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Dendreon Corporation (NASDAQ:DNDN)

Q4 2012 Results Earnings Call

February 25, 2013 9:00 a.m. ET


Andrea Rose - IR

John Johnson - Chairman and CEO

Greg Schiffman - EVP and CFO

Joe DePinto - EVP, Global Commercial Operations

Mark Frohlich - EVP, Research and Development and Chief Medical Officer


Matt Lowe - JPMorgan

John Chung - RBC Capital Markets

Rachel McMinn - Bank of America Merrill Lynch

Robyn Karnauskas - Deutsche Bank

Howard Liang - Leerink Swann

Andrew Goldsmith - Canaccord Genuity

Eric Schmidt - Cowen & Company

Laura Chico - Robert W. Baird

Lee Kalowski - Crédit Suisse

Ryan Martins - Lazard Capital Markets

Ying Huang - Barclays Capital

David D. Miller - Biotech Stock Research

Geoffrey C. Porges - Sanford C. Bernstein


Good morning, ladies and gentlemen, and welcome to the fourth quarter and year end 2012 Dendreon earnings conference call. [Operator Instructions] Now I would like to turn the conference over to your host, Andie Rose.

Andie Rose

Thank you, and good morning, everyone. We're pleased that you could join us today for our fourth quarter and year end conference call. With me are John Johnson, chairman and chief executive officer; Greg Schiffman, executive vice president and chief financial officer; Joe DePinto, executive vice president of global commercial operations; and Mark Frohlich, executive vice president of research and development and chief medical officer.

Before we begin, I'd like to remind you that during this call, we will be making forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ from the results discussed in the forward-looking statements. Reference to these risks and uncertainties is made in today's press release, and they are disclosed in detail in our periodic and current event filings with the U.S. Securities and Exchange Commission.

In addition, this presentation includes non-GAAP financial measures. This presentation is not intended to be a substitute for our financial results presented in conformity with generally accepted accounting principles in the U.S. Investors and potential investors are encouraged to review the reconciliation of the pro forma financial measures included in our earnings release.

The most directly comparable GAAP information and a reconciliation between the non-GAAP and GAAP figures are included in our Q4 2012 earnings release, which has been furnished on the Form 8-K.

Now with that, I will turn the call over to Greg.

Greg Schiffman

Thanks, Andie. Earlier today, we reported our financial results for the fourth quarter and full year ended December 31, 2012. Net product revenue for the quarter ended December 31, 2012 was approximately $85.5 million, compared to approximately $78 million for the quarter ended September 30, 2012.

This quarter, we revised our estimate of outstanding chargebacks related to PHS-eligible providers, resulting in a reduction in the chargeback reserve and an increase in net product revenue of approximately $3.8 million.

On a pro forma basis, excluding this adjustment, net product revenue for the quarter and year ended December 31, 2012 was $81.6 million and $321.5 million respectively, a 5% sequential growth in revenue on a sequential quarter over quarter basis, and 51% year over year.

For the year ended December 31, 2011, we sold our ownership in a royalty stream related to Merck’s sales of Victrelis for $125 million, resulting in total revenue of $341.6 million.

For the quarter ended December 31, 2012, we saw approximately $1.1 million of rebates and chargebacks. Excluding the $3.8 million change in estimate discussed previously, our pro forma rebates and chargebacks were $5 million.

In addition, we recorded approximately $1.2 million of charges associated with GPO administration fees. These fees are included as a reduction of gross sales. As such, for the quarter, we had a growth to net revenue adjustment of approximately 7%, which is consistent with our historical growth to net adjustment.

For the quarter ended December 31, 2012, we had a cost of goods sold of $54.4 million, or 63.6% of revenues. On a pro forma basis, adjusting for the $3.8 million associated with our change in estimate of outstanding chargebacks related to PHS-eligible providers, cost of goods sold was approximately 66.6%. This is consistent with last quarter’s cost of goods sold as a percent of revenue.

As we indicated last quarter, there was a favorable accounting adjustment related primarily to the restructuring activities announced July 30, 2012. On a pro forma basis, we saw a slight improvement in our cost of goods sold.

We executed the sale of our interest in the New Jersey manufacturing facility to Novartis Pharmaceuticals Corporation in December 2012 for $43 million in cash. Going forward, we will no longer incur costs associated with our New Jersey manufacturing operation, which will provide an improvement in our cost of goods sold.

As such, we expect to see an improvement in cost of goods sold in Q1 2013, with our cost of goods sold sequentially improving to approximately 50% by Q3 of 2013. As we move forward with our system and automation initiatives, as well as our ongoing cost reduction activities, we would expect to continue to see our cost of goods sold decrease over time.

In addition, as volumes grow, we expect we will be better able to further leverage our manufacturing infrastructure. For the year ended December 31, 2012, selling, general, and administrative expenses were approximately $317 million, down from approximately $361 million for the year ended December 31, 2011.

For the quarter ended December 31, 2012, selling, general, and administrative expenses were approximately $73.5 million, up from $68.1 million last quarter. Again, the primary reason for this increase is that there were some favorable accounting adjustments last quarter associated with the restructuring, which did not repeat this quarter.

For 2013, I would expect to see expenses decrease slightly through the first half of the year as we begin to realize the benefits of the restructuring. The full benefits of the restructuring will be realized in the third quarter of 2013.

The restructuring activities are removing a substantial portion of our administrative costs and following the completion of our restructuring activities, we will have an administrative cost structure that is consistent with other benchmark companies of similar size and complexity. We are continuing to invest in our commercial activities, including a new investment of approximately $5 million per quarter for a targeted direct-to-consumer ad campaign.

