Dendreon Corporation CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Dendreon Corporation (DNDN)

Dendreon Corporation (NASDAQ:DNDN)

Q3 2013 Results Earnings Conference Call

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


Lindsay Rocco - IR

John Johnson - Chairman and CEO

Greg Cox - VP, Finance

Joe DePinto - EVP, Global Commercial Operations

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


Lee Kalowski - Crédit Suisse

Salveen Richter - Canaccord Genuity

Cory Kasimov - JPMorgan

Chris Raymond - Robert W. Baird

Geoffrey Porges - Sanford C. Bernstein

Eric Schmidt - Cowen & Company

Jason Kolbert - Maxim Group

Ying Huang - Barclays Capital

Mara Goldstein - Cantor Fitzgerald

Michael Yee - RBC Capital Markets


Good morning, ladies and gentlemen, and welcome to the third quarter 2013 Dendreon earnings conference call. [Operator Instructions] Now I would like to turn the conference over to your host, Lindsay Rocco. You may begin.

Lindsay Rocco

Thank you, and good morning, everyone. We are pleased that you could join us today for Dendreon’s third quarter 2013 conference call. With me are John Johnson, chairman, president, and chief executive officer; Greg Cox; Joe DePinto; and Mark Frohlich.

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. 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 Q3 2013 earnings release, which has been furnished on the Form 8-K.

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

John Johnson

Thank you, Lindsay, and thank you for joining us today. To briefly review our third quarter results, net product revenue for the quarter was $68 million compared to net product revenue of $73.3 million for the second quarter of 2013.

While our results were impacted by increased competition and sales force vacancies, which Joe will discuss in greater detail during his portion of the call, we have seen a strengthening of our business during the past two months. In fact, in October we saw more patient enrollments than any other month this year. Should these enrollments convert to infusions at our historical rate, we expect that this will bring benefit to both the fourth quarter of this year and the first quarter of next year.

As we have discussed, accelerating the path to profitability has been a top priority for Dendreon. Consistent with that goal, this morning we announced that we are restructuring the company and implementing additional cost reductions to help Dendreon succeed as a leaner, more nimble biotechnology company focused in immuno-oncology.

Greg will discuss the plan in further detail, but at a high level the plan will remove more than $125 million in cash operating expenses from our 2013 run rate, which is a reduction of approximately 20%. These reductions will come from all expense categories. Following the restructuring, the company will have approximately 820 employees, down from more than 2,000 employees at its peak in 2011.

We will implement the plan immediately, and expect the net benefits will begin to be realized as early as the first quarter of 2014. Our plan enables us to slow our cash burn and be better positioned to achieve profitability while continuing to make strategic investments in initiatives that we believe will create value for shareholders, physicians, and patients.

These strategic investments include manufacturing automation, select European initiatives, and ongoing clinical development programs such as our combination and sequencing studies. We remain focused on reducing costs without compromising quality and we are focused on spending efficiently and managing our balance sheet.

I would now like to address our convertible debt. First, you should know we are discussing our options and are well advised. We have many different options that we are exploring, and we are working to pursue the best option for the company. We expect to provide more detail on our steps to address our debt during our fourth quarter call, which is typically held in February.

As a pioneer in immunotherapy, we continue to believe PROVENGE has important upside potential, particularly given new data released on sequencing and combination studies. Accordingly, we believe the long term potential for PROVENGE and for Dendreon remains significant.

With the increasing amount of data surrounding PROVENGE coming into the marketplace with regard to mechanism of action and use in combination with other agents, we see our [KOL] support strengthening.

As Mark will discuss later on during the call, we had a significant presence at the European Cancer Conference, ECCO and European Society for Medical Oncology, ESMO, meetings, where key data were presented surrounding PROVENGE and immunotherapy.

There was a strong presence on the podium from both EU and US KOLs, who showed great enthusiasm about immunotherapy for the treatment of prostate cancer, PROVENGE, and its mechanism of action. We are seeing oncologists better understand the benefits of immunotherapy and how PROVENGE may work in combination with other therapies. For example, key data at ECCO showed that PROVENGE and ZYTIGA can be given currently without affecting PROVENGE potency and immunological prime boost responses.

Education and increasing patient awareness has been a top priority. We see DTC as an important effort to achieve this goal and help balance the competitive challenges we face. Joe will provide an update on our DTC campaign later on in the call.

In September, we executed a national public relations campaign and supported advocacy events around Prostate Cancer Awareness Month, enabling us to reach new patients, families, and caregivers with our message. As we discussed last quarter, we are also intensifying our efforts with respect to biomarker research as well as sequencing and combination data.

One of the milestones for the quarter was receiving marketing authorization of PROVENGE in the EU. This final decision by the EC follows recent positive opinions from the European Medicines Agency, the EMA; the Committee for Advanced Therapy, CAT; and the Committee for Medicinal Products for Human Use, CHMP.

