* Product is first vaccine to treat cancer

* Cost set at $93,000

* Dendreon shares close up 27 percent (Adds comments from Dendreon, analyst, closing share price)

WASHINGTON, April 29 (Reuters) - The first vaccine to treat cancer won U.S. approval on Thursday as Dendreon Corp's DNDN.O Provenge marked a step forward in the search for new ways to the fight the disease.

Shares of biotechnology company Dendreon soared more than 30 percent after health officials approved the Provenge vaccine for advanced prostate cancer three years after the product’s surprise rejection.

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Graphic on share price: link.reuters.com/fup99j

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“Provenge provides a new treatment option for men with advanced prostate cancer, who currently have limited effective therapies available,” Karen Midthun, acting head of the Food and Drug Administration’s biologics center, said in a statement.

Unlike traditional vaccines that prevent a disease, Provenge treats prostate cancer by stimulating the body’s own immune system to attack malignant cells. It is produced by taking cells from a patient’s tumor and incorporating them into a vaccine that is injected back into the patient.

The field has been littered with failures. Dendreon is the first company to show a cancer vaccine can extend patient survival. In a late-stage study of 512 patients, men given Provenge lived an average of 4.1 months longer than those who got a placebo.

Common side effects were chills, fever and headache that lasted up to two days following infusion. This is seen as an advantage over the debilitating side effects typical of chemotherapy.

Most reactions were mild or moderate but one-quarter of patients reported a serious problem, the FDA said. Problems such as strokes were seen in 3.5 percent of Provenge patients compared with 2.6 percent in the placebo group.

Dendreon said Provenge would cost a total of $93,000 for the full treatment of three infusions.

The vaccine’s sales could easily top $1 billion a year, analysts say. Brean Murray Carret & Co analyst Jonathan Aschoff forecast annual Provenge sales of $1.45 billion in 2013 based on a higher-than-expected price, with peak sales topping $2 billion.

Prostate cancer is the second most common cancer among U.S. men behind skin cancer and usually occurs in older men.

The FDA approved Provenge for hormone-resistant prostate cancer that has spread in the body but is causing no or minimal symptoms.

Dr. Len Lichtenfeld, deputy chief medical officer at the American Cancer Society, said Provenge would give a boost to future efforts to develop treatment vaccines for cancer.

“This is exciting because it does represent a proof of concept. (Provenge) does seem to prolong life in a very specific group of men,” he said.

Other companies are exploring the field. GlaxoSmithKline GSK.L is studying a lung cancer vaccine while Bristol-Myers Squibb BMY.N is testing a melanoma vaccine.

Danish biotech Bavarian Nordic A/S BAVA.CO is about to start late-stage testing of a rival prostate cancer vaccine called Prostvac that does not need to be tailored to the individual patient.

It received a fast track designation from the FDA under which Bavarian Nordic can submit key data as it becomes available rather than waiting until pivotal studies are completed.

Initial Provenge supplies will be limited. Dendreon said it will make the vaccine available at about 50 sites.

Christopher Raymond, an analyst with Robert Baird & Co, said the company told investors in a conference call there will be only enough Provenge within the next 12 months to treat 2,000 patients, all from a factory in New Jersey that is operating at 25 percent capacity.

Dendreon said three plants will be running by mid-2011, which Raymond said should be able to supply 4,400 patients in 2011, and about 8,000 patients in 2012.

“I think the drug goes to $1 billion in short order,” once the three plants are all up and running, he said.

Dendreon executives said the plants will be able to produce enough Provenge to generate annual sales of $1.2 billion to $2.5 billion.

“We think it will be used in a majority of these 30,000 patients per year” with an advanced type of prostate cancer, Cowen and Co analyst Ziad Bakri said.

Provenge had a rocky path to the market. Three years ago, an FDA advisory panel of outside experts found it was safe and had shown “substantial effectiveness.” Despite the panel’s favorable comments, the FDA sent Dendreon back to the clinic to confirm that the drug could extend patient survival.

Some cancer patients and Dendreon investors sharply criticized the agency for denying approval of a drug they said could help critically ill men with few options.

Dendreon shares were trading below $3 in March 2009 before the company unveiled the positive survival data.

Analyst Aschoff, who raised his price target on Dendreon stock to $50 earlier in the week, said he thinks the shares can now go even higher.

“I don’t think the $50 range is a ceiling. You’ve just removed a very large risk element and you have a higher price” for Provenge than many investors expected, he said. (Reporting by Lisa Richwine, Bill Berkrot, Ransdell Pierson and Susan Heavey, editing by Maureen Bavdek, Leslie Gevirtz and Steve Orlofsky)