Dendreon's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Dendreon Corporation (DNDN)

Dendreon Corporation (NASDAQ:DNDN)

Q1 2013 Earnings Call

May 01, 2013, 9:00 am ET


Andrea Rose - Investor Relations

John Johnson - Chairman of the Board, President, Chief Executive Officer

Joe DePinto - Executive Vice President, Global Commercial Operations

Gregory Schiffman - Executive Vice President and Chief Financial Officer

Mark Frohlich - Executive Vice President - Research and Development and Chief Medical Officer


Robyn Karnauskas - Deutsche Bank

Matt Lowe - JPMorgan

Charmaine Chan - RBC Capital Markets

Rachel McMinn - Bank of America

Howard Liang - Leerink Swann

Andrew Goldsmith - Canaccord

Wesley Nurss - ISI Group

Imran Babar - Cowen and Company

Katherine Xu - William Blair

Greg Wade - Wedbush

Lee Kalowski - Credit Suisse

Ryan Martins - Lazard Capital


Good morning, ladies and gentlemen, and welcome to the first quarter 2013 Dendreon earnings conference call. At this time all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions on how to participate will be given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded.

Now, I would like to turn the conference over to your host, Andy Rose.

Andrea Rose

Thank you, and good morning, everyone. We are pleased that you could join us today for Dendreon's first quarter 2013 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 would 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. 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 Q1 2013 earnings release which has been furnished on Form 8-K.

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

John Johnson

Thank you, Andy, and thank you for joining us today. Earlier this morning, we reported our financial results for the first quarter of 2013. In January, we anticipated and communicated that we could face potential headwinds in the first quarter. On our fourth quarter call in February, we discussed those headwinds and that we believe that they would impact our first quarter results in a meaningful way.

Net product revenue for the quarter was approximately $67.6 million compared to pro forma revenue of approximately $81.6 million for the fourth quarter of 2012. This was below our plan and I am not satisfied with these results.

There were two primary drivers for the decline. Complication and patient access. As anticipated, the largest impact was from the new complication entering PROVENGE's labeled indication with the December FDA approval of ZYTIGA and a compendia listing for XTANDI. We are feeling the competitive effect primarily in small and low volume accounts with metastatic patients who have previously received chemotherapy.

We know that these later stage patients have not been in our primary target market or where we are positioning PROVENGE. Smaller accounts are more as a (Inaudible) the competition for two reasons. First, they are not yet as familiar with using complex biologics as larger accounts and hence maybe more drawn to oral therapies. Second, the larger competitors have a reach and frequency advantage in this setting.

So, while we are not pleased with the trends we saw among small and low volume accounts in Q1, which affected our overall performance. Our focus remains on our largest accounts where we see the greatest opportunity. We will continue to position programs earlier in the metastatic CRPC space and we are seeing traction with those efforts.

We believe, we can offset the decline in small and low volume accounts by continuing large account growth. We are encouraged that our large accounts grew quarter-over-quarter despite increased competition. And, by remaining focused on our largest accounts and leveraging the power of DTC, we believe we can effectively reach more patients in our primary target market and grow market share within the segment.

The patient access issue was driven by the large number of ZYTIGA and XTANDI patients hitting the tone of all and the pressure that put on foundations to help those in need with co-pay assistance. Despite the challenges we faced in Q1, we are seeing an improvement in enrollments, a trend which began midway through the first quarter. In fact, April was the strongest month of the year in terms of number of new accounts and monthly sales.

In addition, the first quarter enrollments in urology segment grew significantly. Beyond that, we have also begun to see the smaller and low volume accounts return to PROVENGE in Q2 after some initial trial with oral therapies. Most importantly, our DTC ad campaign is generating powerful and promising early metrics and we are yet to see this benefit in our top line due to the time it takes for most patients to take action and get scheduled. We have also made positive strides in the clinical front, which Mark will discuss later on during the call.

All of this gives us confidence about the future. Looking forward, we believe, based upon current schedules and enrollments that our Q2 sales will grow to the mid-$70 range. With our planned ramp-up of DTC over the next several months, combined with adjustments designed to increase the effectiveness of the sales force, we believe that the fourth quarter maybe our strongest quarter of the year enabling us to grow PROVENGE sales year-over-year.

On Tuesday, I returned from American Urologic Association or AUA Annual Meeting in San Diego. Dendreon had a significant presence at the convention and I was especially pleased with the progress we have made in this segment over the last year. I had in-depth discussions with over 40 customers and walked away with the following takeaways.

First, customers believe PROVENGE will continue to grow in urology. Second, key opinion leaders support has grown dramatically and we were pleased to hear a number of speakers at the podium at AUA advocating for PROVENGE to be used upfront in the treatment sequence of metastatic CRPC. Third, the interest in treating CRPC by urologists is growing. Fourth, urologists describe patients who are now asking about programs following seeing our direct to consumer television advertising campaign. We have also seen new accounts come online immediately after patients requested the product. And finally, the drive to screen more aggressively for metastatic disease is beginning to emerge in urology. All of these observations continue to make me feel very bullish about PROVENGE's future in this critical segment.

Finally, in the first quarter, we continue to make progress on our strategic restructuring to reduce our cost of goods sold and streamline our cost structure. In March, we announced the agreement in principle to settle securities Class Action Litigation, and enter into a Stipulation of Settlement at the end of April. Throughout this quarter, we continue to advance the global market opportunity for PROVENGE, and Mark will speak about the status of our European initiatives.

With that, I would like to turn it over to Joe who will discuss our commercial performance in greater detail.

