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A Potential Blowup Ahead in Biotechnology

By Rob Fannon, editor Phase 1 Investor
Friday, April 13, 2007

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.
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

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