As the first personalized immunotherapy approved for the treatment of metastatic castrate resistant prostate cancer in Europe, PROVENGE provides a new therapeutic option for appropriate prostate cancer patients with a differing mechanism of action than the already approved ZYTIGA.

We also have a commercially favorable label in the EU, including PSA quartile analysis and the correlation between immune parameters and overall survival. These data will allow for a unique commercial message and positioning when we launch and work with the reimbursement authorities in the EU.

In October, our agreement with PharmaCell to be the contract manufacturing organization for the EU commercial production was announced. We have worked with PharmaCell since 2011. As we have previously disclosed, we are in discussions with potential partners and are prioritizing our plans for launch.

Automation will be key to cost efficient manufacturing in Europe. We are also advancing our efforts with respect to automation in the U.S., which will enable us to manufacture PROVENGE more efficiently and cost-effectively. We continue the progress on the regulatory pathway.

With that, I’ll turn the call over to Joe.

Joe DePinto

Thanks, John, and good morning everyone. As John mentioned, our third quarter results were impacted by increased competition and sales force vacancies. During the quarter, we added 27 net new accounts.

In terms of our customer composition, community clinics accounted for 71% of total sales, which as we’ve previously indicated, is where we believe the long term revenue potential for PROVENGE exists.

Within the community setting, oncology accounted for 37% of our total business for the quarter, and urology accounted for 34%. Academic accounted for 19% of total sales. Community urology was down 5%, community oncology was down 10%, and academic was down 3% versus Q2.

2013 enrollment trends held steady across community urology clinics, hospitals, and academic centers, despite additional competitive challenges and sales force turnover. 2013 infusion trends held steady across community urology clinics and academic centers.

First, let me address competition. During the third quarter, the competitive environment continued to evolve. Specifically ZYTIGA and XTANDI increased their share in the post-chemo setting, and we have begun to see some impact of XTANDI in the pre-chemo setting in oncology.

We continue to see the greatest impact of competition in small and low volume accounts across our market segments. Some of our top urology accounts slowed during the quarter. Urology, while down in the third quarter, is up 30% from Q1 to Q3 of 2013, over the same period in 2012. We continue to believe community urology has significant growth potential and believe our commercial efforts will enable us to continue to grow in this segment.

We also had a higher than expected sales vacancy rate in our sales force during the third quarter. We took this opportunity to realign the sales force to focus on our largest accounts, where we continue to see growth and opportunity. With the restructuring, our sales force will focus on our top tier customers in all our key market segments. This will allow us to have more precise focus and execute more efficiently with our top customers.

As John mentioned, we have seen more patient enrollments in October than in any other month this year. We see this as a strengthening of our business and expect it to benefit the fourth quarter of 2013 and first quarter of 2014. During the third quarter, the number of large accounts, which we define as having an annual run rate of more than $1 million in sales, grew to a new all-time high post the competitive entries. We now have 94 large accounts, up from 85 in Q2 and 54 in Q1.

Raising awareness about PROVENGE and about the importance of early screening and detection will continue to be a top priority for Dendreon as we move forward, and we are focused on achieving this objective through our professional marketing campaigns, both in immunotherapy and branded PROVENGE campaigns, as well as DTC advertising and public relations initiatives.

Our campaign has been running since March, and we have achieved our expectation, including raising awareness and registrations, but most importantly in verified enrollments and actual infusions.

We are also seeing that patients who come to us as a result of the relationship marketing campaign receive their first infusion significantly faster than others. These are all the results of our strong relationship marketing campaign, which enables us to develop the relationship with the patient, from interest in PROVENGE all the way through to first infusion. We are continuing to monitor our results and can dial the campaign up or down as needed.

With that, I’ll turn the call over to Greg to discuss the financials.

Greg Cox

Thanks, Joe. I will now walk through the financial review of the quarter. Earlier today, we reported our financial results for the third quarter of 2013. Net product revenue for the quarter ended September 30, 2013 was $68 million compared to $73.3 million for Q2 2013. This represents a decline of approximately $5 million in net revenue.

With profitability as our key objective, we have undertaken an intensive evaluation of our cost structure and identified significant opportunities to reduce costs in 2014 and beyond. The restructuring and cost reduction actions we are announcing today will remove more than $125 million in cash operating expenses from our 2013 run rate, or approximately 20%.

These expense reductions will impact all operating expense categories. Expenses associated with cost of goods sold, or COGS, are expected to decline by approximately 20% year over year based on our 2013 revenue run rate.

R&D expenses are expected to decline 14% year over year. SG&A expenses are expected to decline 23% year over year, of which approximately $35 million will come from a reduction in our sales and marketing expenses.

This has minimal impact on our sales force, and as Joe mentioned, with the restructuring, our sales force will have a more precise focus on our top tier accounts in all of our key market segments.