Joe DePinto

Thanks, John, and good morning, everyone. In the first quarter as John mentioned, we faced some headwinds. Despite the new competitive entries, we continue to add accounts in both, community oncology and urology settings. We ended the quarter with a total of 835 accounts that have infused having added 33 net new accounts during the quarter. In terms of our customer composition, we ended the quarter with community clinics now accounting for 72% of total sales. Within the community setting, oncology accounted for 46% of the total business during the quarter and urology accounted for 26% of our total business.

I would like to take some time to dive in to some of the dynamics of the quarter in further detail. We saw typical slowness in the first quarter due to seasonality and the benefit reverification process that takes place in January. In addition, some issues beyond our control are in over hang such as the potential effect of sequestration on Medicare billing which we are currently evaluating.

In terms of competitive pressure, as is typical for new drug and new label launches the first three months following approval are crucial in disseminating messages to the market. As a result, those first three months typically represent the highest growth rate. In December, ZYTIGA received approval for indication in our label and XTANDI received compendia listing in the pre chemo space. This resulted to significant activity in the mCRPC population through the first quarter, largely in the metastatic patient population that has previously received chemotherapy.

As you know, we are focused on positioning PROVENGE early in the sequence of treatment and this not an either/or situation. We are seeing physicians who understand the benefits of using PROVENGE in conjunction with other therapies. So while we have seen the greatest competition in small and low volume accounts, for patients who have progressed further along in the disease, we are focused on increasing PROVENGE share in the earlier line of therapy within our indication and are targeting larger accounts.

In the first quarter, large accounts were up 15% over Q4. Volume and the average infusion per account went up Q1 versus Q4. The team continues to focus their messaging on utilizing PROVENGE earlier in the disease.

As a byproduct of increased competition we did see some sales force turnover during the quarter. Most companies face sales force turnover in the beginning of the year. In Q1, however, we saw a greater turnover than we would normally see as a result of oncology companies actively building their sales force. We lost only four of our above average representatives.

We have seen good stability in the representatives we have hired over the last year. We continue to attract great talent to Dendreon and they are able to be trained and hit the ground running quickly. In fact, some of our best performers of the quarter are new representatives right out of the sales training program. As we have adjusted alignments with our sales territories and continue to fill vacancies with top talent, we are creating even more efficient and effective sales force to engage customers and maximize our efforts in all our key market segments.

While we have certainly faced many challenges this quarter, we have a sound commercial strategy in place and are executing on that strategy of driving clinical conviction for the use of immunotherapy and PROVENGE in mCRPC, removing barriers to use and helping key customers move to systematic patient identification. Volatility and changes in the market makes this a bit difficult to forecast but we are encouraged that enrollment trends this year continue to show growth quarter-over-quarter.

As John mentioned earlier in the call, we began to see enrollment trends rebound midway through the first quarter, especially in urology. In fact this segment saw its highest enrollments ever in the first quarter. March and April infusions showed an upward trend compared to January and February. In addition, in April, we have seen some of the small and low volume accounts that decreased in volume during the first quarter return to infusing and enrolling PROVENGE patients

In April, we have also seen our yield improve. Yield is a measure of how many enrollments lead to first infusion in the time between enrollment to first Infusion. Last year, we began to deploy our dedicated nurse field team to ensure that infusions actually occur once a patient is enrolled. In April, we began to bring our scheduling in-house, which we believe has accelerated this improvement in yield. Importantly, the strong enrollment trends we begin to see midway through Q1 continue and we are building on the momentum of our DTC campaign.

Turning now to the DTC campaign. I would like to share some highlights with you. Our first national TV commercial aired on March 7, and as we discussed previously, we believe that advertising campaign is an excellent opportunity to educate and identify appropriate patients. The market research we have conducted supported the campaign due to the needs for education and increased awareness in the marketplace. Currently, our commercial is reaching patients directly and the crucial segment of families and caregivers who may become responsible for determining the avenues for patient treatment.

There are too many reasons 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 an appropriate patient there is an extremely high connect rate. The entire team and I remain confident and excited about the promise of the DTC campaign and continue to believe we will see meaningful benefits on our top line in the second half of the year.

Moving through the remainder of the year, we will continue to execute the campaign in a very efficient and targeted manner keeping the expense at approximately $5 million per quarter on the campaign. We will however maintain flexibility by continuously evaluating the effectiveness of the program and can quickly dial it up or down as needed.

We are pleased to be able to share with you some early data from the campaign. Since the first commercial ad on March 7, we have seen a significant increase in call center activity and web traffic. Based on industry standards and norms related to DTC campaigns, it is estimated that commercials must be viewed four to seven times before patient reaches out for more information and patterns we've seen indicate that patients are calling even sooner.

Our call center volume has doubled from our forecasted projections. In fact, 82% of targeted calls we have received since the campaign aired, are from prostate cancer patients themselves, demonstrating that the campaign is already beginning to help motivate men to take action.

Traffic to our patient website is up 55% since the T.V. ad launched and over 40% of our web visits are qualified leads defined by their time on the site and their level of engagement with the content. When we have patients and caregivers contact us directly, we can collect information and build a relationship with these individuals. We are utilizing this type of relationship marketing to maintain contact with customers from interest in PROVENGE to the first infusion and beyond.

At the end of January, we launched two new professional marketing campaigns that we believe will provide further value to our oncology and urology health care practitioners and build strength in our brand. The first is immunotherapy in cancer care, a comprehensive disease state education platform that provides the clinical and scientific rationale for establishing immunotherapy as an important class of treatment for cancer patients. The second is our new PROVENGE campaign that focuses on efficacy to drive clinical conviction in the newly metastatic CRPC patients by driving early detection and therapeutic intervention.

On the reimbursement front, we continue to see improvements during the first quarter, the reported average time to payment remains less than 30 days for physicians.

With that, I will turn the call over to Greg to cover the financials.

