Earlier this week, we highlighted Dendreon Corporation (NASDAQ: DNDN) as one of five biotechs with 50% implied upside.  A new report is out from Canaccord Genuity that has figures which could imply even more upside than what we were reading into shares at the time.

Canaccord Genuity asked, “Can we eliminate the finger test soon?”  Surely, you get their point.  This has been a great week for Dendreon if you look at the stock chart.  A proposed decision memo from the Centers for Medicare/Medicaid Services (CMS) actually supported full reimbursement rates of Provenge in its labeled indication for the specific aims in prostate cancer treatment.  That is not all forms and stages of prostate cancer, but this narrows the definition and should alleviate some of the concerns that surround this stock.

Canaccord Genuity’s Life Sciences analyst George Farmer was expecting a supportive memo, but apparently the support from CMS was more positive than what he was looking for.  He was pleased that there was “no mention of a need to verify metastatic disease” prior to coverage from local contractors.  This is big because it speeds up the process and that speeds up the time of treatment for these patients who are otherwise considered to be dying. 

The company is not entirely out of the woods yet.  A final CMS decision is due on or about June 30, 2011. 

Farmer sees his sales estimates for Provenge of $367 million in 2011 and about $1.2 billion in 2012 being ‘reasonably achievable.’  What Farmer believes is that doctors are likely to be more apt to recommend and prescribe Dendreon’s Provenge with a lower worry about reimbursement risk. 

As a reminder, Provenge numbers for the next two quarters are not as critical as what is expected ahead.  The company’s increased production is on facilities being constructed as we speak and that means that the bulk of the 2011 guidance is very back-end loaded.  It will not be until 2012 that you start to see a normalized revenue growth rate from Dendreon.

If Canaccord Genuity is correct, then our belief is that Dendreon could be worth far more than what analysts are rating the stock as today.  Their analyst George Farmer noted a potential $4 billion or more in annual sales in the U.S. alone as being possible.  He also expects successful supply expansion and “on-label payor reimbursement” coming up.

So why are we more bullish, assuming he is correct?  Simple… That $4 billion figure is massive. Dendreon’s market cap is about $5.4 billion and Thomson Reuters still has sales estimates of $370 million in 2011 revenues and $867.2 million in 2012.  Farmer is already calling for $1.2 billion in 2012 for now. 

Another consideration is that Provenge is currently only approved for specific instances of prostate cancer.  Dendreon is evaluating Provenge and other possible drug candidates as possible renal cell carcinoma treatments as well as in colon, cervical, breast, and ovarian cancers.  We are not yet willing to model a single penny on these yet into future revenues, but these offer significant upside to the company with its other products and its other indications if the news flow on those is positive.

Dendreon shares are taking a bit of a breather so far on Friday.  Shares are down 0.55% at $37.22 before Noon EST but shares were down as low as $33.50 early on Monday morning this week.  The consensus analyst target is $54.53, but George Farmer’s target is $65.00 per share.  

If Dendreon gets anywhere close to a $4 billion per year sales figure for Provenge, then Dendreon is likely to have a far higher share value based on that alone.  That would represent a mere multiple of about two-times eventual revenues at the forward price target.  We are currently seeing Dendreon trade at five-times to six-times 2012 revenue expectations with higher growth targets in the years thereafter.  Throw in other trials and other potential trial candidates and you have a new large biotech with even more implied upside ahead and it would still be considered cheap to established players even at the forward share price targets. 

As always with any calls like this, the situation described is all an “if-then” model.  What CMS ultimately decides is often as unpredictable as FDA approval decisions.  There is a lot of potential upside here, but this one cannot be considered to be without risk by any measures. 

JON C. OGG

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