Dendreon (DNDN) Q3 2010 update

Dendreon (DNDN) closed at $35.07 on November 5th, 2010.

I just finished listening to the Q3 2010 update (unfortunately I could not find a transcript online)

My key takeaways were the following:

• Revenue guidance of 350MM to 400MM for 2011
• One half (175MM-200MM) is expected in the 4th Quarter 2011 (full capacity)
• Implied revenue guidance of 700MM-800MM for 2012
• Expansion in New Jersey is on track and will be ready for FDA review shortly (planned operation for March 2011) 
• Construction of facilities in Atlanta and Los Angeles are on track and are almost complete
• Finish the year with 250MM Cash and Cash Equivalents

Based on the new revenue guidance, I have updated my spreadsheet to include these new figures.  Feel free to download and play around with the numbers for yourself

docs.google.com/leaf?id=0B91Wluk5zm-ZMTc...

Using the numbers from 2012, the range of prices are $29.54 to $37.98 (not discounted) and discounted at 10% are $26.59 to $35.94.

The reason why I still like DNDN long, even though the valuation is not much higher than the current stock price is for the following reasons.  The valuations do not take into account any sales outside of the United States, as the timing of those sales are unknown.  Secondly, the valuation does not take into account any additional sales for uses in the future (for other prostate cancers or other cancers in general).

Disclosure: Long DNDN

My strategy is to try to buy DNDN at a price closer to the low end of the valuation, which is why I am selling puts at $25 (net long the stock as I would be required to buy the stock at $25).  Please note that I sell only cash covered puts and not naked puts.

My valuation for Dendreon (DNDN)

DNDN closed at $40.99 on October 4th, 2010.

My key takeaways from the Q2 2010 Earnings call and forward guidance

• 2,000 patients treated the first 12 months.
• Expansion done on NJ facility early 2011, facility in Atlanta and Los Angeles mid 2011
• Cost of Goods sold 30% as expansion ramps up, moving towards 20% by 2012
• Finish 2010 with 200MM in cash not including receipts for drug sales in 2010 (please note that my revenue analysis excludes the cash balance)

Below is my valuation based on revenues.  For 2011, I used the current analyst estimates on Yahoo Finance as of October 3rd 2010. 

2011 Estimates	Low	Average	High
RPP	$       93,000	$        93,000	$        93,000
# of Patients	2723	4320	7473
Analyst Estimates	$253,200,000	$ 401,750,000	$     695,000,000
Revenue Multiple	4	4	4
Market Valuation	$ 1,012,800,000	$ 1,607,000,000	$  2,780,000,000
Value per share	$7.04	$11.17	$19.33

Using the most conservative numbers, the value of DNDN per share would be approximately $7.  This model uses a revenue multiple of 4.

2011 Estimates	Low	Average	High
RPP	$       93,000	$       93,000	$       93,000
# of Patients	2723	4320	7473
Analyst Estimates	$  253,200,000	$  401,750,000	$  695,000,000
Revenue Multiple	6	6	6
Market Valuation	$ 1,519,200,000	$2,410,500,000	$4,170,000,000
Value per share	$10.56	$16.76	$28.99

Using the average estimate and a revenue multiple of 6 (more in line with industry averages),  the model values DNDN at just under $17 per share. 

Since 2011, the manufacturing capacity is still being built out, a valuation of 2012 guidance seems more appropriate.

2012 Estimates	Low	Average	High
RPP	$          93,000	$      93,000	$         93,000
# of patients	10753	16129	21505
Mgmt Guidance	$  1,000,000,000	$ 1,500,000,000	$  2,000,000,000
Revenue Multiple	4	4	4
	$  4,000,000,000	$  6,000,000,000	$  8,000,000,000
	$27.81	$41.71	$55.61
discount (1 year)
10%	$25.03	$37.54	$50.05
12%	$24.47	$36.71	$48.94
15%	$23.64	$35.45	$47.27
20%	$22.25	$33.37	$44.49

Since the revenues are over 1 year out, I have also included various discounts depending on your cost of capital. 

Using Management Guidance (vs Analyst Estimates previously) we come up with a broad range of values at 4x revenues $27.81 to $55.61 per share.  If we use a higher revenue multiple at 6x revenues (like before) the range moves to $41.71 to $83.42 per share. 

Please see the attached file and you can play around with my assumptions.
Spreadsheet (hosted by Google)

I am short (net long) DNDN 25 puts (cash covered) and am hoping to get long at that price.