Gregory Schiffman

Thanks, Joe. Earlier today, we reported our financial results for the first quarter of 2013. Net product for the quarter ended March 31, 2013 was $67.6 million compared to pro forma revenue of $81.6 million for Q4 2012. The pro forma revenue is adjust for the $3.8 million associated with our change in estimate of outstanding charge backs related to PHS eligible providers for the quarter ended December 31, 2012. This represents a decline of approximately $14 million in net revenue or 70%.

For the quarter, we had a cost of goods sold of $43.4 million or 64.2% of revenue. For the quarter ended December 31, 2012, we had a cost of goods sold of $54.4 million or 63.6% of revenue. This represents an approximate $11 million decrease in absolute spend in Q1 2013. As we discussed previously, the majority of our cost of goods sold spending is fixed.

Currently, the primary exception to this is expense associated with raw materials and [shipping], which approximate 15% of our net revenues. Therefore, using our Q4 pro forma revenue of $81.6 million is variable cost associated with lower revenue would be approximately $2 million. This equates to a decrease in our fixed cost of goods sold by approximately $9 million, primarily due to the restructuring activities that occurred last year.

Using our pro forma revenue of $81.6 million, our cost of goods sold for the quarter ended December 31, 2012 was 66.6%. At revenue levels consistent with last quarter pro forma revenue, our cost of goods sold, as a percent of revenue, would have been approximately 56% or an improvement of approximately 11 points.

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 revenues grow, we will see leverage in our manufacturing infrastructure.

Sales, general and administrative expenses were $62.4 million this quarter, down from $95.3 million in Q1 of last year and down from $73.5 million last quarter. This is a reduction of approximately $11 million, of which the majority of the savings is associated with the restructuring activities. As we continue our DTC campaign, we do expect to see slightly higher SG&A expenses next quarter. We then expect to see slight improvements in SG&A in the second half of the year as we complete the implementation of our restructuring activities.

Research and development expenses for the quarter were approximately $18.4 million compared with $17.3 million for the same quarter a year ago and approximately $19 million last quarter. We are on track with our projected savings from the restructuring activities. As we indicated we do expect to see further savings with the full benefits being realized in the second half of this year.

However, I would like to note, in Q1 2013, we did experience adjustments in non-cash stock compensation expense which decreased non-cash stock compensation to approximately $2 million of expense. This was primarily driven by changes in the forfeiture rates used to calculate non-cash stock compensation expense based upon our historical data. We expect to see non-cash stock compensation expenses closer to $8 million per quarter, going forward. Thus the increased non-cash costs are expected to be offset with the cash savings associated with the restructuring.

The company had a GAAP loss of $0.48 per share this quarter, down from approximately $0.70 per share in Q1 of last year and down from a Q4 2012 pro forma GAAP loss which excludes the favorable adjustment to restructuring expenses associated with the sale of our interest in New Jersey manufacturing facility of approximately $36 million, of approximately $0.50 per share. We have consistently provided a pro forma representation of our financials excluding our non-cash related charges to provide a better insight as we move towards cash flow breakeven.

We have cash, cash equivalent and short and long-term investments at March 31, 2013 of approximately $337 million compared to December 31, 2012 of approximately $430 million. For the quarter, the company had a net cash usage of approximately $93 million. This is up substantially through our run rate last year of approximately $58 million on average per quarter, excluding the cash received from the sale of our interest in the New Jersey manufacturing facility of approximately $43 million.

We did expect to see cash usage up in the first quarter, driven by a few factors. Cash payments associated to employees leaving company as part of the restructuring were approximately $8 million. Cash payments associated with inventory growth primarily antigen of approximately $12 million. Cash payouts occur annually and were approximately $12 million. Finally we had timing of prepaid expenses of approximately $5 million in cash interest expenses which are paid out semiannually of about $9 million.

We would expect to see cash usage down dramatically for the remainder of the year. Our cash usage coupled with the improvements we are beginning to see from the restructuring are consistent with our expectations of being able to achieve cash flow breakeven at approximately $100 million from U.S. operations. We believe that the cash balance we are holding is more than sufficient to get us to cash flow positive in our U.S. operations

I will now turn the call over to Mark for some clinical highlights.

Mark Frohlich

Thanks, Greg. At the AUA annual meeting in San Diego, we continue to be encouraged by the discussions with key opinion leaders about the value of using PROVENGE early in the metastatic CRPC treatment paradigm in a combination with other agents. There's a lot of academic interest in understanding the optimal sequencing of PROVENGE with XTANDI. We are finalizing the steady design of a sequencing study with PROVENGE and XTANDI, which we anticipate will begin enrolling patients in late 2013.

The Steering Committee for this study will consist of three highly respected medical oncologists, Charles Drake, Johns Hopkins, Sidney Kimmel, Comprehensive Cancer Center, (Inaudible) and David Quinn of USC Norris Cancer Center. The study design will be similar to that of our in-progress sequencing study with PROVENGE and ZYTIGA.

It's been hypothesized that there may be a synergistic effect of using these agents in combination due to the effects of antigen ablation has on stimulating the immune system. A recently case report published in the journal, Urology, highlights this potential.

At patient with metastatic CRPC had become refractory to XTANDI, who continued on XTANDI and received treatment with PROVENGE, six months after receiving PROVENGE, without any intervening treatment she sees a completely PSA response, which has been durable for over a year.

Anyway, we presented analysis and impact, indicating that the optimal timing of PROVENGE administration maybe early after the diagnosis of metastatic CRPC. This concept is supported by an exploratory analysis from IMPACT recently published in the journal, Urology, in which patients were divided into quartiles by baseline PSA levels.

PROVENGE was effective across all subgroups, but the treatment effect was greater in patients with lower PSA values. For patients in the lowest quartile with PSA of less than 22.1 nanograms per mill, the median survival benefit was 13 months, compared to the highest PSA quartile greater than 134 nanograms per mill, in which the median survival benefit was 2.8 months. These data support the idea that PROVENGE is most effective when administered soon after diagnosis of metastatic disease when the disease burden is low and immune system likely more robust.