For the year ended December 31, 2012, research and development expenses were approximately $74.6 million, compared to $74.3 million for the year ended December 31, 2011. Research and development expenses for the quarter ended December 31, 2012 were approximately $19 million, consistent with last quarter.

For the year ended December 31, 2012, the company had a GAAP loss of $2.65 per share. This includes approximately $46 million associated with the restructuring. Excluding noncash charges and the cash charges associated with the restructuring and certain executive terminations for the year ended December 31, 2012, we had a non-GAAP loss per share of approximately $206.5 million, or $1.39 per share.

For the year ended December 31, 2011, the company had a GAAP loss of $337.8 million. This included both the sale of the royalty as well as approximately $39 million associated with the restructuring activities.

Excluding the royalty and noncash charges and the cash charges associated with the restructuring, for the year ended December 31, 2011, we had a non-GAAP loss per share of approximately $311 million, or $2.13 per share.

For the quarter ended December 31, 2012, the company had a GAAP loss of approximately $0.26 per share. This includes a favorable restructuring adjustment of approximately $36 million associated with the sale of our interest in the New Jersey manufacturing facility.

Excluding noncash charges and the cash charges associated with restructuring for the quarter ended December 31, 2012, we had a non-GAAP loss per share of approximately $45 million, or $0.30 per share.

Our EBITDA loss for the quarter, adjusting for only noncash expenses including depreciation, noncash stock comp, and imputed interest on our convertible notes was approximately $9.5 million, or $0.06 per share.

We have consistently provided a pro forma representation of our financials excluding our noncash related charges to provide better insight as we move toward cash flow breakeven. We believe we have a strong balance sheet with cash, cash equivalents, and short and long term investments at December 31, 2012 of approximately $430 million, compared to December 31, 2011 of approximately $618 million.

For the quarter, the company had a net cash usage of approximately $15 million. This includes $43 million associated with the sale of our interest in the New Jersey manufacturing facility. On a pro forma basis, excluding the sale of our interest in the facility, our cash usage was approximately $58 million.

We believe that we are in a strong financial position, and we believe that the cash balance we are holding is sufficient to get us to cash flow positive in our U.S. operations.

I will now turn the call over to Joe, who will provide you with an update on our commercial performance and plans.

Joe DePinto

Thanks, Greg, and good morning everyone. In the fourth quarter, we continue to see positive trends in our community accounts, which we believe demonstrate that our commercial strategy is taking hold. We continue to add accounts in both community oncology and urology settings. During the fourth quarter, we added 61 net new accounts for a total of 802 infusing accounts, and we are pleased to have delivered our highest quarter ever for community sales.

In terms of our customer composition, we ended the quarter with community clinics now accounting for 71% of total sales, which is where we believe the long term revenue potential exists. Within the community setting, oncology accounts accounted for 43% of the total business during the quarter, and urology accounted for 28% of our total business.

While adding new infusing accounts is important, our focus remains on penetrating our existing customer account base to increase our depth of sales, which drives volume. We have seen many accounts ramp up, and in fact have one account that is treating more than 30 patients per quarter for the last six months now.

In the second and third quarters of this year, we put in place key account managers to grow urology. We began applying the same strategy to community oncology, with the implementation of our area business managers during the third quarter. During the fourth quarter, sales in community urology accounts were up 25% and sales in community oncology accounts grew 4%. We expect our sales force execution to continue to improve.

We are seeing a natural shift away from academic institutions, which declined 9% sequentially in the quarter. We are hearing direct positive feedback from physicians and patients alike about PROVENGE, both in terms of efficacy and reimbursement. With regard to efficacy, physicians have told us that PROVENGE is currently the only product with an immune-mediated mechanism of action as well as a statistically significant overall survival benefit within our label.

With regard to reimbursement, physicians are pleased that all Medicare administrative contractors cover PROVENGE for the FDA label as per the national coverage decision and 99% of commercial healthcare plans have coverage. Approximately 75% of PROVENGE patients have minimal out of pocket costs.

In the first quarter of 2012, we began implementing our PROPEL patient initiatives. We continue to make traction with this program, which is a branded patient education series consisting of physician presentations to prostate cancer patients at local and regional meetings of the largest prostate cancer support groups throughout the country.

This enables us to access and extremely wide audience of potential PROVENGE patients, and we will continue to execute this program to drive awareness. In 2012, we executed 75 PROPEL meetings with an average of 20 patients attending per meeting, while for certain larger meetings we were able to reach over 400 patients in total.

As we discussed at JPMorgan, we will also be executing a national direct-to-consumer advertising campaign. Studies have shown that direct-to-consumer advertising is an excellent tool to educate patients as well as to identify appropriate patients. The market research we have conducted makes an ideal case for direct-to-consumer advertising, given the need for education and increased awareness in the marketplace, combined with our large national infusing footprint.

And it’s not just about reaching patients directly, it’s about reaching families and caregivers. There are two main reasons that this campaign is important. The first is, when PROVENGE is recommended to patients by physicians, some patients may hesitate because they don’t understand immunotherapy.

Second, we know that when a well-educated consumer asks his doctor for PROVENGE and he is an appropriate patient, there is an extremely high connect rate. We are pleased to unveil our commercial to you today through the presentation on our webcast. This is expected to air in the second quarter if not sooner. Our commercial team is certainly excited about this ad, and we hope you are too.

Commercial - Male voice: “No matter what, people can count on me to get the job done, so when my prostate cancer returned, my doctor told me that this time can be different, with PROVENGE, a personalized treatment that lets me count on my own body to fight back.”

