Dendreon (Nasdaq: DNDN) has its second date with destiny, as the Food and Drug Administration has a goal of making a decision by May 1 about its prostate cancer treatment, Provenge. Should you buy ahead of the call? It's a reasonable choice as long as you understand the risks.

Without knowing how much Dendreon will charge for Provenge, it's a little hard to pinpoint how much the company is truly worth. Perhaps the best way to look at its current valuation is to figure out how much revenue investors have already priced into the stock. Here's a look at how investors valued a couple of cancer drug companies with just one drug on the market.


Range of Enterprise Value to Revenue Valuations (2005-2008)

Millennium Pharmaceuticals

3.7 - 14.4

ImClone Systems

2.7 - 11.9

Source: Capital IQ, a division of Standard & Poor's.

Unlike both of those companies, Dendreon doesn't have a partner taking a cut of the revenue, so it'll likely command a ratio on the high end once Provenge has been on the market. At an enterprise value of $4.4 billion, Dendreon has about $440 million worth of sales already priced in if you assume it can command an enterprise value/revenue value of 10. It's certainly reasonable to expect more out of Provenge in a few years, so there's some upside remaining. Just don't expect a quick double.

An approval is likely ...
The phase 3 data for Provenge looked solid enough to gain approval, and we know the trial was what the FDA was looking for since Dendreon got a special protocol assessment (SPA).

SPAs only cover the efficacy data, and the FDA isn't held to them if new side effects are discovered. However, Provenge's side effects are fairly mild, and I didn't see anything new in the data. But even if something crops up, it won't likely be a problem for the cancer therapy. Just look at the labels on chemotherapy drugs like sanofi-aventis' (NYSE: SNY) Taxotere, Eli Lilly's (NYSE: LLY) Gemzar, and Bristol-Myers Squibb's (NYSE: BMY) Taxol. All three have warnings about the potential for death from the drug; a reasonable risk when the alternative is death from cancer.

Unless ...
The bigger risk for investors is that the FDA will issue a complete response letter because of a manufacturing issue. Provenge is one of the most complex therapies I've ever seen. Blood is drawn from the patient and certain immune-system cells are purified and sent to Dendreon. The company activates the immune cells, essentially training them to attack the cancer. The cells are then shipped back to the doctor, who puts them back in the patient.

There's potential for contamination like Genzyme (Nasdaq: GENZ) has experienced, but that's true of all biotech drugs that are produced in living cells, like Amgen's (Nasdaq: AMGN) Epogen and Pfizer's (NYSE: PFE) Enbrel.

The bigger concern, as I see it, is the potential for variability during the process. As with any drug, the FDA will want to be assured that Dendreon can reproduce the process identically and that it has the ability to recognize when things go wrong. As the manufacturing process becomes more complex, the risk of the FDA finding some problem also increases.

Putting a value on the risk is difficult because investors have very little insight into the validation of the manufacturing process. The good news is that unlike efficacy -- the drug either works or it doesn't -- companies usually have the ability to fix manufacturing problems found by the FDA.

May Day could come late (or early)
If you're thinking about jumping into Dendreon on the Friday before its PDUFA date to make a quick buck, I'd suggest rethinking the strategy. While many drugmakers do hear from the FDA on their PDUFA day, the FDA isn't required to send out word on that day. And there's always the possibility of the FDA finishing its paperwork early. That's what happened the last time Dendreon got a decision from the FDA; it arrived about a week before the PDUFA date.

It's better to just buy now if you think the upside potential is worth the unknown manufacturing risk, which I think is reasonable with the caveat not to overweight your portfolio. Enjoy the next four weeks knowing you've got a piece of the action no matter when it comes.

What do you think? Is the potential reward worth the risk of another thumbs-down from the FDA? Let us know in the comments box below.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Pfizer is a recommendation of the Inside Value newsletter. The Fool has a disclosure policy.