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Dendreon's Provenge Overhang

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Signs are positive for Dendreon moving ahead with its prostate cancer vaccine Provenge in the US and eventually Europe. Medicare reimbursement however, continues to hold back the stock.

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Dendreon (DNDN) is moving ahead with plans to sell its prostate cancer vaccine Provenge in Europe, a positive signal for a stock that's been beat up over reimbursement worries in the US.

Dendreon will apply either late this year or early 2012 to sell Provenge in Europe. Company executives say they won't be required to conduct any new human studies to get approval there -- another positive. If all goes as planned, Dendreon will get European clearance by 2013.

Despite the positives, Dendreon's shares aren't exactly rallying on the news. The stock rose about 4% to $36.93 in midday trading. The shares are down 4% over the past three months and down almost a third from their high last year as concerns over the company's capacity to make enough Provenge and insurance reimbursement questions spooked some investors.

In November, a panel of experts advising Medicare and Medicaid recommended that the government should reimburse patients who receive the vaccine. The agency that oversees the two public health plans ordered the review after Provenge was approved for sale in the US last year. The Centers for Medicare and Medicaid Services says it will draft guidance on paying for the treatment by March and will make a decision by June 30. Provenge patients are currently being reimbursed by government and private insurance.

Dendreon reiterated an earlier estimate that Provenge sales will be as much as $400 million this year and the company will continue to lose money as it spends to produce and sell the vaccine and expand to Europe. (Provenge revenue was $48 million last year.) Dendreon plans to build a plant in Germany and initially will contract with another company to produce Provenge. That's, of course, contingent on Provenge winning EU approval.

The bulls on this stock think Dendreon is way undervalued.

Robert W. Baird analyst Christopher Raymond has a price target of $56 a share. The stock closed above $54 after receiving approval last year.

"Now may be the best time to get involved in this name, ahead of Dendreon's planned capacity expansions and in particular ahead of additional or more substantive signals of strong commercial uptake," Raymond says in a note yesterday.

Provenge is a new type of treatment. It's a vaccine that turns a patient's immune system against cancer. In men with advanced prostate cancer it's been shown to extend their life an average of four months. A number of analysts predict the treatment eventually will exceed $1 billion in annual sales.

"What we're in is a golden era for patients with prostate cancer," Dendreon CEO Mitchell Gold said on a call with investors and analysts this morning.

This wonder drug comes with a big price tag: $93,000 per treatment. Conspiracy theorists believe the government's review of the treatment is related to sticker shock. But Medicare's analysis isn't supposed to consider price. The review in November was over safety and effectiveness.

Pricing the product in Europe will be an issue as well. But that's a challenge every drug maker faces as a number of countries have price controls.

Gold says demand continues to be strong and plans for production and sales are on track. The company has 100 sales people and production capacity will increase tenfold this year as plants in New Jersey, Los Angeles and Atlanta come on line.

The only overhang on the stock seems to be the Medicare issue. A bet on Dendreon continues to be a call on whether insurance reimbursement is upheld. So far, the signs point to that happening.
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No positions in stocks mentioned.
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