Editor's note: Today's two-part series, which originally appeared in Growth Stock Wire, comes from Stansberry Research's medical and biotech stock analyst, Rob Fannon. Rob's analysis in this case centered on one of 2007's biotech darlings, Dendreon. By doing thorough homework, using industry contacts, and thinking against the crowd, Rob demonstrated how investors can avoid (and even profit from) the pitfalls of biotech stock investing.
A Potential Blowup Ahead in Biotechnology
Originally published in the April 13 edition of Growth Stock Wire
All the volatility in the world... over just a few words.
What started as a $4 stock should've become a $1.50 stock. Instead, late last month, it rocketed up nearly 400% in a few days – all the way up to $25 per share. And all this because of a few choice words...
Sometimes before a drug goes up for approval at the FDA, the agency uses an outside panel of experts to help guide its decision. The process is simple... the experts present all the data and then there's a vote. Two requirements must be met:
| 1. Is the drug safe? | |
| 2. Is the drug effective? |
Last month, the first ever "cancer vaccine" was the subject of one of these pre-decision committee meetings. Actually, it wasn't technically a vaccine. Rather, the experts prefer the term "immunotherapy." This drug, called Provenge, is a medical treatment derived from a patient's own prostate cancer cells, molecularly tricked in the lab and reintroduced to the body to help stimulate the patient's immune system.
The first three experts on the 17-person panel all voted "no." Our contacts in the industry say it looked like the vote was heading for 100% "nays." However, the committee chairman stepped in to "clarify the language" of what actually was being voted on.
The question on the floor – Does the data establish efficacy? – became: Do the results provide substantial evidence that the drug works? It's a subtle difference.
But, essentially, the experts had been answering this question: "Is the data a slam dunk?" After three negatives, the chairman changed that to: "Is there at least a signal that the drug is working like it's supposed to?"
With the "clearing up," the voting started over. The new result: 13–4 in favor of the drug.
The next day, Dendreon (DNDN) – the company behind Provenge – opened up nearly 300%. Speculators on the decision made a fortune.
But the FDA doesn't have to follow the advisory panel's advice. The final ruling isn't due until May 15.
At $19 per share and sporting a $1.5 billion market cap, Dendreon is now priced for an outright approval. However, we could easily see the stock fall back where it started... at $4 per share.
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Outside of the panel's semantic slight of hand, there are a few other reasons why Dendreon is a biotech stock we'd avoid:
One: We polled four of the leading immunotherapy experts through our contacts at Johns Hopkins Medical School. There were three "no" votes, including one of the four "nays" that was actually on the FDA committee. One scientist voted "yes" but clarified that if Provenge was approved outright in May, it would be "one of the weakest drug approvals by the FDA ever."
This is from experts who have been working their entire careers to develop a drug like this.
Two: The most likely outcome at the FDA would be an "approvable" letter. There's a larger Phase III trial taking place right now that won't be completed until 2010. I'd say there's a 50% chance the agency will rule the drug is worthy, but will want to wait until the final results are in.
Three: Just a few days after the huge spike upwards, CEO Mitch Gold sold $2.2 million worth of stock.
In other words, next month may be a rough one for Dendreon.
Good investing,
Rob Fannon, editor, Phase 1 Investor
Dendreon's Bubble Bursts
Originally published in the May 11 edition of Growth Stock Wire
The FDA spoiled Dendreon's party.
Late Tuesday, America's drug watchdog served Dendreon an "approvable" letter for its novel prostate cancer drug Provenge. In other words, it wanted to see more data before handing over a commercial approval for the world's first cancer vaccine.
Dendreon has been living high on the hog since its stock tripled after a preliminary FDA committee gave the drug a tentative thumbs-up. But as I outlined a month ago, the ruling was littered with inconsistencies... and Dendreon was doomed to fail. The stock has tumbled close to 70% in two days.
But there are two parties that have emerged from the bloodshed huge winners:
| 1. | Short sellers |
| 2. | Dendreon's CEO – Mitch Gold |
Perhaps the biggest "tell" that Dendreon's prospects were disaster-prone: Dr. Mitch Gold unloaded $2.2 million of his insider holdings just days after his company's stock skyrocketed. Those holdings would be worth less than three-quarters of a million dollars now.
Even after a conference call last night, Dendreon is reluctant to share details of the specific data the FDA is requesting. Our best guess is that the Provenge pause button will be in place for another two to three years until additional data from an ongoing Phase III trial is available. The company says this data could be ready in 2008, but a more realistic outlook is 2010, when the trial is completely finished. The FDA letter also called for more information on the drug's chemical manufacturing method, adding salt to the wound.
Dendreon has about $100 million cash in the bank. Costly clinical trials will quickly run this well dry. Existing Dendreon shareholders will surely face a dilution as the company seeks a new round of financing. Perhaps Dendreon should have followed its CEO's lead and raised capital at a $17 per share, rather than at $5, where it's sure to wallow for quite a while...
The lesson of the Dendreon story? Biotech is likely the most dangerous sector in the market for the average investor.
Sure, there's lots of money to be made on biotech. But it's imperative to be on the right side of the equation.
The committee's wishy-washy decision, CEO insider selling, and direct insight from our cancer vaccine contacts demonstrated the only side to be on regarding Dendreon was the short side... for now.
Is Dendreon worth anything? Sure. But, exactly how much remains to be seen. As we hear more about the specific data the FDA wants to see, we'll have a better idea.
Stay tuned...
Rob Fannon
Editor, Phase 1 Investor
P.S. Biotech may be dangerous for the uninformed investor, but with the right research, you can make a fortune. Tonight, I'll be telling readers of my Phase 1 service about one particular company that is poised to benefit from Big Pharma's outsourcing trend.
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