Announcer: “PROVENGE is clinically proven to help extend life in certain men with advanced prostate cancer by taking your own blood cells and reprogramming them to jumpstart your immune system so it can attack your prostate cancer.

PROVENGE can cause serious reactions including those resulting from infusion and stroke. Severe but infrequent infusion reactions include chills, fever, fatigue, weakness, breathing difficulties and shortness of breath, decreased oxygen, wheezing, dizziness, headache, high blood pressure, muscle ache, nausea, and vomiting. Tell your doctor about all of your medical problems, including heart problems, lung problems, or history of stroke.

Call 1-800-861-8141 for more information. Talk to your doctor and find out if the time is right for PROVENGE. PROVENGE, helping you help yourself.”

As a cancer treatment therapy, we are in a unique position to be able to show the benefits of PROVENGE in an on-air segment, given its profile. We believe patients will take away the many advantages of PROVENGE, balanced with its side-effect profile. Based on our extensive market research, we believe this indication and awareness will have a positive impact on PROVENGE utilization.

On the reimbursement front, we continue to see improvements during the fourth quarter. We discussed Aetna expanding its policy in Q3, and in Q4, Noridian also enhanced its reimbursement coverage. The reported average time to payment remains less than 30 days for physicians.

In conclusion, with a stronger and more robust commercial team, targeted strategy, and increased focus on consumer education and awareness, we are confident in our ability to grow PROVENGE over time.

I’ll now turn the call over to Mark, who will provide some highlights from ASCO-GU.

Mark Frohlich

Thanks, Joe. This year’s ASCO-GU meeting was important for Dendreon. As you know, we’ve been actively engaged in conducting clinical trials to further our understanding of the clinical application of PROVENGE as well as to apply our platform to other cancers.

In particular, the initial data from these studies inform us on the investigational uses of PROVENGE in combination or sequence with other treatments. I’d like to highlight some of the most important data that were presented at the conference.

First, I’ll discuss a randomized Phase II open label study of PROVENGE concurrent with, or prior to, ZYTIGA for patients with metastatic castration-resistant prostate cancer. In one arm, ZYTIGA and prednisone are administered the day following the first infusion of PROVENGE and in the second arm, patients receive ZYTIGA and prednisone 10 weeks following initiation of PROVENGE. The trial is now fully enrolled, with 69 patients.

In a preliminary analysis of cell product parameters data in a total of 29 patients, the total number of androgen-presenting cells and the degree of androgen-presenting cell activation across the three doses was comparable between the two arms.

And the pattern of androgen-presenting cell activation was consistent with a prime boost effect and was also comparable between the two arms. This suggests that PROVENGE can be successfully manufactured when ZYTIGA and prednisone are initiated concurrent with PROVENGE. We anticipate having additional data on immune responses measured in the peripheral blood later this year.

We also presented data on an open label study of PROVENGE in metastatic castration-resistant prostate cancer patients previously treated with PROVENGE in the rising PSA hormone-sensitive setting as part of the ProtecT trial. As of September of last year, seven patients have been enrolled in this trial and have received at least one infusion of PROVENGE.

The median interval between the last infusion in the ProtecT trial and the first infusion in P10-1 was 8.6 years. At the first infusion during retreatment, androgen-presenting cell activation was high relative to the first infusion in ProtecT, indicating very long term immunologic memory.

At the meeting, we also met with key opinion leaders to discuss a new early detection registry we will be launching. Patients with castrate-resistant prostate cancer and without known metastases will be enrolled and imaged regularly to detect metastases. The registry should provide data on predictive factors that can help physicians determine when a patient should be imaged for metastatic disease.

Finally, we presented data from the new (indiscernible) trial of DN24-02, our autologous cell immunotherapy based on the same platform as PROVENGE but targeting the tumor antigen HER 2 rather than prostatic acid phosphatase.

This trial will randomize approximately 180 patients with surgically resected urothelial cancer at high risk of recurrence to DN24-02 or observation, with a primary endpoint of overall survival. In an analysis of patients screened for HER 2 expression for the trial, 80% or more of the patients had 1+ or greater expression of HER 2… [audio drops out]

John Johnson

I think we may have lost Mark due to technical reasons. I’ll continue the final paragraph of his script.

In overall, we had a very positive response from the medical community to these data, particularly around the investigative value of data to inform the clinicians on the sequencing of PROVENGE with other therapies, and we look forward to the additional data being presented later this year.

So 2012, was a year of transformation for Dendreon. We undertook a total commercial overhaul in terms of our strategy, structure, and people. We implemented a strategic restructuring to reduce our cost of goods sold and streamline our cost structure. We added significant talent to our team, and I believe we have the right commercial strategy to grow sales.

I’m pleased with the great strides we have taken, but we still have more progress to make in 2013. We also continue to make progress advancing the global market opportunity for PROVENGE. In Europe, we have filed our application with the EMA and expect a regulatory decision in mid-2013. We continue to evaluate partnering strategies in Europe while we continue enrolling patients in the European open label study.

In January, at JPMorgan, we guided that we believe we will see year over year growth for PROVENGE, that we expect to see cost of goods sold of less than 50% in the second half of the year, and we believe that we can be cash flow positive with our U.S. operations on a net trade sales level of $100 million. That guidance is still intact.

I also spoke about some potential headwinds we believe we can be facing as we headed into the first quarter, including the effects of seasonality and Hurricane Sandy and promise an update on what effect, if any, they would have on our first quarter results. It appears that those headwinds we predicted did indeed impact results in January and continued into early February.