We continue to investigate new biomarkers using a variety of approaches and occurred by preliminary data and markers that may help identify patients with better clinical outcomes following treatment with PROVENGE.

As we mentioned in our last call, we are initiating a new early detection study which we have named predict. Cancer resistant patients without known metastatic disease who enrolled will be imaged for metastatic disease. The study will explore factors that may be predicted for the presence of metastatic disease. The data from this study may help physicians better identify patients early in the disease state.

We have selected this Steering Committee and are in the process of finalizing protocol and expect to begin enrolling patients in the fourth quarter. We also continue to make progress advancing the global market opportunity for PROVENGE. In Europe, we have filed our application with the EMA as PROVENGE is an autologous cellular therapy requires review by both the Community for Advanced Therapies or CAT. In addition, the Committee for Medicinal Products for Human Use, or CHMP, we will be participating in an oral explanation with the CAT, mid-year.

We have recently learned that for procedural reasons a possible subsequent oral explanation with CHMP would not occur for a month or two after the CAT oral explanation. We therefore now anticipate a regulatory decision in the second half of 2013. As we have previously disclosed, we are evaluating partner strategies in Europe and continue to enroll patients in the European open label study.

To increase our engagement with clinical researchers, Dendreon is supporting 19 novel investigator initiated trials independently developed by experts at 16 centers of excellence. The program will advance our understanding to immunotherapy in the treatment of advanced prostate cancer. It will be composed of scientifically and clinically novel studies, designed to generate data that will further elucidate the mechanisms by which immunotherapy works, evaluate novel combinations that may enhance immune responses, explore optimal sequencing of current treatment modalities, investigate potential biomarkers, advance the ability to detect metastatic prostate cancer and examine racial disparities. We are also looking forward to additional data being presented in June at the American Society for Clinical Oncology Annual Meeting.

With that, I will turn the call back over to John for closing remarks.

John Johnson

In conclusion, while our first quarter was certainly challenging, we are encouraged that we are regaining momentum as evidenced by recent enrollment trends and are on track to make significant progress in 2013 both in terms of driving PROVENGE growth and in streamlining our cost structure.

Looking forward, we remain focused on strong commercial execution to further penetrate our largest accounts as we target patients with a lower burden of disease. We believe that our DTC ads, which is already generating positive metrics will play an important role in helping us reach our targeted patients and physicians.

I would now like to open up the call for questions.

Question-and-Answer Session


(Operator Instructions) In the interest of time, the speakers request that you limit yourself to asking one question. (Operator Instructions). Our first question comes from Robyn Karnauskas from Deutsche Bank. Your line is open.

Robyn Karnauskas - Deutsche Bank

Thanks for taking my question and congrats on, it sounds like a successful marketing campaign. Two quick questions. They are almost the same thing, I promise. It sounds like you gave year-over-year growth guidance and I was just wondering if you could maybe help us understand what is your year-over-year growth? Is that 1%? Is that low single digits?

Then, as well regarding your guidance, if you look at what you gave out for 2Q, like when are you really going to see the impact from the marketing campaign and do you know how many people are really translating into sales? Do you know if someone goes to your site that they will be signed up from PROVENGE maybe three months later. So are we really going to see a big bump like in 3Q? Thanks.

John Johnson

Thanks, Robyn. It's John. So a couple of things. We are not going to specific on the year-over-year growth other than to say that we expect it to grow. So, obviously we expect the product to bounce back in the fourth quarter. Our confidence around that is driven by a couple of things.

First of all, as you said, the DTC campaign is off to a great start. Frankly, better than we thought. It normally does take four to seven times for a patient to view a commercial before they will take action. We have seen that a little faster here. That said, they still have to call us, get information, go see their doctor, get scheduled, get aid and then infused. So you are really not going to see the substantial benefit from the campaign until we get closer until the September timeframe, just given the normal time progress through that.

That said, let me give you some anecdotal responses that we have had. I was at a AUA. We had some of our sales folks in there spoke to our district manager from Texas. We have had three accounts in the last two weeks that had never before used PROVENGE, get Dendreon systems ready and infuse patients. The reason was because they have patients that came in and asked for it.

I would say probably of the 40 folks that I talked to probably 80%, it had a patient mention PROVENGE since we have initiated the campaign. So these were normally larger accounts. So I want to put that proviso on there. But it was clear that the patients were seeing the ad and asking about it. Obviously there needs to be an appropriate patient in our label and in our window but it was gaining momentum. Every customer I spoke to thus far, bar none, has been very positive about the ad both in terms of the way that it was done and the fact that we are airing it.

So, for us, we feel very good about that. We feel very good about, you know, at AUA annual I can't tell you that the difference a year makes from the podium. Really some strong support I think positioning it early in a lower burden disease and just a lot of positive feedback. So we remain bullish.

Clearly, the first quarter, we were not satisfied with. We lost the patients post-chemo, especially the oncology setting much faster than we anticipated in the lower volume accounts were the ones to really adopt orals quicker. But as we said in our remarks they came back. So we think that the combination of the campaign, the combination of really aligning our sales force better, as Joe mentioned, getting some more efficiency out of that group and continuing some of the efforts Mark talked about is what's going to lead to the growth and probably in the September timeframe is when we would expect to see a more robust bump from DTC.

Keep in mind that these accounts normally your peak ROI of these accounts come about 18 months after you start them, but we would expect to see the real benefits happen in the September timeframe.

Robyn Karnauskas - Deutsche Bank

Great. Thanks for all that color.


Thank you. Our next question comes from Cory Asimov from JPMorgan. Your line is open.

