A drug gets denied marketing approval by the FDA, and the biotech's share price falls more than 50%. Was there any way we investors could have foreseen this happening? Today, drugmaker Dendreon (NASDAQ:DNDN) experienced this unfortunate event when the FDA issued an approvable letter for its lead compound, potential prostate cancer treatment Provenge.

What sent shares sharply lower wasn't simply the fact that an approvable letter was given for Provenge. It was that the FDA asked for more efficacy data on the drug, and the nature of the data the agency is asking for sounds like it will necessitate further clinical trial work. The FDA also requested more information on the manufacturing of Provenge, but this request sounds like it will be easier to complete (although other drugmakers like Discovery Labs (NASDAQ:DSCO) have proven this assumption wrong).

The approvable letter with Dendreon didn't come as much of a surprise to me. After all, it's important that investors are able to separate out what sort of decisions they would make on a drug's approval, from the decisions that the FDA would make on the drug. It's almost always best to base your estimates about how the FDA will vote on its past actions.

As I said in my last article about Dendreon, "My quibble with Provenge has never been that the drug wasn't promising. Rather, it is that within the constraints of the FDA, Provenge has not demonstrated enough statistical proof of efficacy to make it through the drug approval process without more clinical trial data."

Besides AstraZeneca's (NYSE:AZN) cancer drug Iressa, which has turned into a big flop, no other compound has made it through the FDA on such a weak data package. After today's decision on Provenge, it doesn't look like the FDA is ready to risk allowing a second possible Iressa on the market. (The FDA got egg on its face when a later clinical trial for Iressa showed that the drug failed to improve survival for the cancer patients it was approved to treat.)

Even with the negative FDA decision on Provenge, Dendreon is not dead in the water. It still has the 500-person D9902b phase 3 trial under way, which could supply the "additional clinical data in support of the efficacy claim" that the FDA is looking for. However, the issue with the D9902b trial is that Dendreon doesn't expect it to be completed until 2010. This could mean years of waiting and copious amounts of share dilution for Dendreon investors unless the FDA allows an interim look at the trial's results to satisfy the request for more efficacy data.

Speaking of dilution and share price, Dendreon currently has a market capitalization in the $500 million range. Now that the drugmaker's future is once again based on the outcome of an uncertain phase 3 study years away from completion or even interim analysis, Dendreon is much more deserving of a valuation in the $300 million to $500 million market cap range of other oncology-focused biotechs at this point in their development, like ArQule (NASDAQ:ARQL) or Seattle Genetics (NASDAQ:SGEN).

The lesson that investors can learn from the Dendreon saga is that betting against historical FDA actions is usually a losing proposition. It's also important to remember that companies will always try to present their efficacy and safety data in the best possible light, so you have to view their top-line press-release data presentations with a sharp and skeptical eye and be wary of anything that doesn't sound right -- like with Neurochem's (NASDAQ:NRMX) recent press releases regarding its Alzheimer's compound.

In the end, it is usually the little details that end up meaning big things for investors. The earlier FDA advisory panel vote of 13-4 in favor of Provenge sounds unequivocally positive if you don't take a closer look at what the panel was actually voting in favor of. It wasn't the drug's approvability, but rather "whether there is substantial evidence that the product is efficacious," which is a completely different and much less contentious issue.

It's important to remember that when dealing with the FDA, things are never as easy or transparent as they seem, and interpreting the nuances of FDA-speak is an incredibly difficult trick. Those involved with Dendreon found out that hard lesson today.

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Fool contributor Brian Lawler still doesn't understand all the nuances of trying to speak German and does not own shares of any company mentioned in this article. The Fool has a disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.