I’d like to take a moment to discuss these, and what we are seeing in the marketplace. First, we did see an effect of seasonality as we entered January. This is not unusual for the higher-priced oncology infusables, and is especially relevant for a product like PROVENGE, where you see the entire cost of therapy encountered within the 30-45 day window.

As you know, benefit re-verification, including verification of copay insurance, takes place in January, and we believe it did impact PROVENGE again this year. We also saw some softness in our enrollments in late 2012, which is similar to what we saw in the prior year. We saw those enrollments begin to rebound in January.

We believe such softness has been caused by a few factors, which include seasonality, the effects of Hurricane Sandy, and sales vacancies in certain territories. As you know, we have seen new competition enter the pre-chemo space with the FDA approval of ZYTIGA in this indication and a compendia listing for its standing.

We have seen some effect on our business from the competition, primarily in the metastatic patient population that has previously received chemotherapy. As you know, we are focused on positioning PROVENGE for appropriate patients early in the disease. So while we have seen the most robust competition for patients who have progressed further in the disease, we are focused on increasing PROVENGE share in the earlier line of therapy within our indication.

As we look at where we are in the quarter, and due to these factors just described, we now believe that first quarter sales results will be lower than pro forma revenue in the fourth quarter, which is below the current consensus number. Please keep in mind that a variety of factors, which include enrollments over the next several weeks, yield, and scheduled changes for the quarter, which can vary dramatically, can impact this range of decline.

To address these factors, we rolled out a new marketing message in our first quarter sales meeting, which focuses on PROVENGE as being the only product that has shown statistically significant overall survival in the pre-chemo space. That sales meeting was the best I have seen at Dendreon. The combination of the successful, experienced, loyal Dendreon sales team members, combined with some outstanding new talent, increased my confidence in our ability to grow PROVENGE as the year progresses.

The entire team and I are excited about the DTC campaign you saw today. Based on extensive research that we have done to date, we expect that this advertising will have a positive impact on PROVENGE utilization. We believe the majority of that benefit will come in the second half of the year.

In addition to the direct-to-consumer advertising and the new marketing message, we believe that, with the data published at ASCO-GU, and the data to be published for the balance of this year, along with stability in our sales leadership team and sales force, and having the benefit reverification process behind us, we believe PROVENGE sales will continue to grow.

I returned 10 days ago from ASCO-GU, where I spent significant time with key opinion leaders. They continue to see the benefits of sequencing therapies and the lifecycle of patient care, and believe community physicians will use all the arrows in their quiver to provide patients with the best outcomes.

They reiterated that PROVENGE, as a personalized amino therapy, continues to be an important first line treatment option for appropriate patients with MCRPC. With more treatment options, they expect our market will grow, as physicians increase their focus on early screening and detection for the treatment of this disease.

Their feedback on the investigational ZYTIGA PROVENGE sequencing data was very positive, as it began to remove some concerns around how quickly patients could move to ZYTIGA post-PROVENGE treatment. The feedback on the direct-to-consumer advertising was also very positive, especially among PROVENGE prescribers.

On Friday, Mitch Gold informed us that he would be stepping down and resigning his position on the board of directors to allow him to pursue other business endeavors. We are thankful for, and appreciate, all of his contributions to Dendreon, especially his part in bringing the world’s first cancer immunotherapy to patients. On behalf of the board of directors and the executive committee, we wish him all the best.

In conclusion, 2012 was a year of transformation for Dendreon. We took the tough decisions, are financially stronger, and are better positioned today to take advantage of the opportunities in front of us with PROVENGE as well as our pipeline.

We continue to believe that we can grow PROVENGE year over year, and we look forward to achieving that goal. I would now like to open up the call for questions.

Question-and-Answer Session


[Operator instructions.] Our first question is from Cory Kasimov of JPMorgan. You may begin.

Matt Lowe - JPMorgan

Hi there, it’s Matt Lowe in for Cory today. Just a couple of quick questions. The first one is if you could just talk a little bit about the seasonality of the product. And then secondly, how impactful do you see the sequencing data being on sales, and over what timeframe.

John Johnson

As it relates to seasonality, what we see is that when physicians enter the year with a product like PROVENGE, where they’re likely to have the out of pocket costs for their practice occur within a 30-45 day window, they’re very cautious about making sure that the benefits are verified as they go into the year. In addition to just the medical benefit, they’re also looking closely at the copay information as they go through that.

And what we saw as we went into January, not too dissimilar from last year, was that we had a number of physicians that held off and somewhat slowed down in their enrollments late in the year. And in fact, what we saw was that begin to rebound in January.

So I think we’re going to be seeing this as we go forward on a yearly basis. That said, our teams are out there working very hard to make sure that all the benefits, any questions that may be out there, that we’ve been able to help them in any way we can with the reverification, and we have that now in our rear view mirror.

As for the sequencing data, I think it’s too early to say how much of an impact, if any, it will have on sales. The feedback I got at ASCO-GU was it removed some concerns, but keep in mind that that is not yet complete, that trial, that these were preliminary results. But it clearly helped remove some concerns that some of the physicians had, especially as it related to how quickly they would go to ZYTIGA post-PROVENGE.


Our next question is from Michael Yee of RBC Capital Markets. You may begin.

John Chung - RBC Capital Markets

This is John Chung on behalf of Michael Yee. I just have a few quick questions. With increased competition in the pre-chemo setting, how do you expect the sequencing dynamics to change going forward?

