, but ultimately, you're either a believer or you're not. Investors tend to be passionate about Dendreon, so there are a lot of fervent supporters and detractors -- 23% of its shares are sold short.
I'm also a believer in Dendreon. Having followed the company for some time, I finally bought shares earlier this year. But is it a Rule Breaker, a company that not only promises tremendous growth potential but also has fundamental characteristics that make it a worthy investment on something more than faith?
Most of the potential Rule Breakers my colleagues are discussing this week (we're sizing up more than a half-dozen companies for their Rule Breaking potential) are clear innovators that have already made their mark on the world. The question for them is whether there is enough juice left in these maturing companies to justify paying premium growth-stock prices.
In many ways, Dendreon poses the opposite problem. It may simply be too risky for anything other than "mad money."
Anatomy of a renegade
Dendreon is best known for Provenge, an experimental treatment for prostate cancer. Provenge is a vaccine, but not in the sense that it inoculates patients against illness (it is only given to people who have advanced disease). Instead, Provenge uses antigen from the cancer itself to stimulate greater of production of T cells by the body to attack the cancer. Companies such as Cell Genesys (Nasdaq: CEGE ) , Antigenics (Nasdaq: AGEN ) , CancerVax (Nasdaq: CNVX ) , Biomira (Nasdaq: BIOM ) , Geron (Nasdaq: GERN ) , and others are all developing cancer vaccines based on some variation of this strategy, but there are as yet no cancer vaccines on the market.
Dendreon, like some of the other companies mentioned above, has made it to phase 3 testing of its product -- the last stage before an approval decision. But while CancerVax, for instance, recently discontinued a trial because it didn't produce evidence of a therapeutic benefit, and Antigenics is still awaiting the moment of truth (and struggling with the FDA over whether the drug used in its earlier clinical trials will be judged acceptable for evaluation), Dendreon has simply produced ambiguous results.
The company has designed three phase 3 studies: D9901, D9902A, and D9902B. In the first of these, D9901, Provenge failed to meet its primary endpoint of slowing disease progression. That's bad. Down went the stock -- from $9 the day before the first interim analysis was announced to $5 the next day, and thereafter as low as $1.26. But as follow-ups continued, Dendreon established that Provenge significantly extended the lives of some of the people who took the drug. That's good. The stock went over $10 per share after the first interim survival results were announced and peaked above $16 per share after more detailed survival results were released.
When D9901 failed to meet its primary endpoint, researchers at Dendreon combed through the data, as is common in such situations, to see if there were some patients who did better on the drug than others. They discovered that Provenge significantly extended the time-to-disease progression in patients with a Gleason score (a measure of the severity of prostate cancer) of 7 or less.
Seeking to confirm this benefit, Dendreon redesigned its second ongoing phase 3 trial, then called D9902. They halted further enrollment in D9902 and called this truncated study group D9902A. After consulting with the FDA, Dendreon pursued a new study named D9902B, enrolling only patients with a Gleason score of 7 or less.
Still with me? Fast-forward to 2005, when interim results of D9902A came out. The study missed its primary endpoint. The drug didn't reduce time-to-disease progression. Trends did, however, indicate that Provenge again extended survival, a different endpoint from time-to-disease progression, with the curves reportedly looking very much as they did in D9901.
Largely lost in the hubbub was the fact that D9902A was also not a complete clinical trial. It never reached targeted enrollment of 120 patients (enrollment halted at 98), and it lacked statistical significance as a stand-alone study. Since detailed results of D9902A have not been published -- and survival follow-up is still ongoing -- we don't know how the results will stack up when they are combined with data from D9901, which is how the results will ultimately have to be read.
But if we believe management's assertion about the survival curve, it looks like D9902A may well confirm the excellent survival results of D9901. And they were excellent, albeit limited. Median survival was extended 4.5 months among the patients on Provenge, and three times as many Provenge patients were alive three years after beginning treatment than those on a placebo. This survival benefit was, as Dendreon put it in their 10-K, "greater than that observed with any type of treatment in any published phase 3 study in late-stage prostate cancer." But the size of the study leaves questions about whether these results will be consistent.
D9902b is now the critical study. According to the company, if it meets its primary endpoints, Provenge could be on the market as early as 2006. If not, we may have to wait for further clinical results that would push approval out another year or more -- or Provenge could, of course, never get approved at all.
Breaking too many rules?
But now for the question at hand: Is Dendreon a Rule Breaker? While recognizing that there are only limited data available and that a more complete picture may tell a different story, I happen to believe Provenge has produced some pretty remarkable survival results. I trust management enough to believe that the trends seen in D9902A to date appear to confirm earlier results, and I think survival trumps other measures of efficacy like time-to-disease progression, which is just a surrogate endpoint anyway. I think the safety profile of Provenge -- with transient fever and chills being the most common side effects -- also helps the drug.
What if I'm wrong? Dendreon has just one other clinical product, Neuvenge (currently in phase 1 studies), which is to ovarian and breast cancer what Provenge is to prostate cancer. It works on the same technology platform (with a different antigen). Therefore, if Provenge fails, investors will, fairly or not, likely discount the value of Neuvenge to something near zero.
That will leave Dendreon in a tough position. It's not the type of situation we like to subject Motley Fool Rule Breakers subscribers to. Our ideal is to pick companies with a vision, mission, and strategy we believe in enough to hold the stock for the long term, ignoring the odd hiccup in the forward path. Even for biotech companies, where the failure of a product is always a big deal and always a possibility, we try to stick to companies that have more than one trick up their sleeve. Yes, Dendreon has other programs in place -- some quite interesting ones, even -- but these are too early in development to salvage much value for shareholders in a worst-case scenario. If Provenge fails -- really, unequivocally fails -- I'll have little choice but to take my loss and pack off somewhere else, tail between my legs.
Still, I have to say this: Dendreon is a Rule Breaker in every other Foolish sense. It is pioneering a new treatment modality, nearing the finish line with a product that, if approved, will enjoy the biopharmaceutical industry's typical high margins and solid patent protection. It has some real data to support that product. The market it is addressing is large, growing, and not adequately served by current options. I like the fact that Dendreon still owns worldwide rights to Provenge, so it's not giving away the goods to a big pharmaceutical company. And let's not forget that while investors often have to pay up for Rule Breaking companies with big growth potential, Dendreon is trading at less than $5 a share -- with a piddling $278 million market cap. With little debt and $177 million in cash, equivalents, and short-term investments at the end of 2004, that's not much of a price tag to pay for the company's products and technology. The market is obviously betting against it, but the rewards for the faithful, if they prove right, will be substantial.
Acknowledging that Dendreon is more speculative than the stocks we usually favor in Rule Breakers, I humbly throw this question to you: Should we make room for Dendreon?
To check out our exploration of Rule Breaking companies, see:
- Searching for Rule Breakers by David Gardner
- Is Apple a Rule Breaker? by Rick Munarriz
- Is DreamWorks a Rule Breaker? by John Reeves
- Is eBay a Rule Breaker? by Alyce Lomax
- Is Geron a Rule Breaker? by Charly Travers
- Is Netflix a Rule Breaker? by Beirne White
- Is IBM a Rule Breaker? by Carl Wherrett and John Yelovich
- Is Google a Rule Breaker? by Tim Beyers
Karl Thiel owns shares of Dendreon. The Motley Fool has a disclosure policy.