Cost reductions include a company-wide reduction of more than 20% of our workforce. Following the restructuring, the company will have approximately 820 employees, down from more than 2,000 employees at its peak. In addition, approximately $50 million of expense savings is attributable to non-people costs.

Our 2000 plans still include investments in projects and initiatives which we believe will create value for Dendreon. These include manufacturing automation, select European initiatives, and ongoing clinical programs including combination and sequencing studies.

Our COGS for Q3 was approximately $47 million or $69 million of revenue. However, this amount includes a $6 million noncash charge for [antigen] which did not meet product specifications. Accordingly, we have filed an insurance claim to seek recovery for the $6 million loss.

Excluding this one-time charge, our COGS was approximately $41 million, or 60% of revenue. For the quarter ended June 30, 2013, our COGS was $44 million, or 60% of revenue. We expect our COGS to continue to decrease over time with the benefits of automation in the manufacturing process, and we continue to advance through the regulatory process, as John mentioned.

Following the implementation of automation, at our current forecasted revenues, we believe COGS will be in the 30s. In addition, our antigen is the most expensive raw material outside of the collection process, and we have efforts underway which will have the potential to reduce the cost of this key component.

SG&A expenses were approximately $56 million this quarter, down from approximately $67 million last quarter. The decrease in SG&A expenses is consistent with the guidance we provided last quarter and was driven by spending associated with external vendors.

Research and development expenses remained stable for the quarter, at approximately $18 million, as compared with approximately $18 million from last quarter.

Through the third quarter of 2013, we experienced a significant decrease in our noncash stock compensation expense of approximately $45 million, as compared to the prior year. This was primarily driven by fewer employees and changes in the forfeiture rates used to calculate noncash stock compensation expense, based upon our historical data. We expect to see noncash stock compensation expenses closer to $7 million per quarter going forward.

The company had a GAAP loss of $0.44 per share this quarter, down from approximately $0.45 per share last quarter. We have cash, cash equivalents, and short and long term investments as of September 30, 2013 of approximately $233.3 million.

For the quarter, the company had a net cash usage of approximately $47 million. This is consistent with our expectations for Q3 and down substantially from our Q2 cash usage of approximately $57 million.

In conclusion, achieving profitability remains our key strategic imperative, and with our plans announced today, we are confident we can slow our cash burn and be better positioned to achieve profitability while continuing to make strategic investments in initiatives that we believe will create value for shareholders, physicians, and patients.

With that, I’ll turn the call over to Mark.

Mark Frohlich

Thanks, Greg. I’m pleased to share with you some important clinical updates this quarter, which demonstrate that the rationale for positioning PROVENGE as front line therapy in metastatic castration-resistant prostate cancer continues to gain momentum.

First, I will address the results of the XTANDI PREVAIL overall survival analysis, which was positive news for PROVENGE. Prior to announcements of the XTANDI pre-chemotherapy data from the Phase III PREVAIL trial, many physicians we spoke with speculated that the survival benefit would be so large that it would create an imperative for its use as frontline therapy in metastatic castration-resistant prostate cancer.

While clearly demonstrating a meaningful clinical benefit to patients, the 2.2 month median survival benefit observed in the PREVAIL trial suggests that there may be less urgency to use XTANDI in patients also eligible for PROVENGE than initially anticipated.

We continue to be PROVENGE is complementary to products such as XTANDI. PROVENGE continues to be an important first line treatment option for patients with asymptomatic or minimally symptomatic metastatic castration-resistant prostate cancer.

And we are continuing to see physicians sequence PROVENGE as initial therapy or in combination with other therapies approved for metastatic castration-resistant prostate cancer. Only PROVENGE has the unique combination of a clinically and statistically significant 4.1 month median overall survival benefit, a short duration of therapy, and a sustained immune response.

Some evidence has suggested PROVENGE has a greater treatment effect in patients with lower disease burden as measured by PSA. In contrast, conventional hormonal and chemotherapy agents appear to be more effective later in the disease, as evidenced by the stronger effect on median overall survival demonstrated by ZYTIGA and XTANDI in post-chemotherapy trials relative to pre-chemotherapy trials.

Early PROVENGE use treats patients at a lower disease burden so they have more time to benefit from the potentially long-lived effects of immunotherapy. Preliminary data presented at ECCO from an ongoing open label study designed to evaluate retreatment with PROVENGE suggested immunologic memory of PROVENGE several years following initial treatment, and retreatment appeared to boost immunologic responses.

The seven patients reported from the study were initially treated with PROVENGE when they had antigen dependent prostate cancer and were retreated after they had progressed to metastatic castration-resistant prostate cancer. PROVENGE has a short duration of therapy, with a manageable adverse event profile. Early use of PROVENGE ensures patients will receive the only approved agent with an immunologic mechanism of action.

The importance of using agents with differing mechanisms of action in the treatment of metastatic castration-resistant prostate cancer is highlighted by the evidence of the cross resistance between hormonal agents, as presented at ECCO-ESMO.

