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Copying Dendreon

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Big pharma partners can help biotech companies fund their R&D, but that's not always the best option for shareholders. Dendreon is a model for going alone.

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A partnership with a big pharmaceutical maker can be a life preserver for a small biotech company that desperately needs money to continue research.

But the pact also can be a hindrance, robbing investors of a bigger payoff down the road, according to an analysis by consultant MD Becker Partners. Becker holds up Dendreon (DNDN) as an example of a company that was able to successfully develop and launch a new treatment -- the prostate cancer vaccine Provenge -- with no help from a larger company. The result: Provenge is expected to be a blockbuster and the company's market cap has swelled to $4.8 billion.

Investors who held Dendreon at the end of 2009 saw their shares double by April of last year when the Food and Drug Administration approved Provenge. (The stock has since declined on concerns about government health insurance reimbursement.) Dendreon shares were up 2% to $33.61 midday Friday.

In 2009, Cougar Biotechnology also had a promising prostate cancer treatment, abiraterone. But that company decided to sell to Johnson & Johnson (JNJ) for $970 million, or $43 a share, which was about a 16% premium. The promising drug is still being tested. Other companies that are in the late stages of testing prostate cancer drugs with the help of partners include Medivation (MDVN) and OncoGenex Pharmaceuticals (OGXI). Those two companies would probably have larger market caps if they didn't agree to share future revenue upon approval, Becker says.

"The fact that Dendreon has achieved the largest market valuation of any company in the late-stage prostate cancer segment of the market by commercializing its product without a partner helps support the notion that going alone may provide the highest value to stakeholders," Becker says in the report.

Becker's thesis is a bit contrarian. Danish biotech company Bavarian Nordic, for instance, saw its shares pummeled yesterday after the company said it was considering raising capital for a prostate cancer vaccine. The company is considering a rights offering to raise money rather than seek a drug development partner.

"There could be more benefits in terms of shareholder value from retaining control in a full in-house development program," [pdf] the company said in a statement.

Shares of a biotech company can plunge even lower when a big drug company drops a partnership due to a reorganization, Becker says. When Pfizer (PFE) terminated its agreement with Celldex Therapeutics (CLDX) last year, the smaller company's stock dropped by more than a quarter. Becker points out that the partnership for a cancer vaccine was scrapped by Pfizer even though the product had met safety and efficacy objectives through three clinical trials.

Becker highlights 11 companies in late stages of human studies testing cancer treatments that don't have partners. The publicly traded companies include Celldex, Cell Therapeutics (CTIC), Cyclacel Pharmaceuticals (CYCC), Exelixis (EXEL), Oncolytics Biotech (ONCY) and Sunesis Pharmaceuticals (SNSSD).

Others with late-stage cancer drugs include Bavarian-Nordic, Pink Sheet firms Avax Technologies and Biovest International and closely held Light Sciences Oncology and Oncova Therapeutics.

"This group of companies will likely represent a mixed bag of approaches, with some going alone, others entering into collaborations and several being acquired," says Michael Becker, senior partner and founder of MD Becker.
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