Mark Frohlich

With the increased competition in the market setting, what we’re seeing is that we’re seeing additional market growth in the marketplace. We’re seeing more and more physicians identifying patients in the pre-chemo setting. And when you look at that, we look at the growth in this marketplace, we don’t see one class or therapy getting the lion’s share. What we see is all of the therapies being utilized in some type of sequence. We’ve seen that from the podium, and we’ve seen that time and time again. So we continue to look at physicians wanting to use all the different therapies to maximize their therapeutic interventions in this space.

John Johnson

I think just to add a little color to that, the data that we’ve been able to see so far indicates that the inroads that the competition has had against PROVENGE has been in those patients that previously received chemotherapy, but were still asymptomatic or minimally symptomatic. In our clinical trial, that was about 18% of our patients. Not too dissimilar amount depending on what audits you look at here.

So we’ve seen some impact there, where the disease has further progressed within our label. I don’t think that that’s surprising, but let’s keep in mind, our positioning is that in immunotherapy, it should be considered early in the therapy, early in the indication, and the KOL feedback certainly that we got at ASCO-GU continues to support PROVENGE, and they continue to believe it should be used up front.


Our next question is from Rachel McMinn of Bank of America Merrill Lynch. You may begin.

Rachel McMinn - Bank of America Merrill Lynch

I just wanted to better understand the comments about the rebound in enrollment in January, the guiding sort of lower Q1 sales. I think I’m missing something there. And then I also wanted to understand for the cost of goods sold guidance, you have a 50% number, below 50% for the back half of the year, and I’m wondering if that can happen based on what you’re seeing in Q1 or you need sales to accelerate to get to that target. Thank you.

John Johnson

As it relates to enrollments, when you look at PROVENGE and the way the process works, depending on the office, and I want to put this disclaimer out there, offices vary. Some offices can get from enrollment through benefit verification to schedule an infusion very quickly. Others take time, and it can take 60 to 90 days for that to happen in some offices. So you have some impact as you lead into the first quarter by the enrollments that we’re seeing in November and December.

As you move into January, they come back. You begin to see those patients. And it really is dependent on the office. And one of the challenges in forecasting this business is that there are a lot of factors that can dramatically affect any given quarter, which include anything from the raw number of enrollments, which accounts are from the yield, any schedule changes.

All these factors can change. And it makes it more difficult to forecast, even when you are in the middle of the quarter. Many products that I’ve worked on in the past, where you have a bank of patients coming in - this is an acute therapy, so it’s tougher as you go through every quarter to forecast exactly what you’re going to get.

That said, we saw enrollments start to come back, which was a positive sign. That happened last year as well. But as we modeled it out, we felt that we would be down. The extent to which we can tell, because these factors can change it so much, even with the amount of time we have left in this quarter.

Greg Schiffman

And with regard to cost of goods sold, our assumption on the below-50% is revenues consistent with what we were seeing in Q4. Volume will have an impact there with respect to spreading of the fixed overhead. We are assuming something in the $80 millions to hit the COGS number. That’s something that we are certainly expecting to be achieving later this year, as we’re looking to grow year over year.


Our next question is from Robyn Karnauskas with Deutsche Bank. You may begin.

Robyn Karnauskas - Deutsche Bank

Just thinking a little bit longer term, you’ve mentioned 2014, getting COGS down due to automation of hoods. And I know that would require some sort of process this year. Maybe you can talk a little bit about how that process is going and what are the hurdles that you have to overcome to get the FDA to maybe allow you to use these automation hoods.

Mark Frohlich

We’ve had activity underway associated with this for quite a while now. We’re hitting a phase where it’s moving from the research phase into really process engineering. You’ve got a vendor, you’ve got machinery, you’re starting to get comparable data.

A really critical factor for us is being able to demonstrate to the FDA comparability of the data via the new process and the process we’re using today. As you know, our product and the process are very closely aligned. So that’s probably, if I look, the most important aspect that we’re working through.

Beyond that, you will deal with the implementation and how you roll this out throughout your organization. We think we’re making good progress. We’re in the process of generating some of the data we’ve talked to, and we’ve clearly had discussions with the FDA and will continue as we move through the process.


Our next question is from Howard Liang of Leerink Swann. You may begin.

Howard Liang - Leerink Swann

Just regarding the guidance for the first quarter, you mentioned it will be lower than the fourth quarter. Do you see it above the level of the third quarter in 2012?

John Johnson

We’re not going to give any specific guidance in terms of a range, just because we know we can see a lot change between now and the end of the quarter, and some of these factors can vary dramatically as you go in. And everything from, as I mentioned, the number of enrollments that happens between now and year end, which accounts they come from, the yields, as well as any schedule changes. You know, any weather.

So for all those reasons, we don’t want to give any more specific guidance than that, but we wanted to be transparent and let you know that we expect it to be down. That said, I feel good about the plan that Joe and his team have in place. The sales meeting was really a terrific meeting. I felt good about the message that was rolled out. I feel really really good about the DTC ad. I mean, compared to historical norms, that agencies looked out when they do market research, it looks very strong. And the entire plan that the team has.

So I feel like we are moving in the right direction. We have a stable sales leadership team now. We took a lot of tough decisions last year. And I think as that team continues to gel and mature in their positions, I think that’s all going to have a positive effect on PROVENGE as we go through the balance of the year. But it’s hard to predict exactly how the quarter will end, and therefore we stayed away from a range.


Our next question is from Salveen Richter of Canaccord Genuity. You may begin.

Andrew Goldsmith - Canaccord Genuity

This is Andrew Goldsmith on the line for Salveen. You mentioned you had softness in enrollment at the end of the year, I believe, if you look at the sales vacancies. Is this related to the kind of sales vacancies you’re hearing about at midyear? And maybe more generally, are you fully staffed?