Matt Lowe - JPMorgan

Hi, there. It's actually Matt Lowe in for Cory today. You mentioned a number of factors responsible for 1Q sales competition, seasonality, benefit, re-verification, Sandy, sales vacancies. Just wondering if you could help us think about a kind of percentage contribution on how they impacted 1Q sales each of those factors or maybe rank them in terms of their importance, that will be helpful. Thank you.

Joe DePinto

So, Matt, thanks for the question. It's Joe. So, when you look at what had happened in the first quarter, clearly predominantly two major factors, right? So, one is competition into the space. What we saw, is we saw the approval in December of ZYTIGA in this space in our indication and we saw XTANDI received compendia listing. And, where we saw that competition impact us greatest is in our small or low volume accounts in the first quarter. We saw that physicians who are perhaps less sophisticated are less comfortable with complex biologics go the oral route.

The nice thing about that, what we've seen that gives those promises is that some of those accounts that seem to have stopped or slowed down in the first quarter have already come back in April with infusing as well as enrolling patients on PROVENGE. And, as well in the first quarter or mind you, the large accounts were up 15% in that in that same time period.

Access issues in it for patients was really an issue early in the year as typically is when you see biologics and these type of oncology medications. You have benefit re-verifications that have to occur. You have foundations that are trying to help to support co-pay assistance and this has put a lot of pressure on these foundations when you have multiple new competitors entering into the space. And as John has said in the past, these patients had to go through the period of the doughnut hole as well as with some of the orals, so that put some more pressure on patient access. So, I would break it down to those two areas that are really we saw the greatest impact to our business in the first quarter. Hope that helps.

Matt Lowe - JPMorgan

Okay. That's helpful. Thank you.


Thank you. Our next question comes from Michael Yee from RBC Capital Markets. Your line is open. Please check your mute button.

Charmaine Chan - RBC Capital Markets

Hi. This is Charmaine on behalf of Michael. Can you remind us of the makeup of your accounts like large versus medium size versus small, and on your comment on small accounts already coming back, [reintroducing] our patients with PROVENGE. do you think that the competition impact has normalized and that Q1 is your low watermark and that you expect normalization of revenue forward?

Joe DePinto

Charmaine. It's Joe. Thanks for the question. So, as we talked about in the script, 72% of our sales come from the community setting, either the community oncology or the community urology market segment. And, when we look back at large versus small accounts, we look at small accounts in volume of PROVENGE and small accounts in volume therapeutics base of comparator products.

When we look at large accounts and how we quantify our large account is account that's running at around the $1 million dollar run rate. So, when we look at our business, the majority of those large accounts sit in three market segments. They sit in community oncology, community urology and some of the academic centers that we call on.

When looking at the April numbers, was by far the best month of the year infusion wise. Our urology enrollments continue to be positive from March into April. We added the most new accounts infusing of the year. Our yield in accounts improved during the month of April as well.

So again March and April trends are positive compared to January and February. So I hope that sort of explains a little bit more on what we saw in April for you.

John Johnson

And Charmaine, just to provide a little bit more color, we do believe that the first quarter would be our low watermark for this year. Obviously we don’t control what the competition does or what events could potentially take place. That said, given what we have seen so far, we believe that that would in fact be the case and for the reasons we discussed earlier specifically around DTC and something for dealing with our sales force, we would expect us to have or certainly believe that we would have a stronger fourth quarter and really begin to see some of that benefit take in place around September.

Charmaine Chan - RBC Capital Markets

That’s very helpful. So if I could tag one additional question is with the market space with diagnostics being launched such as GHDX/Oncotype DX or Myraid's Polaris, how do you think that would change the space and is there room for you to collaborate in better identifying patients with you guys are already making tremendous effort in? But just wondering whether diagnostics from that side would change the game a little bit for you guys? Thank you.

John Johnson

Well, I will ask Mark to comment first and then I will make a couple of comments once he has.

Mark Frohlich

We think biomarkers could really plan an important role here, as I mentioned in my comments, and we already have. Baseline PSA seems to be a pretty reasonable marker at differentiating patients who appear to be benefitting more from PROVENGE but we think that specific immune markers to our product maybe even more discriminatory.

So we have really been, given that these markers may will be specific to immunotherapy and specific to PROVENGE we have our own internal biomarker effort where we are looking at both factors that we might use following treatment of PROVENGE to determine who maybe benefitting more as well as pretreatment markers that may predict who is likely to benefit more.

So we have an active group looking at Smith analysis, gene expression, protein microarray, et cetera and has some encouraging results that we are encourage that there are markers out there or a constellation of markers that may help identify patients and we continue to follow up on those findings, ultimately plan on having discussion with regulators to find out what the data package would be required to actually implement some of those biomarkers.

John Johnson

I think beyond that, Charmaine, I think one of the things we certainly heard at AUA was that using some of these tests and particularly screening earlier for metastatic disease is a trend that’s begun to emerge and I think building more momentum are predict trials, certainly will help us and help facilitate the thinking, especially in the urology space with these patients normally present first.

So net net, I think it will be good for our business and I think certainly if we are able to develop these biomarkers that Mark was referring to that will answer one of the big questions that many physicians have in terms of who will benefit and are they responding. I think that those are potential game changers and obviously we have to work with the FDA to bring those to market and make sure they bear out. But some pretty exciting work that’s been going on in our labs.


Thank you. Our next question comes from Rachel McMinn from Bank of America. Your line is open.

Rachel McMinn - Bank of America

I wanted to ask a couple of questions. One on expense and then on Europe to clarify, just on (inaudible), Greg, I didn’t understand why your saying that cost of goods sold in theory was improved but I just didn’t understand that your cost of goods sold seems to have worsened. So just help me understand what you are trying to get at?

