Many of you are sitting on substantial profits in Dendreon (DNDN) and in good what-have-you-done-for-me-lately form, I’m already getting emails looking for the next one. Fair enough — I happen to think our portfolio is full of potential rockets, where a single event or two can create doubles, triples and more.

But in the Biotech MegaShift specifically, there is a lot to learn from Dendreon. Why did it “work” so well? And why did it take so long? I want to take a look at the answers to those questions and compare DNDN to a new recommendation that I have for you today.

1. Why did the investment work?

A. First, the technology was solid. By that I mean there was clear evidence of a clinical benefit and few questions about safety.

DNDN — Clinical trials showed that Provenge extends survival in men with recurring prostate cancer who have not responded to hormone treatment. It uses the patient’s cells, so the chances of rejection are low. I knew of no safety issues with the treatment until the FDA staff notes were posted, and even if I had known, the side effects were infrequent enough to require little more than careful observation.

New Recommendation — This company’s product is already approved in the U.K. and sold from 2002 to 2006. It replaces a product that has a shorter half-life in the body. It also uses the patient’s cells, so the chances of rejection are low and the half-life is longer.

B. Second, the company is selling a cold drink to a thirsty crowd.

DNDN — Recurrent prostate cancer is often terminal, and there was no other drug or treatment alternative that seemed to work well in these men.

New Recommendation — Product is cosmetic, not dealing with a life-threatening illness, but the market of aging baby boomers is hundreds of times as large as recurrent prostate cancer patients, and they are eager to maintain their youthful appearance (“70 is the new 50″).

C. Third, management ran the company carefully, focused on FDA approval and conserved cash.

DNDN — Although their process is applicable to any solid tumor cancer, as soon as they realized that Provenge might be approvable for prostate cancer, management stopped clinical development of the same process for breast and head & neck cancers in order to conserve funds. They took every opportunity to talk with the FDA so that they could cut and run if it looked like they were wasting money pursuing Provenge approval. That included requesting and getting approval for a “rolling” Biologics Licensing Application, requesting and getting Fast Track review, and using numerous consultants who were ex-FDA examiners to review and hammer on everything that was submitted to the agency. In addition to cutting costs, DNDN did several small stock offerings and had about $100 million in cash when Provenge was approved by the FDA Advisory Committee.

New Recommendation — Although their process is applicable to many areas requiring soft tissue regeneration, including periodontal disease, reconstructive surgery, cosmetic surgery and cosmetic dermatology, the company focused on getting U.K. approval for the biggest market: cosmetic dermatology. They then brought the product to the U.S., where they are in Phase III trials. They have completed a Phase I trial for a second application for periodontal disease, but that was a low-cost, low-risk initiative. They have about $24 million in cash today, enough to get them through this year. They have closed the U.K. operation for now to save money, and sold labs in Switzerland. Like DNDN, I expect them to raise more cash from time to time.

2. Why did it take so long?

DNDN — I first recommended the stock in July 2005 and you would be polite to say it “languished” for almost two years before the rocket took off. The reason was simple: Wall Street did not believe the story. Specifically, they did not believe that Provenge would be approved. So, they did not move the stock until actual approval was imminent.

Should I have waited until just before approval to recommend it? While 20/20 hindsight would say “yes,” I’ve seen many other situations where Wall Street changed its mind and moved the stock long before approval. And I knew Dendreon was in constant talks with potential partners, so if a big pharma had bellied up to the bar, the stock would have jumped overnight. Our DNDN investment easily could have paid off much earlier, but it took a while. Ultimately, we will have a $40 or $50 stock here — a “10 bagger” or 1,000% return from the lows we bought it at — and the wait will have been worth it. (Even from today’s levels, the stock will probably be higher after FDA approval and the partnership agreement. But I wouldn’t be surprised to see it back at these levels sometime after approval, although eventually we will see $40 or $50. If you want to take your original investment off the table, just for peace of mind, I have no problem with that. Otherwise, continue to hold DNDN.)

New Recommendation — Their first U.S. Phase III clinical trial was not conclusive, and the stock tanked. The company now has new management and a new Phase III pivotal trial of the Isolagen Process is underway. The FDA agreed to a Special Protocol Assessment, which essentially means if the trial hits statistical significance, the Isolagen Process gets approval. I don’t know if Wall Street will wait until the Phase III results are announced, or start moving the stock up based on the new management’s track record in cosmetic medicine, so like, DNDN, I think we should get onboard before it could really start moving.

So, enough mystery, who is the next Dendreon?

Buy Isolagen

Isolagen (ILE) develps autologous cellular therapies for soft tissue regeneration in the United States and, until recently, the United Kingdom. “Autologous” means that they extract some of the patient’s cells, multiply them dramatically in the lab, and then reinfuse them. Their lead product, the Isolagen Process, is used by dermatologists to correct and reduce the normal effects of aging, like wrinkles, creases, sun damage and nasolabial folds. Is there a market for this? Ask yourself, do you know anyone over the age of 45 who wants to look younger? There is your answer.

In the beginning, this will be a high-end cosmetic procedure paid for by the patients. That’s about a six million person market in the U.S., or a $1.8 billion a year market at $300 per treatment, once a year. It won’t start at that level, but this is the kind of market that can grow 100% a year for a few years. Plus, I expect it to become a reimbursed procedure over time, either by competing health plans or in the form of expanded health savings accounts, where people can spend pre-tax dollars on whatever health care they want. There is also a medical need for autologous cellular therapy in sports and other injuries, burns and birth defects.

Isolagen’s process replaces using bovine collagen to plump up wrinkled and creased areas. Bovine collagen breaks down and wanders in just a few months, and while the patient can keep getting new injections, many peoples’ immune systems become sensitized by repeated exposure to a foreign substance, developing antibodies and immune reactions. That doesn’t happen if a doctor can use their own cells, and Isolagen’s treatment lasts three or four times as long — about a year.

ILE is depressed because their first U.S. clinical trial failed, even though Isolagen Therapy was approved in the U.K. and sold from 2002 through the end of 2006, when the operation was closed to save money. I had little interest in the stock under the old management, but they got the heave-ho in March 2006, and the company hired Nicholas Teti in June. He built Inamed, the silicon-filled breast implant company, over four years and sold it to Allergan at the end of 2005 for $84 a share. He is widely regarded as a superb manager in cosmetic medicine. Suddenly, I am very interested in ILE.

In August 2006, ILE acquired 57% of Agera, a company that sells advanced skin care systems based on nano-peptide technology. These are sold over-the-counter in the U.S. and the U.K., including anti-aging, anti-pigmentary and acne treatment systems, and they should generate good cash flow while ILE proceeds through clinical trials.

It is obvious from the price of the stock that, like Provenge, Wall Street does not think the Isolagen Process will have a successful Phase III trial or be approved. I think they are looking at the last, badly designed trial instead of looking forward to what the new management can do.

The stock came down from $12 in April 2004 to $1 in November 2005, bounced over $4 in June 2006 and then sold off to $2 at the end of January. It has doubled since then. Like DNDN, I think it ultimately will be a 10 bagger or better from the January lows, getting to $25. For now, though, buy ILE under $4.50 for a $9 first target.