Joe DePinto

Let me walk you through some of our vacancies. We have had stability in our top performing territories from a vacancy standpoint. We haven’t seen a great deal of turn there. We’ve seen some movement of representatives at the end of the year, which we typically do. Those are typically lower performing territories.

We have a new sales leadership team that’s in place that came on the second half of last year, and I’m confident with that team. We’ve had highly skilled sales representatives join our team, and we have a combination of some loyal Dendreon sales representatives that really have a good history and knowledge.

And we’re focused on the oncology and neurology marketplace. We’re able to recruit top talent to service and sell our high potential customers, and we believe we’ll continue to have to make sure that we’re doing everything we can to make sure that we service the urology and oncology marketplace.

John Johnson

And to give you a little bit more color on that. Last year, in the first half of the year, we saw a number of high performers leave Dendreon, and as we had stated at JPMorgan, we’ve seen the top of our sales force really stabilize, especially the top 30. So we feel good about that.

And our vacancy rate today is less than 10%. So we’re filling, we’re getting quality people, we’re excited about the talent that we can bring in. It’s not unusual in the marketplace to see some turnover at the bottom of your sales force as you close a year out and go into a new year, and we did see some of that, but Joe and his team have done a good job of backfilling it with some really quality people.


Our next question is from Mark J. Schoenebaum of ISI. You may begin.

Unidentified Analyst

Hi, this is Wes sitting in for Mark. A couple of questions. First is do you still envision a positive benefit from the key account managers’ commercial strategy in the [oncology] setting in the first half of the year just given some of these headwinds? And second question is regarding the R&D clinical data from ASCO-GU. You showed some CD54 up-regulation data, but just explicitly, how do you think about that translating into potential effects into the OS benefit? And how do you think that might effect PROVENGE use following patients who have already taken ZYTIGA?

John Johnson

I’ll have Joe address the key account question, and then we’ll have Mark address the CD54 question.

Joe DePinto

Last year, midyear, we added the key account managers to focus on our urology marketplace to help service our most important urology customers. We’ve done the same thing in the third quarter with our area business managers, and their focus is on our top oncology clinics in the community setting. We believe that working in conjunction with our sales force, and delivering a focused, new message and executing our marketing message and plan will be really critical.

We continue to add more community accounts, and our efforts at penetrating our existing account base is still our focus. While we’ve seen accounts continue to grow, both in new and existing accounts, we continue to believe that both these teams, the key account managers and the sales force, working together to execute in our key market segments of not only urology but oncology community setting, is really critical to our success.

John Johnson

And Mark, could you address the CD54 question please?

Mark Frohlich

Sure. So in the PROVENGE ZYTIGA sequencing study, we noted a comparable degree of c54 up-regulation or androgen-presenting cell activation in the two arms. And your question was how do we anticipate that translating to overall survival. What we do know is from our prior studies that the magnitude of androgen-presenting cell activation strongly correlated with overall survival. So the better the androgen-presenting cell activation, the longer the patients tended to live.

So we’re encouraged by seeing comparable levels, that they may translate into a comparable clinical outcome. And so I think that’s the information that was helpful for physicians, that if there is a patient that they feel an urgency to treat with ZYTIGA, that this potentially indicates that at least you can make product in combining the two agents together.

In terms of using ZYTIGA prior to PROVENGE, we don’t know the answer to that. I think if a patient has been on long term ZYTIGA with the steroids, there’s potentially a risk that it may be difficult to make PROVENGE, and that’s the reason that I think we’ve been hearing from key opinion leaders that what really makes sense is to sequence PROVENGE early in the treatment paradigm and then subsequently follow it with these other therapies.


Our next question is from Eric Schmidt of Cowen & Company. You may begin.

Eric Schmidt - Cowen & Company

Maybe another one on the gross margins for Greg. I think at the time of the Q3 call, you had been guiding to 50% gross margins being achieved when you closed New Jersey, so year-end 2012. And that’s been pushed back a little bit. Is that due to volume or some other factor?

Greg Schiffman

Actually no, I think we talked about this one a bit at JPMorgan when we altered the guidance there. There was some strategic decisions that we made as an organization, just around risk mitigation, that caused us to slow achieving the results. It’s not one that couldn’t have been achieved, but it’s ones that there were decisions made that caused it to delay, and I think we got that information out at the very start of the year.


Our next question is from Chris Raymond of Robert W. Baird. You may begin.

Laura Chico - Robert W. Baird

This is Laura Chico in for Chris Raymond. I have two questions. First, on the breakeven guidance at $100 million, that’s still unchanged despite the $5 million in incremental quarterly spend on the DTC? Just want to make sure I’m understanding that correctly. And then second, related to the DTC campaign, you mentioned you had some market research there that was indicating patient choice or preference is important for selecting a therapy. Just wondered if you could elaborate a little bit more on that.

Greg Schiffman

On the breakeven one, actually the guidance of breaking even at $100 million was prior to decisions to do DTC, and I think we would say today that we can still break even at $100 million. If we do not see benefit from the DTC campaign, it is something that can be ceased, and we are looking, and we’ll monitor that. And there are potentially other areas we might reduce. But at this point in time, we have not made any formal decisions that we’re making reductions in other areas and as such, I’d say the $100 million is $105 million with all else going forward.

John Johnson

Regarding the DTC and some of the rationale and the market research, the DTC activity is part of our commitment to patients and their needs for education and awareness. After we looked at the market research, and what we saw was that we believe that this product was uniquely positioned to be able to go the DTC route because of its profile.

