This article is part of our "Best Stocks for 2011" series where our Foolish writers pick their top stock ideas for the year ahead. Click here to see a review of last year's picks and our 12 recommendations for the year ahead.
I'll admit it: I should have picked Dendreon (Nasdaq: DNDN ) as my 2010 best buy. Shares are up nearly 40% this year. I didn't have confidence that its prostate cancer treatment, Provenge, would get past the Food and Drug Administration. Better yet, I should have picked it before the positive phase 3 data was announced in early 2009; shares are up more than 500% since then.
Dendreon isn't going to see those kinds of returns in 2011. Drugmakers with binary events -- like Orexigen Therapeutics (Nasdaq: OREX ) and its obesity drug, Contrave, which is up for an FDA decision, or Exelixis (Nasdaq: EXEL ) , which is expecting phase 3 data for its cancer drug XL184 next year -- are more likely to offer one-year multibaggers.
Then why the heck are you picking it?
Simply put, the risk is mostly gone, but there's still upside left. Sometimes a relatively safe stock with double-digit potential beats a volatile double-or-nothing stock.
At a market cap of more than $5 billion, some Provenge sales are already priced in, but shares can certainly go higher from here.
How much higher? Investors were willing to price it above $54 per share after the FDA approved Provenge in April. When investors came to their senses and realized there was still risk involved with owning a drugmaker even if it has an approved drug, shares fell substantially. Eventually though, they're bound to get back there when investors have confidence that the launch is going as planned.
A buyout kicker
Provenge could offer a buyer an extended revenue stream well after its patents expire, since it's more of a treatment than an easy-to-copy drug. Generic-less drugs are pretty much a dream for Pfizer (NYSE: PFE ) , given its coming loss of Lipitor, or Eli Lilly (NYSE: LLY ) , which has multiple top selling drugs coming off patent.
An acquisition may not happen in 2011; actually, I'd be a little surprised if it did. But the idea of some pharmaceutical company buying Dendreon will always be in the back of investors' minds, which should keep Dendreon from falling too much.
My guess is it'll go something like this: Dendreon signs up a big pharma as an ex-U.S. marketing partner. The pharma company uses the opportunity to better gauge the value of Provenge and makes an offer in a year or three. We've seen this story before.
About that "mostly gone" risk
Two things really hung over Dendreon in 2010: whether it could produce enough Provenge and whether Dendreon could get it paid for.
The latter seems fairly likely. Aetna (NYSE: AET ) , Humana (NYSE: HUM ) , Kaiser, and others have all signed off on reimbursement. And advisors to the Centers for Medicare & Medicaid Services gave the drug a more-confident-than-not vote. When the agency issues its national guidance next year, paying for the drug -- at least for on-label use -- seems pretty likely.
The issue of making Provenge isn't as cleared up since Provenge is not your typical drug. The personalized treatment requires patients' blood cells to be sent to the lab, where it's trained to elicit an immune response against the cancer before being sent to the doctor's office to be put back into the patient.
Dendreon seems to have fairly easily ramped up to its current capacity of around $10 million per month. Of course, extrapolate that out and it's only $120 million per year, a far cry from the blockbuster everyone is expecting.
In order to hit its loftier revenue goals, Dendreon must get additional capacity at its New Jersey plant approved around March and bring its new plants in Atlanta and Los Angeles plants online around mid-year.
Could it still run into snags? Absolutely; this stock is far from riskless. But with every day that goes by, investors should be a little more confident that Dendreon can hit its capacity goal. And confident investors are all that Dendreon really needs to see its shares rise.
What do you think? Is Dendreon the best stock for 2011? Take our poll and sound off on the risk-reward profile in the comments box below.
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