We also believe that PROVENGE has the potential to demonstrate synergy with other approved and investigational agents given a strong biologic and clinical rationale. From a biologic point of view, the blocking of the antigen pathway has been demonstrated to be immunostimulatory, and the cytoreduction provided by hormonal agents will lower the tumor burden, releasing tumor antigens and potentially making immunotherapy even more effective.

In addition, the delay in disease progression afforded by hormonal agents provides time for immunotherapy to work. From a clinical point of view, we see that the reduction in PSA provided by hormonal agents can decrease physician and patient anxiety. There were also case reports of dramatic clinical effects of patients receiving hormonal agents and PROVENGE.

In order to investigate these potential synergies, we are pursuing a clinical program designed to provide physicians data on the safety and potential synergy of combining PROVENGE with other agents. The Phase II [stand] study of the sequencing of PROVENGE and androgen [deprivation] therapy, or ADT, is fully enrolled. Data analysis indicating a high frequency of radiographic metastatic disease in the setting of hormone naïve biochemically recurrent prostate cancer, which highlights the importance of screening for metastases in this early stage patient population.

The Phase II sequencing study of PROVENGE and ZYTIGA is also fully enrolled. Data presented at ECCO indicate that PROVENGE and ZYTIGA can be given concurrently, without affecting PROVENGE potency and immunologic prime boost responses. In addition, the safety profile of drugs in combination appear to be consistent with the individual drugs’ existing labels.

These data may lead physicians to enlarge the pool of patients they consider for PROVENGE to include those with rapidly progressive disease who may be in need of cytoreductive therapy in the near term.

Finally, the Phase II sequencing study of PROVENGE and XTANDI is also active and enrolling patients, and the first patient has been treated.

To increase our engagement with clinical researchers, Dendreon is supporting 23 novel investigator initiated studies at 19 sites. The program will advantage their understanding of immunotherapy and the treatment of advanced prostate cancer.

Our PROCEED registry, which will also serve as a rich source of data on patients treated with PROVENGE and how it is used in the treatment paradigm, has completed enrollment. We will continue to follow these patients for safety and survival in order to fulfill our post-approval commitment to the FDA. We anticipate presenting analyses from PROCEED at future conferences.

Last quarter, we discussed the importance of accelerating our biomarker discovery efforts. We have identified potential biomarkers prior to, during, and following treatment with PROVENGE that may predict patient outcomes. We will be presenting these data at conferences over the coming year, continue to work on confirming the findings, and anticipate meetings with regulators next year to discuss how certain biomarker results could be made available to physicians.

Improved identification with metastatic disease using new imaging modalities and physician education may markedly grow the size of the metastatic castration-resistant prostate cancer patient pool. To further this effort, we have begun actively enrolling patients and predict our early detection screening study that will image castrate-resistant patients without known metastatic disease.

The study will explore factors that may be predictive for the presence of metastatic disease. The data from this study may help physicians better identify metastatic castration-resistant prostate cancer patients early in the disease state.

As John mentioned, one of the milestones from the quarter was receiving marketing authorization of PROVENGE in the EU, which reaffirms the robustness of data we have around PROVENGE and represents a large market opportunity. As the first personalized immunotherapy approved for the treatment of metastatic castration-resistant prostate cancer in Europe, PROVENGE will provide a new therapeutic option for appropriate prostate cancer patients with a differing mechanism of action than the other available agents.

We have a favorable EU label including PSA quartile analysis and correlation between immune parameters and overall survival. These data will allow for a unique commercial message and positioning in the EU when we launch and work with reimbursement authorities there.

While we are in discussions with potential partners and are prioritizing our plans for launch, we are also working with health technology assessment committees in the EU to provide necessary information to support reimbursement. In addition, our European open label study demonstrated that the manufacturing of PROVENGE can be performed successfully by a European facility that serves multiple nations and resulted in a similar product profile as PROVENGE manufactured in the U.S.

Finally, we are continuing to advance our promising immuno-oncology pipeline. We continue to enroll patients in a randomized Phase II study in high risk urothelial cancer. Patients in this trial are treated with DN24-02, our autologous cell immunotherapy based on the same platform as PROVENGE, but targeting the tumor antigen HER2/neu.

Our preliminary analysis demonstrated positive immuno responses to DN24-02 and suggested that the antigen presenting cell activation is comparable to that of PROVENGE. In addition, an interim analysis demonstrated a high prevalence of HER2 protein expression with approximately 75% of tumors expressing HER2/neu.

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

John Johnson

Thanks, Mark. In conclusion, we believe we are taking tough but necessary steps to move Dendreon forward in a challenging and involving environment. We are confident that with the successful execution of our plan, we can create value for shareholders, physicians, and patients.

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

Question-and-Answer Session


[Operator instructions.] Our first question comes from the line of Lee Kalowski of Crédit Suisse. Your line is now open.