Then on Europe, that overall argument, should we that it as a negative line? Is that CHMP is not likely to approve PROVENGE this year? Thanks.

Gregory Schiffman

Sure. So actually cost of goods sold, if we look at it first just as an absolute level of spend, my Q4 cost of goods sold was $54.4 million. My Q1 cost of goods sold was $43.4 million, so it's down absolutely a substantial amount of money. As a percentage of revenue, revenue is certainly an important driver there. And if we looked at revenue, we had $86 million in our GAAP statements.

If you use the pro forma revenue that we talked about, we saw almost an 11-point improvement. If you did a pro forma this quarter, our cost of goods sold, we have about 15% of revenue is variable. The rest of it is all fixed. The reduction in revenue would have equated to about $2 million of raw material [aperies] season shipping declined which absolutely brings my cost of goods sold down into spending by $9 million.

I think that our guidance was, we were looking for around $9 million to 10 million improvement for quarter at this point, and so it's right in line with the guidance we've given on the restructuring and so cost of goods sold is down substantially quarter-on-quarter in absolute spend. And if you looked at it on a relative revenue pro forma basis, adjusting up is actually down substantially as a percentage of revenue.

Joe DePinto

In terms of all explanation, when we embarked on this process and the feedback we got from external regulatory consultants with a lot of experience in Europe is that they anticipated that the European regulators would like want to haven an oral argument given that there's a novel first-in-class biologic and the first you experienced with it. So, in the U.S. we had 15 years of laboratory interactions with the FDA, but we didn't have a manufacturing facility and didn't include European patients in our trials. So, I think, all explanation is not unanticipated.


Thank you. Our next question comes from Howard Liang from Leerink Swann. Your line is open.

Howard Liang - Leerink Swann

Thanks very much. Just a question on the cost of goods, your expectation that it will be below 50% in the third quarter this year you said that was the current forecast of those. Can you talk about little bit what kind of sales levels that is has been…

Joe DePinto

I think we've always discussed cost of goods sold getting to about 50% in Q3. I think we're still in line with the guidance there, the one that's important is, the discussion we just had with COGS, revenue drives a large impact, because a lot of work our COGS short-term are fixed that certainly are COGS long-term if we were looking at dropping volume sustained were lower that we could reduce expenses. So, from that basis, Howard, it wouldn't be substantially inconsistent with what had seen in Q4.


Thank you. Our next question comes from Salveen Richter from Canaccord. Your line is open.

Andrew Goldsmith - Canaccord

Hi. This is Andrew Goldsmith on the line for Salveen. So, I believe 28% of your revenues are coming from these ex-community accounts. It sounds like you want to grow those. How should we think like, how big do you if you could like that number to get?

Gregory Schiffman

The breakout of our business basically shows 26% of our business is coming from the urology, the community clinics and urology. And, we see urology as one of the important market segments for us. So, historically it has been a really strong performing market segment. We see the patients especially as we look at trends in screening patients and where we want to be around the appropriate patients.

Mark shared with you some of the data that we had published recently in the Journal of Urology. More and more important that we treat those patients earlier in therapy and they typically sit in that urology market segment.

I mean, it's important that we continue to have strong relationships as well as strong account performance with those large urology group practices. I was as well with John this weekend at the Annual Meeting at Urology Association and was very enthusiastic about at the podium, how many key opinion leaders multiple times talked about the importance of sequencing these drugs with PROVENGE, first in the setting, because it really from our standpoint is the optimal place for the drug to be used, as well as looking at appropriate screening for that metastatic patient. So we get that patient when they become metastatic in our label at a lower PSA.

So we believe that space is really important. Our focus there will continue to be on those large urology group practices. We have deployed a urochem, a urology key account management team to work side-by-side with our sales team to make sure we maximize the opportunity in that market segment.

John Johnson

And Andrew, just to give you a little bit more color on that. In the first quarter, the community urology clinics were about 26% of our business. As we look at enrollments, which is a key indicator of what's going to take place going forward, they were 32% of our enrollments in the first quarter.

So, clearly that’s a segment that’s going to be important to us. Keep in mind too, when we talk about urology, that’s the community urology setting any hospital or academic center or mixed market segment business from urology is not well delineated. So it certainly looks like they are doing somewhere north of a third of our business now and an important growing segment for us going forward.


Thank you. Our next question comes from Mark Schoenebaum from ISI Group. Your line is open.

Wesley Nurss - ISI Group

Hi, John and Team, this is Wes sitting in for Mark. I have a question about cash usage. If I do my math correctly, the cash usage excluding one-time items were a little under $50 million. My question is, is that the expected quarterly number going forward for the rest of the three quarters? Also expect that number to be closer to that $90 million number the first quarter of 2014? Finally, how levered is cash usage to revenue growth? Thank you.

Gregory Schiffman

So, as we look at the cash usage we would not expect it, if you look at the number of the $50 million. No, we would not expect to see that number the same going forward. I think as we indicated, there is a couple of effects that are taking place this quarter but in addition, non-cash stock comp was down substantially. If you think about the GAAP P&L and what we have guided there will be further reductions in terms of SG&A of where we expect to be in the second half of the year based on the restructuring and on a cash basis those are even greater because the non-cash stock comp is going up while the GAAP expenses will not be. They will have to be declining.

So there is savings both in COGS and SG&A that we are projecting going forward. So no, that number at the revenues consistent with this quarter would be down below the numbers that you are discussing.

Would I expect to see Q1 up similar next year? No. Again on that one, actually if looked at last year, you take all four quarters which does include Q1, it was $58 million on average. If we look we were down both in COGS and SG&A in terms of the drop there. There will be an additional round tied to $7 million of cash coming out further from what we saw in the first quarter.

You could see that we will be down substantially to the $58 million run rate at revenues like this quarter and as we did indicated we expecting to see revenues grow into the year. There is a lot of leverage with revenues. It is basically about $0.85 of every dollar move through the bottom line at this point in time.