We also have two main reasons why the campaign is important. We believe that PROVENGE, when recommended to patients by doctors, may cause a bit of hesitation, because they don’t understand immunotherapy. Immunotherapy is unique. It’s different than other therapies.

We know that a well-educated consumer, when they ask their doctor for PROVENGE, that there is a high connect rate there. And what the market research showed is when you put this in a format that focuses on education and awareness, it’s highly effective in achieving those two goals.


Our next question is from Katherine Xu with William Blair. You may begin.

Unidentified Analyst

This is Phil (indiscernible) calling in for Katherine. Just wanted to see if you could provide us any details regarding plans for study programs with XTANDI. I know you had mentioned previous sequencing studies were in plans. I just want to see if there’s any additional details you could provide us.

Mark Frohlich

We’re looking at a study that’s probably of similar design to the ZYTIGA sequencing study, so essentially looking at patients getting the combination concurrently versus sequentially of PROVENGE followed by XTANDI as the (indiscernible) trial.


Our next question is from David Nierengarten with Wedbush Securities. You may begin.

David Nierengarten - Wedbush Securities

When you look at COGS improvement over the next quarter, is it all going to be loaded into Q3? How is the gradual step down going to work here? And also, when you look back at Q3 to Q4, you have an incremental sales improvement, looking at end user sales, and you look at the incremental COGS increase and you get an incremental cost of goods of 72% of the revenues. How do you reconcile that with your cost improvements?

Greg Schiffman

I’m not sure I understand the second question. With regards to COGS themselves, I do expect to see, if we just look at the level of COGS in absolute dollars, that it will go down a fair amount in Q1. We have had a lot of expenses associated with our New Jersey manufacturing operation. They were essentially on our books for all of last quarter. And they won’t be for Q1. And so you will see a step function drop.

However, it would not be one that will get you below 50% at Q1, as we had discussed in Q3. But there will be sequential improvements when you hit Q3 being at the 50% mark. So you should expect to see a fairly substantial improvement in Q1.

David Nierengarten - Wedbush Securities

So just to explain the latter part of my question, when you look at the revenue increase in end user sales, you have the $3.6 million or so increase in revenues, and then you have the $2.6 million quarter over quarter Q3/Q4 increase in COGS, and the COGS increase is about 72% of the revenue increase.

Greg Schiffman

You bet. So actually, one of the key drivers there, and I think this affected all three of our reported areas, R&D, SG&A, and COGS, was that in Q3 they were inordinately low. We had discussed this. There was some reversals, predominantly associated with the restructurings that we implemented, where you had some reversals basically that had been accrued for the first six months that were pulled out in Q3.

And so the Q3 numbers did not reflect actual activity that quarter. We saw an improvement on a pro forma basis, on a quarterly sequential basis if you excluded that, and so they did get better. You just have to basically realize that Q3, as we had discussed, was an inordinately low quarter for all functional areas.


And our next question is from Lee Kalowski of Credit Suisse. You may begin.

Lee Kalowski - Crédit Suisse

I guess first just a point of clarification. Sorry if I missed this. When you said Q1 would be down over Q4, is the base 81 or 85?

Greg Schiffman

We said on the pro forma, so that would be the $81 million base.

Lee Kalowski - Crédit Suisse

And then turning to Europe, can you just give an update in terms of where you are, in terms of the starting and stopping and the list of outstanding questions from the CHMP?

John Johnson

We’re not going to comment on any specific process inside of the work that we’re doing with the authorities there. We do expect a regulatory decision midyear. And that hasn’t changed.


Our next question is from Ryan Martins of Lazard Capital Markets. You may begin.

Ryan Martins - Lazard Capital Markets

Just on the registration study that you’re initiating on (indiscernible) patients, can you talk about the scope and size maybe of that study?

Mark Frohlich

You’re referring to the study for screening pats with castrate-resistant prostate cancer but without known metastases. We anticipate that trial being roughly on the order of 1,500-2,000 patients, both patients without metastatic disease when they’re initially scanned and with, for the development of metastatic disease with the goal really of defining some of the factors that may help physicians better understand when a patient with non-metastatic castrate-resistant prostate cancer should be imaged.

Ryan Martins - Lazard Capital Markets

And can you tell us about how frequently those scans are going to be done?

Mark Frohlich

Right now we’re looking at probably about a six-month interval.

Ryan Martins - Lazard Capital Markets

And then I missed some of the earlier comments, but on the CD54 up-regulation data that you presented at ASCO-GU, I know you’ve mentioned that there’s a correlation between the CD54 up-regulation and overall survival. So I just wanted to know what kind of feedback you got from some of the docs, urologists and oncologists alike, there.

And also, when I look at your survival curves for CD54 up-regulation across the three trials, the integrated data, it seems like if you follow them over time, between two and three years, you see the curves converge and actually cross over further follow up. So I mean, how much do the physicians actually believe that there is this correlation between survival and what kind of feedback have you got?

Mark Frohlich

I think the important feedback from physicians is that there’s a subset of patients who are asymptomatic or minimally symptomatic who may have a high disease burden or rapidly progressive disease that they feel will need some other form of therapy quickly, and given that PROVENGE doesn’t typically lead to dramatic PSA reductions, they feel a need to initiate other therapies.

And so I think what this data provided them more information on is it is possible to use the agents concurrently or in sequence closely. And I think the data on androgen-presenting cell activation indicates that in fact you can make a robust product that looks comparable to a product not made with ZYTIGA and prednisone.

And in terms of the robustness of the CD54 data, I think if you look at the P value, it’s a very small P value that shows the correlation between the two parameters. It persists after you adjust for baseline parameters like PSA and LDH, suggesting it’s not just a marker for patients who are healthier and have a lower disease burden.