Lee Kalowski - Crédit Suisse

I was wondering if I might be able to ask a question on expenses, and then maybe just follow up real quickly after that on some of your comments on PREVAIL. On expenses, I just want to clarify here, you’re talking about $125 million coming out of the run rate. I guess maybe you could just clarify a little bit what you’re talking about as far as the run rate is concerned. Presumably it’s not just Q3, but talking about expenses in the quarter up to Q3 as well?

And then maybe just as we’re thinking about next year, how we should be approaching the $125 million coming out. And then I guess related to this, have you sort of gone through and figured out, is this the maximum amount of expenses that can come out? Is this sort of the final restructuring? And I guess I think about that in regards to the fact that there’s still one plant that could potentially be closed down.

Greg Cox

I’ll start off, and then I’ll let John fill in. But the restructuring costs that we referred to, it’s the 2013 cash run rate, so yes, you are correct. It’s from Q1 to Q3, and that’s the period we’re looking at.

John Johnson

You know, as it relates to the maximum, I think that there’s a couple of points that we should make. First of all, we continue to make some strategic investments in things like clinical trials and manufacturing automation. We know that at some point those investments will end, which will lower our ongoing expense rate, and we also know that we’ll see, certainly in the case, for example, of automation, a decrease in costs that are associated with that.

Beyond that, we continue to look to be more efficient, and I think we’ll become more efficient as we go forward in different aspects of our business. An example there would be direct-to-consumer television advertising. We actually put a different 800 number on each ad that we show, so that we can understand exactly where we get the response. We then match the patients that come into our relationship management system, we look at those, we see where they came from, and we adjust our spend accordingly.

And we’re looking at ROIs and all of our commercial expenses and we’re making sure that we’re being as efficient as possible. So I think we’ll continue to evolve over time, and we want to become more efficient. We think that some of the investments we’re making will pay off to help us get to that goal as well.

Lee Kalowski - Crédit Suisse

Okay, but at some point could you consider shutting down one of the plants?

John Johnson

You know, we’re not going to go and discuss that today. I think for us we think that automation will be a big step forward. Seal Beach plays an important role in servicing the West Coast and the group out of Atlanta obviously the East Coast and much of the Midwest. But over time we’re certainly going to look to be more effective, but right now we think that that configuration is the right one.

Lee Kalowski - Crédit Suisse

And as far as PREVAIL, I appreciate some of the comments on the call. Just wondering if you could give a little bit of greater detail. It sounded like you were saying that maybe it would be less of a competitive threat than you once thought. I guess just some overall thoughts on the trial. [unintelligible] the study, it’s still early, with statistically significant overall survival, statistically significant [unintelligible] for [unintelligible] survival, and you were talking about competitive forces this quarter, I guess why wouldn’t the competitive dynamics become even more of a headwind once the product’s approved?

John Johnson

First of all, let’s step back for a second and say that this is good news for patients. Overall survival is the gold standard in oncology, and we look at XTANDI hitting this as good for patients. As many of you know, my father has prostate cancer, and I’m glad that he has new agents that continually become available.

From a PROVENGE standpoint and how we look at the marketplace, we had heard as recently as 45 days ago that the over survival benefit could be 8 months or greater. And there was some [KOL] feedback that hey, this could potentially impact where they sequence PROVENGE if in fact that benefit was that strong. And Mark referred to that in his comments.

I think that 2.2 months, what it demonstrates - and obviously that could change, because it’s not final. But none of these products are a cure. And at the end of the day, it’s important for physicians to have a number of arrows in their quiver. We think that the complementary nature of PROVENGE from a mechanism of action standpoint will help patients. There are patients that we think are appropriate, that could benefit from it.

And as we look ahead, we really believe that PROVENGE is going to continue to play a very important role in this treatment paradigm. And I think from just a standpoint of what we were hearing in terms of what could happen, I think we feel like we’re in a better position today than we were a couple of weeks ago. Mark, I don’t know if there’s anything you’d want to add to that.

Mark Frohlich

Yeah, just to expand a little bit on that, I think the other piece of evidence that we’re seeing is increasing evidence of cross resistance among the hormonal agents and also potentially between hormonal agents and chemotherapy. So if you look at, for example, the response rate to ZYTIGA in patients who have previously had XTANDI the PSA response rate is kind of single digit percentages.

And so while there was a tremendous amount of enthusiasm when these agents first came out, I think there’s kind of a little bit of a sobering that there may be diminishing returns from those agents. And therefore, I think that really highlights the importance of agents with differing mechanisms of action. And again, PROVENGE being the only agent with an immunologic mechanism of action. I think when you really think what’s best for a patient, it’s having as many of those agents as possible and using immunotherapy early in the treatment paradigm ensures that for patients.


Our next question comes from the line of Salveen Richter of Canaccord.

Salveen Richter - Canaccord Genuity

I also had a question on the cash operating expenses reduction of $125 million. How should we think about the timeframe there? Is that the next year, next two years, next three years? And then related to that, the sales force vacancies you mentioned, could you just briefly detail what that was related to and what steps you’re taking to address it?