Thank you. our next question comes from Imran Babar from Cowen. Your line is open.

Imran Babar - Cowen and Company

Thanks for taking my question. Congrats on the success of the TV campaign. Just wondering if you could estimate your market penetration into the labeled market for PREVENGE or alternatively estimate how many new patients in the U.S. are eligible for treatment for the label?

Joe DePinto

Imran, thanks for the question. This is Joe. The market penetration question is really challenging here. It is really complex because you have both urology and oncology treating in this space. What we know from the U.S. data that we see is that it is about 30,000 patients. That’s 28,000 to 30,000 patients each year that die of prostate cancer and renter the market into prostate cancer, metastatic castrate resistant prostate cancer.

So we continue to look at ways to penetrate. There are some market audits that we use but they are not in the totality of the market. They are basically on different market segments. So we continue to use that. I can assure you one thing that PROVENGE is very much underpenetrated. There is a huge opportunity and upside in this market and physicians are becoming more and more familiar with immunotherapy and with PROVENGE and how to use it appropriately, because this is different than what we have seen in this space.

It's not a hormone and it's not a chemotherapy, which typically has played a significant role in this place. We continue to see big upside opportunity here, but again physicians continue to adopt this new treatment paradigm and learn about the best place to use and realistic expectations on what to expect with PROVENGE, because it is different than a hormone or it is different than a chemotherapy.


Thank you. Our next question comes from Katherine Xu from William Blair. Your line is open.

Katherine Xu - William Blair

All right. Good morning. I have a question on the sequencing study with XTANDI. I am just curious, because right now it is really difficult to figure out whether in future it's going to be XTANDI before PROVENGE or PROVENGE before XTANDI. And, especially, eventually at least the pre-chemo label is going to be pretty much the same, so I was curious just given the mechanistic action that XTANDI and PROVENGE are synergistic. I am just wondering does it make sense to do combination, so you can both see position in the earlier stage and then like you said, there are some anecdotal evidence about, again, first with one agent and then in combination with both, so then can we just go with both in the setting so that you can actually be positioned together with XTANDI?

Joe DePinto

Yes. So, I think there's a strong rationale for using the two agents together and the design of this study is to look at XTANDI start of the couple of weeks before PROVENGE, and given simultaneously versus given PROVENGE first and sequenced by XTANDI. There is potential biologic rationales for either of those, so we are not sure which is going to be the most impactful, but I think that the absence the requirements are still large with XTANDI, the potential immunologic synergy, the ability to bring the PSA down with XTANDI and also getting [lifelong] and favorable adverse from that profile for PROVENGE is really attract their physicians and that's why we have seen an incredible outpouring of enthusiasm about the study and physicians wanting to participate, so we anticipate it will all quickly and provide really important useful information to physicians about how to sequence them.


Thank you. Our next question comes from Greg Wade from Wedbush. Your line is open.

Greg Wade - Wedbush

Good morning. Thanks for taking my question as well. John, it looks just like you are kind of bumping up against running out of money in the next six or seven quarters, just wondering is there different posture you can put the business in to be breakeven at or slightly above the revenue run rate you have now and what would that business look like? When this year would you expect you would take a decision to put the business on that footing? Thanks.

Joe DePinto

Thanks for the question, Greg. Clearly, we could take a different posture with the business if we so chose, and we would do that if we felt that PROVENGE was at its peak and you would change where you would traditionally marketing investment standpoint to more of a maintained type of a posture and to try to pull more cash out of the business from a cash flow breakeven standpoint and we could do that here.

I think for us, we still believe that there is this growth for PROVENGE ahead that there is the ability to build this business and grow the top line. And the reason we believe that is a couple fold, I think number one, over the last year we really took a hard look at the customers and realized that we did not message appropriately after launch.

Clearly, not enough physicians understood immunotherapy and then clearly not enough understood PROVENGE, and we have really worked with our sales team now with the new message around how to better educate and that there was a gap.

The second thing we knew there's a gap in educational on the consumer side, and we have investigated against DTC and we are very excited about what we've seen earlier. It is obviously still early, but it looks pretty good. Beyond that, the work that Mark talked about biomarkers.

One of the big questions around PROVENGE is, how do I know if its working and how do I know if it will work on a given patient. The work that Mark referenced in our lab that’s game changing type of work. The next point is, as in all oncology markets, you look at combination data and you say is there a combination that could benefit these patients and there is a lot of excitement about using these agents together, especially XTANDI.

Not only in the metastatic space, but in the space before that. So that’s a long answer to a question which is really, we still believe in PROVENGE, we still believe in its ability to grow. We think that there are some levers that could really cause some inflection points going ahead. If at any point we change our posture on that, our position that we would the posture of our business to your point, we are not there yet. We obviously look closely at this, both, our team and the board.

At this point we still believe PROVENGE a lot of room to grow.

Greg Wade - Wedbush

No, I respect that. I just would ask that you share with us what the business looks like if you should choose to reposition the business to be breakeven, slightly profitable, just slightly higher sales so that investors can understand the profitability magnitude of the size of the business that is contemplated. I am sure those plans are now in place because of the short run runway you have, running out of money. It is probably this year that the posture would have to change in order to not run out of money. So to help investors understand what the business would look like if you could just share this with us those plan. Then the timing this year you would expect to make a decision about why don’t you reposition the business? Thanks.

Joe DePinto

I am not going to share those plans today. Obviously we have looked at that. We have talked about cost of goods sold reducing the cost of automation being the contributor to that in the future. I am not going to get specific today on that other than to say we have looked at that. But our case is clearly one for growth, and our business case reflects that. As we go through the fourth quarter and get to the end of the year, if we don’t see some of these things materialize, we will certainly reassess where we are at. But at this point, I continue to be positive on the growth and that comes from not only the data we are seeing on DTC but the time I spend with customers.


