Almost a year ago, I selected Dendreon
My reasoning was simple: The biotech was fairly de-risked, having already gained FDA approval for its prostate-cancer treatment Provenge. All Dendreon needed to do was gain Food and Drug Administration approval for its two new manufacturing plants, and the company would be home free.
The FDA approved both plants, but that wasn't enough. "If you build it, they will come" works better for fictional baseball movies than for drug sales.
Dendreon is down 77% year to date after a rough launch that resulted in a pulling of its sales guidance for the year.
Getting paid is still risky
It's not enough to have an innovative product that's better than the current standard of care. Sure, it's helpful, as Vertex Pharmaceuticals'
In the case of Provenge, that means having doctors front the cash for the $93,000 treatment before being reimbursed by health insurers or Medicare. Other cancer drugs are just as expensive: Bristol-Myers Squibb's
Learning from my mistake
Biotech is a risky sector to invest in, but fortunately most of the risks are fairly obvious and can be easily avoided if the potential rewards don't justify the risk. Aeterna Zentaris
What I failed to notice was the unique risk that Dendreon posed. The launch looked good in the beginning because the early adopters were academic institutions that didn't have to worry about fronting large amounts of money. It wasn't until Dendreon started expanding to community doctors that the risk became apparent.
Still an opportunity?
Dendreon is more risky than it was a year ago. Until doctors are convinced that they'll be reimbursed quickly, they're not going to prescribe Provenge en masse. And predicting when that might happen is difficult. Dendreon isn't even willing to give anything but vague "modest quarter-over-quarter growth" sales guidance.
But there's also more potential upside for Dendreon than there was a year ago. Biotechs are ultimately valued on the peak sales of their drug, so assuming the payment problems eventually get worked out and no other issues crop up, Dendreon's terminal value hasn't changed much; it'll just take longer to get there.
I registered a Motley Fool CAPS call on Dendreon in March, predicting that the biotech would beat the market over five-plus years. I'm sticking with that prediction even though I'm currently trailing the market by 66 points. I have four years to catch up, after all.
Perhaps my biggest mistake was entering a long-term pick into a series with a short time frame.
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Fool contributor Brian Orelli is in the top 2,000 out of more than 180,000 CAPS members. He holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Dendreon. Motley Fool newsletter services have recommended buying shares of Vertex Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.