Greg Cox

The $125 million cash reduction will start to take place immediately, and we expect the full benefit to be over the next six to nine months.

Joe DePinto

As far as the vacancies, vacant territories historically have not performed as well as the stable territories. And greater turnover in the field base than expected in the third quarter. We hire great people here at Dendreon. They’re experienced and in demand in the market. And we train them well. We have put programs in place for retention, and looking at other ways that we can continue to focus on keeping our best people in the organization.

Again, we are focused on really improving our efforts in our large customers and the realignment will allow us to have precise and focused execution at our top customers and we believe that will help to continue the trend that we’ve seen so far in October in enrollments to move forward here as we end the year.

John Johnson

I think just to add to that, what we saw was if a sales rep had been in the territory for the entire quarter and in fact had been hired and trained prior to the second quarter, we saw those territories that we defined as stable actually grew this quarter, 15% versus the quarter before. So obviously the work that Joe is doing is very important. We continue to hire great people, and we’re looking to address the retention issues that we have faced.


Our next question comes from the line of Cory Kasimov of JPMorgan. Your line is now open.

Cory Kasimov - JPMorgan

I’m wondering if you can give us any more detail on the strong performance in October. I guess maybe some more granularity relative to prior months, and whether maybe that uptick sort of corresponded to the restructuring and refocus of the sales force?

John Johnson

Regarding our internal trends here as we enter the October and early November, we’re pleased to see these enrollment trends, and they’re strong. They’re strong across all our key market segments, but specifically when we look at these trends, we believe if it follows the current pattern that we’ll see those results in Q4 infusions as well as some in Q1.

Again, this really speaks to the fact that we grew our number of large accounts this quarter as well, in the third quarter. What we’re seeing is a focus on our top customers. We want to make sure we have a laser focus, and we have the ability to build depth and breadth in our key customer space.

The other component here is we have a strong marketing campaign, both in unbranded and a branded campaign. Unbranded, talking about the benefits of immunotherapy and the branded campaign talking about the benefits of PROVENGE. And you parallel that with the strong direct-to-consumer advertising campaign. We believe that will help us to continue to move forward.

From a realignment standpoint, we believe that realignment helps us to continue to have that focus on those top customers. We’ve also added hospital representatives in the quarter, which will allow us to call on our key academic centers, which we haven’t had in the past. So we’re really taking efforts to show we’re comprehensive in our approach, we’re enthusiastic about the trend, and we’ll continue to sort of help to accelerate that, hopefully.


Our next question comes from the line of Chris Raymond with Robert Baird. Your line is now open.

Chris Raymond - Robert W. Baird

We’re actually picking up some chatter that American Red Cross collections [unintelligible] have kind of pulled back on their apheresis capabilities for PROVENGE. And I just wondered if you could talk a little about whether that’s a widespread phenomenon. And maybe what steps are you taking to maintain your footing?

Joe DePinto

Our apheresis network has evolved over time, and certainly in the 21 months I’ve been here I’ve seen our apheresis network continue to improve, giving access to more and more patients and cutting down the travel that patients have to take. We continue to partner with all of our apheresis partners across the United States, and we see our apheresis network as much improved since we joined here 21 months ago. We’ll continue to monitor the apheresis network, because it’s an important component of what we do from an operational standpoint, but we believe it’s been improved since the beginnings, as we joined.

Chris Raymond - Robert W. Baird

One last question, just on the converts. You mentioned that you’re exploring a range of options, and I know you’ll get into it more on the Q4 call, but just maybe if you could just walk through a couple of what the options include maybe?

John Johnson

We’re not going to go into depth on those today. Obviously we’re looking at all options. We are well advised, and we’re going to, in the end, make the decision we believe is best for the company. We do want folks to know that it is top of mind. There’s been a lot of time and thought put into this and how we should address it. And we look forward to sharing those thoughts with you in February.


Our next question comes from the line of Geoffrey Porges with Sanford Bernstein. Your line is now open.

Geoffrey Porges - Sanford C. Bernstein

First, could you just clarify the comments on the COGS, because I think you said that because we’ll be in the 30s, is that in dollars, or is it a percentage, when you move forward? And when might that be? Secondly, could you quantify for us the territory vacancies, just approximately the percentage at the start of the quarter and the end of the quarter?

And then lastly, you talked about combinations, but you haven’t discussed any combinations of checkpoint inhibitors with PROVENGE. Is that something that you continue to explore, are are you primarily focused on combinations with other prostate cancer modalities?

John Johnson

On the COGS, that’s in percentages. So we see it in the 30% range to 39% range as we go forward. We’re not going to give a specific timeframe on that. We’re getting better clarity on the regulatory pathway for automation, but we clearly believe that that’s going to decline over time and will continue to become more efficient.