Thank you. Our next question comes from Lee Kalowski from Credit Suisse. Your line is open.

Lee Kalowski - Credit Suisse

I appreciate the opportunity to ask a question. I guess in typical sale side fashion, though it does have a couple of parts. The first piece of it is, I just wanted to clarify, you were previously saying that you expect full year 2013 to grow over 2012. I guess, I just wanted to be clear here. Are you still thinking if that’s the case.

John Johnson


Lee Kalowski - Credit Suisse

Okay, and so as I look at that, that would put you, by my math, on a run rate of $90 million to $100 million per quarter on the back half of the year. Is that the range that we are talking about? Related to that, if some of that is coming from DTC, what other oncology products could you help point us to where DTC campaigns have been utilized that you look at and say well that really was a success in the oncology setting?

John Johnson

Look, that’s a fair question, and basic math with our guidance of mid-70s would say you would have to be in that range at the end of the year. So the answer what oncology products can you point to, let's talk about a couple of things.

First of all, this is the first oncology product ever advertised on television with a survival benefit period. So, we are in some new space here. If you look at other oncology products, one that I have certainly had experience with in the past was Procrit. When we went on TV with Procrit we saw a dramatic increase in our business at that point in time over a several year period.

So as I look at it, we are in a bit of uncharted waters. It is a history making ad from that standpoint, being able to talk about survival. That could be what's driving some of our good early results. It's that modeling that we have used. We are around the product that gets us to that in the fourth quarter with the timing and the exposures and the buying pattern that we have currently set up for space in television. So, we would expect that pop and as I've said that the question earlier I really would expect that come September you'd begin to see a more robust benefit from the product advertising.

Lee Kalowski - Credit Suisse

Okay. That's helpful. And maybe if I could sneak one last question then, you mentioned access had been an issue. And I guess, I just wanted to clarify. I knew historically you had said the majority of patients given that PROVENGE is the Part-B product had Medigap, I am just wondering wouldn't that mean that most patients have their out-of-pocket expenses covered?

Joe DePinto

Well, a large group do, there is some subset under 10% that does require complete co-pay assistance, and the challenge that we had was, A, those were patients that go to foundations, because we can't contribute to or provide assistance to them. It's only through donations we would make to a foundation. And because you had patients who were on both ZYTIGA and XTANDI, all hitting the donut hole about the same time in the first quarter that you had this real pressure on these foundations and for us because our co-pays are higher than their monthly co-pays, we're just getting it all within 30 to 45 day window there certainly with more pressure on us in the quarter and we felt that and that does affect how the office [thinks]. And, in terms of the broader picture for access for PROVENGE and we saw some of that. Fortunately as we said, we've turned that trend around and we've seen small offices that aren't as efficient in dealing with foundations begin to bounce back here in April.

Okay. Thank you. Appreciate the color there.


Thank you. And, we have one more question from Ryan Martins of Lazard Capital. Your line is open.

Ryan Martins - Lazard Capital

Okay. Thanks for taking the question. My key questions have been asked, but maybe on Europe. Can you talk about, you said you are going to have to and oral presentation to the CHMP and I think another committee. Can you tell us about the differences of what you may need to discuss here with these committees and what you may need to convince them off? This at this voters [hearing]. And, then the second part is, in terms of DTC, you said you may dial up or dial down. Can you give us an idea what the incremental dial up or dial down could be?

Joe DePinto

In terms of Europe, so just to clarify, because PROVENGE is autologous cellular therapy, it requires review first by the committee for advanced therapy. They do the primary initial review, because they have the expertise the [aspects] of a complex biologic.

So, as I noted in my statements, we will be having oral explanation with the CAT, the Committee for Advanced Therapy, and after that the CAT will determine or the CHMP will determine based on input from the recommendations whether or not they feel an additional oral explanation is wanted, so we don't know that at this time. It really depends on the outcome of the CAT, and in terms of issues it's not something that we get into those level of details about questions being asked in the regulatory process we have strong data package. We believe that we are well positioned to answer questions that will be raised any oral explanation.

John Johnson

And, as it relates to DTC, Ryan, outliners a couple of things. Number one if it's not working, of course, you could always shut it off and that's not what we anticipate. You could dial it back and pulse it, so you would go on, say for six weeks, go dark for six weeks and pulse it to something that looks more like 2.5 million to 3 million a quarter you know or you could dial it up, and you we are not going to talk about how high we could potentially dial it up, but at this point in time we feel that run rate in the neighborhood of $5 million in the quarters is going to be good for this market, but we could always pull it back pulse it or shut it down. That’s going to be fact-based decision-making. That’s really what is going to drive it are going to be the facts and the results.

Joe DePinto

Hi, Ryan, it's Joe. I can add a little bit more to this. One of the interesting things with our direct to consumer campaign is the fact that we have different call-in numbers based on the different networks that are currently airing our ad. We run the analyses on how effective those networks are in looking at our ad placement. So when we want to be effective and targeted in dialing it up and down, we can also go heavy up or reduce based on the under performing networks that really aren’t getting patients into our call center, into our relationship marketing campaign or visiting our website because we capture all that data when a patient comes in. Again, this is a very, very detail oriented approach to capturing that relationship with the patient from interest in PROVENGE to the first infusion and beyond. So hopefully that helps give a little bit more color on our ability to dial it up or dial it down.


Thank you, and I would like to turn the conference back to the speakers for any concluding remarks.

John Johnson

Thank you. I would just like to thank everyone for joining us today. We look forward to seeing you at some of the upcoming conferences and meetings. As always, you can feel free to reach out with us for any further questions. Thank you very much. Have a great day.


Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.

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