And I think you have to be careful when you start doing subset analyses and looking at the Kaplan-Meier curves, because the number of patients at the end of those curves end up getting smaller. So I think we feel that the correlation is quite robust based on the statistical correlation. And that’s the feedback that we’ve gotten from physicians as well.


Our next question is from Ying Huang of Barclays. You may begin.

Ying Huang - Barclays Capital

The first question is can you tell us a little bit about the so-called strong sales growth in the [enlisting] accounts, and what’s the average infusion per center in Q4? You used to provide that information. And then secondly, we have heard that some other companies are pulling back from funding the so-called patient assistance programs. I wonder what you’re seeing in the marketplace, and also is Dendreon still committed to funding these programs?

Joe DePinto

Let me take the same-account sales. We continue to add new accounts in each quarter, and this quarter we added 61 new accounts. And our focus has not only been on adding new accounts, but growing in our existing accounts. And we’ve had small accounts become big accounts within a quarter.

One of the things that we pointed to in the script today was we have one account that is actually greater than 30 patients a quarter for the last six months. This account is doing nothing different than any other account can’t do. They believe clinically in our products. They are proactively identifying patients, and they are utilizing the PROVENGE in an appropriate fashion earlier in line of therapy within the label.

So we continue to have that as a focus for us, as we continue to move forward. We believe the growth of this business will come through not only adding new accounts, but deeper penetrating in our existing accounts in the community setting of both urology and oncology, but across all our key market segments.

As far as our patient assistance program funding, and what we’re hearing in the marketplace, Dendreon for years has supported the patient assistance program. We have what we believe is world-class reimbursement programs across all of our offerings. And we will continue to fund patient assistant programs through charitable contributions as we move forward in 2013.

John Johnson

And I think some of what you may have been hearing in the marketplace was with the orals now, ZYTIGA and XTANDI, turning the new year, where you hit the donut hole pretty quickly, you’ll see a lot more pressure on the foundations as you turn the year, and you would expect that after that bolus goes through that the foundations shouldn’t have as much trouble keeping up.


Our next question is from David D. Miller of Biotech Stock Research. You may begin.

David D. Miller - Biotech Stock Research

At ASCO-GU, both from the podiums and in talking to the key opinion leaders there, I heard a lot about prostate cancer drug trials in combination, a lot of ZYTIGA - XTANDI trials, a lot of XTANDI Cabozantinib trials, you name it. People were wanting to use it combination. Notably absent from those conversations was trials from the academic institutions involving PROVENGE. I know there’s some specific investigator trials, but from the larger cooperative groups I heard nothing. Was I just missing something? Or are these being discussed? And if not, how can this be changed?

Mark Frohlich

I think what we’re pursuing is company-sponsored trials. The trials that we feel are the most important really look at the combination of PROVENGE with hormonal therapies like ZYTIGA and XTANDI. We’ve heard anecdotes of a patient with a dramatic long term response with a combination of XTANDI and PROVENGE. And that’s the type of data we hope to show some synergy in these combination trials.

We also have a number of investigator trials looking at biologic combinations. So those include things like anti-PD1, ipilimumab, IL21, 1MT, which is an IDO-inhibitor. So we hope to get a lot of information around potentially synergistic effects of PROVENGE with these other types of biologic agents.

In terms of the larger cooperative group studies, I think the issue for us is that given the cost of our product, I think those are substantial investments to make, and we’re carefully considering those. So I think the difference between us and other products is that it’s not something we just hand over a supply of drug to somebody. It requires us to make that product, which is a substantial investment.

So it’s likely that if we were to do trials early in the natural history of the disease, those are things that we would likely do as a company-sponsored trial, as opposed to a cooperative group.


We have time for one more question from Geoffrey Porges of Bernstein. You may begin.

Geoffrey Porges - Sanford C. Bernstein

One quick question and one long term question. You reported and highlighted the robust growth in Q4, and the (indiscernible) urology setting. Is that where the shortfall is, all in Q1? Is that the slowdown in growth that’s primarily being affected? And then secondly, just a follow up on this issue of the anti-androgens. What proportion of the patients in the pivotal trials were on anti-androgens as well as LHRH, and was there any difference in the overall survival response when you did the analysis on that basis?

Joe DePinto

You’re right, in the community urology setting, we did report 25% growth quarter over quarter in Q4. As John stated previously, there are multiple factors that come into your sales within the quarter, and at this point in time those factors can be what enrollments do we see in the next few weeks? What is our yield going to be like? Will there be any schedule changes? All can impact that range of where we end up the quarter.

So at this point in time, it would be a bit early to make any comment on a specific market segment, and where we’re at. So I think that we believe that community urology and community oncology are two very important market segments that our commercial organization is very focused on.

Mark Frohlich

We allowed patients who had prior combined androgen blockades on LHRH agonist plus an anti-androgen, or LHRH alone. At the time they were actually enrolled, they couldn’t be on the anti-androgen, but they were allowed to have it previously. And when you look at the subgroup analysis, as we published in the New England Journal, there’s a comparable or consistent treatment effect in those who did and did not have prior anti-androgen.

Geoffrey Porges - Sanford C. Bernstein

But there was no concomitant experience in that trial?

Mark Frohlich

Not from registration until the time of progression. They were precluded from having concomitant therapies.


At this time, I would like to turn the conference back to our presenters for any concluding remarks.

John Johnson

I’d like to thank everyone for joining us today. We look forward to seeing all of you at the upcoming conferences and meetings. Have a terrific day, and thanks for joining us.

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