As for the territories, we never give specifics in terms of the territories and the amount that we’ve turned over in any one given quarter or let alone the individual time inside. I think for us we saw it beginning to stabilize in the summer timeframe. And it’s been more stable than it was in the first half of the year.

The challenge this quarter, frankly, was we saw a pretty high turnover in the second quarter. A little bit late first quarter, early second quarter we saw a surge of vacancies. And that carried over by the time we had hired and had those folks trained. And I think the thing that we looked at, as Joe said, we need to do a better job here in retaining these folks, and we have some ideas and programs we’re putting into place.

And beyond that, I think what we’re encouraged by is if we had someone that was stable, that was in the field for that entire period. The fact that those territories were up 15%, we know that we have to get better at this area, and we’re addressing it. And then I’ll turn it over to Mark to talk about the PD1s.

Mark Frohlich

There’s a very strong rationale for combining immunotherapy with checkpoint inhibitors and when I joined Dendreon eight years ago, it was top of mind as a high priority to investigate that. The challenge has been getting access to the checkpoint inhibitors, and we’re finally getting some traction there. And we’re supporting three investigator initiated trials with checkpoint inhibitors, two with [unintelligible] and one with an anti-PD1 inhibitor.

And as you may know, in the Phase I trials of the anti-PD1 inhibitors, or PD1 ligand inhibitor, there hasn’t been evidence of a strong [unintelligible] in prostate cancer. But what we saw in our[neoadjuvant] trial of PROVENGE was up regulation of PD1 on tumor infiltrating lymphocytes.

And so I think there’s an evolving thought that really combining immunotherapy with checkpoints in diseases where they’re not previously showing evidence of response could actually create some responses there through synergy. So that’s definitely an area that we’re very interested in focusing on through our investigator initiated trial program. We’re also investigating other biologic agents, an IDO inhibitor, a cytokine IL7, etc. So I think there’s real promise for synergy there between biologic agents like that.


Our next question comes from the line of Eric Schmidt with Cowen & Company. Your line is now open.

Eric Schmidt - Cowen & Company

John, is there any kind of rough guidance on the new PROVENGE sales run rate that you might need to achieve breakeven given the restructuring announced today?

John Johnson

We’re not going to give any specifics on that. We have spent a good bit of time focused on really what it’s going to take to run this business more efficiently. As I mentioned in some of my earlier remarks, we continue to look for ways to become efficient over time. We think we’ll become even more efficient. We’re not going to put a specific number out there today, but we think we’ve taken a significant step towards that.

Eric Schmidt - Cowen & Company

Maybe for Joe, do you think that given the cuts you’re making on the marketing and sales side you can grow sales? Is that the plan, to have a longer term growth trajectory off the current run rate?

Joe DePinto

Great question. Our priority is to always grow the top line revenue, as a commercial organization. We certainly believe that a more precise focus and integrated approach at our top customer base is really important, across all of our key market segments. So absolutely, the goal is always to grow the top line revenue.

Eric Schmidt - Cowen & Company

And John, any better sense of when we might start to model in EU revenues? I know you’ve been working on a partnership for some time.

John Johnson

We’re not going to give a specific date on that. And we have, and I think there obviously some uncertainty in the market. We were going through the approval process, I think some folks frankly were waiting to see what the PREVAIL data may show, and how that might affect the competitive environment.

So we’re not going to put out a specific date. And I know you would like that for your model. But I will say, when we step back, we feel great, frankly, about the label that we received in Europe. It had the benefit of having more data available at the time when the regulators went through it. Having the quartile data in that really we think the European authorities really gave physicians and patients as well as payers a good idea of where they should use the product, who might receive the most benefit. And as a result, we think that the product is very well-positioned to be launched in Europe, frankly better than it was in the U.S. at the time of PROVENGE U.S. approval.


The next question comes from the line of Jason Kolbert of Maxim. Your line is now open.

Jason Kolbert - Maxim Group

I just wanted to ask you about next generation therapies. Funny, because Inovio just had their conference call. They signed a really significant deal with Roche to start developing a plasma based technology against multiple antigens in prostate cancer. So I’m just wondering is there a next generation PROVENGE coming where we’ll either see the ability to cryopreserve product so that we end up with one apheresis and targeting more than one antigen?

Mark Frohlich

Certainly those are the areas that we’ve been interested in for a long time, and definitely have some thoughts about how we could potentially improve the platform, make it more cost effective. And we’ll certainly keep you apprised as we have announcements to make on that.


Our next question comes from Ying Huang of Barclays. Your line is now open.

Ying Huang - Barclays Capital

I had one question, mainly regarding the COGS and also the automation. Can you give us any details around what type of automation that may be? And if it’s something that you guys are developing from scratch, or is it something which is already out there and you guys are sort of modifying to fit your criteria? Any guidance with that would be very helpful.

