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di Giancarlo Nicoli

ahrahr (99.31)

ahrahr beat the market on Friday

Rank: 486 out of 70713

With DNDN, I’m up +547.90% since I selected it with CAPS, against a S&P -8.57%. My CAPS gain is +556.46.

Dendreon closed the week at $38.55. Since there are around 150,000,000 shares around, market cap is 5.8B.

That’s how Mr. Market values it now. But how much is DNDN worth?

There are two metrics, in my opinion, suitable to put a valuation on Dendreon. One is price to sales (P/S) and the other is price to earnings (P/E). Successful biotechnology companies usually have a P/S ranging from 4 to 10, while P/Es usually have a range from 10 to 30 (even more when they are bubbly or price incorporates growth when earnings are still low).

How many sales will DNDN be able to achieve in – say – 2 to 4 years?. They have three plants, one ready (in New Jersey) and two (in California and Georgia) almost done. Company says the FDA will validate the NJ plant at the latest early in 2011, while it expects FDA will validate the CA and GA ones in the middle of next year. Company projects $1.25-$2.5B in revenue when all facilities are completed. That’s the USA market alone.

Dendreon will pursue EU approval and commercialization by itself. EU market is almost double the USA one. It takes less than one year to have a plant ready and running. Just say that by 2014 the EU will be able to support $3B in sales. Why just $3B and not more? I don’t think DNDN will be able to price in the EU a three Provenge infusions cycle at $93,000 like in the USA. They will sell more but at a lower price.

I have a $5.5B sales tag achievable within 2015. It excludes Japan and rest of the world sales. $5.5Bx8=$44B. That gives me a $293 value per share. Do you want to consider the USA alone? Then $2.5Bx8=$20B. That gives me a $133 value per share.

Provenge is a high margin product (90%+). I don’t think Dendreon will have a net margin lower than 65%-70%. But let’s be extremely prudent and put the net profit at 50% of sales. $5.5×50%=$2.75B. -30% tax =$1.93B. EPS=12,87. Just put a multiplier: x10=$128,7; x20=$257,40. Do you want to break down USA alone? then $2.5Bx50%=$1.25B. -30% tax=$0.875. EPS=5.83. Just put a multiplier: x10=$58.3; x20=116.67.

Dendreon has a deep pipeline; its technology is scalable; its biologic products do not face generic competition.

They have in Phase II a product called Neuvenge, which targets HER2/neu, a protein found in ovarian, colorectal, breast, bladder cancers. They have in development two treatments against certain types of kidney, colon, cervical, breast, lung cancers.

Basically, DNDN is the next big thing. We are witnessing the history of medicine being made.

Discl. I’m long the stock, short some naked puts, long some calls.

This post is not intended to be investment advice of any kind. YMMV. Do your own DD.


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