Mark Frohlich

We’re moving towards a process which is less manual and more automated, so a closed system where things don’t need to be done in a hood allows you to go to a less strictly classified space, which I think would really reduce, ultimately, the cost of your facilities and the amount of manual labor required to execute a process. So a single operator potentially doing more than one process at a time. So we really anticipate significant cost savings in the long run from that type of approach.

John Johnson

Yeah, and to give you a little further color on that, we’re actually going to be using a machine that’s used for other uses that will be adapted for our use with some disposables. We’re not going to give too much on that for competitive reasons at this point in time, but clearly it shrinks our footprint and allows us to operate more efficiently inside of our manufacturing space. And I think importantly, allows us to flex our demand up and down much faster than we’re able to do with our current process.

Ying Huang - Barclays Capital

And one more follow up to that. When do you think you’ll start seeing the cost savings? Should we expect it to begin in the beginning of next year, or is it something that’s more longer term?

John Johnson

It will be a little bit further out than next year, but we’re not going to give a specific time until we get a little bit more clarity on the regulatory pathway.


Our next question comes from the line of Mara Goldstein of Cantor Fitzgerald. Your line is now open.

Mara Goldstein - Cantor Fitzgerald

I just wanted to maybe go at the COGS question a different way. I understand that you’re not going to comment on what your anticipation is around sort of revenue run rate, but if we go back to prior guidance that suggested that a 50% margin was achievable at $100 million run rate, and now we’re speaking to a 30% gross margin, is that independent of what that run rate is, and so is that all cost reduction factoring into that 20 percentage point differential?

Greg Cox

To affirm your question, I think what you’re trying to do is walk from the 50% to the 30% with automation. So it is a combination of automation as well as efficiencies to the plant to get into the 30s, down from the 50s.

Mara Goldstein - Cantor Fitzgerald

So there is no change in terms of, speaking to sort of a revenue run rate issue as it affects the COGS on that basis? The gross margin, excuse me.

Greg Cox

I see where you’re going. We haven’t specifically guided to the revenue that that would be. It’s based upon internal projections and right now we’re not going to share that data.

John Johnson

And that’s one of the reasons why we said the 30s, and didn’t give up that more specific. I mean, obviously we could get more specific if we pinpointed the revenue. We’re not going to guide the revenue. But without question, our absolute cost per unit is going to go down as we enter automation, assuming it’s approved.

Mara Goldstein - Cantor Fitzgerald

And if I could just ask one more question, in the discussion around historical enrollment rates and whatnot, given that the sales trend has been sort of bounced around and whatnot, is there something that we could consider sort of benchmark from a historical rate? Is it, you know, one infusion for every 10 enrollments? And how might that translate also into the hit rate on the DTC going from inbound call to actual infusion?

Joe DePinto

When we look at our process, enrollment is a good predictor of future infusions. That’s how we look at it. So the fact that the October enrollments were the highest of the year is a big thing for us. It’s an early indicator. As long as we progress through the quarter, that things follow through the way they typically do with our process.

As far as DTC and indicators, we track a variety of metrics that were early indicators, and then we have some lagging indicators. And our lagging indicators are registrations that turn to actual patients being infused. And as we have stated in the past, the early indicators were positive, we’re really happy the traffic to the website. We’re able to track how efficient we are being, as John has stated several times, on the different networks by people who register with us, because they have the unique identifier number that they call.

So we’re really being precise in how efficient we can manage the DTC. And the lagging indicators of patients getting to infusions are starting to come in as we’ve been on the air since March. And what we’re learning is not only are they coming in that these patients are able to go from our registration, from enrollment to first infusion, quicker because they’re highly motivated patients.

John Johnson

And to your question, we’ve never given a specific conversion rate from enrollment to infusion. But I will say that a majority of those patients progress from enrollment to infusion.


And we have time for one more question. Our next question will come from the line of Michael Yee with RBC Capital Markets. Your line is now open.

Michael Yee - RBC Capital Markets

First, going back to the stronger enrollment trends you’ve seen so far and how you think this will benefit this Q and next Q, does that mean you expect sales to grow meaningfully sequentially in Q4? Because previously I think Q4 has been the highest Q of the year. So do you expect this trend to continue this year?

John Johnson

We’re not going to give specific guidance. What we have said in our remarks is that if these historical conversion rates hold, it should not only benefit this quarter, but in fact should benefit the first quarter of next year.

Michael Yee - RBC Capital Markets

Then maybe one last one. Regarding the debt due in 2016, do you have any strategic alternatives or creative plans to refinance this?

John Johnson

As we’ve said relative to converts, we’re looking at all of our options. We feel that we’re well advised. We have given this a lot of thought. It is top of mind, and we look forward to discussing more with you guys in February.

With that, I just want to say thank you to all of you for joining us today, and thanks to the employees at Dendreon who work so hard each and every day to bring PROVENGE to patients, not only here in the States, but now as we expand into Europe. So thanks to them and thanks to you for joining us today. Have a great day.

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