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Dendreon Corporation (NASDAQ:DNDN)

Q4 2013 Earnings Conference Call

March 03, 2014, 09:00 AM ET

Executives

Lindsay Rocco - IR

John H. Johnson - Chairman, President and CEO

Gregory R. Cox - Interim CFO

Silvio Pacheco - Chief Customer Officer

Bill Jenkinson - Chief Marketing Officer

Andrew S. Sandler - EVP, Chief Medical Officer

Analysts

Andrew Goldsmith - Canaccord Genuity

Lee Kalowski - Crédit Suisse

Matthew Lowe - JPMorgan

Geoffrey Porges - Sanford C. Bernstein

Mara Goldstein - Cantor Fitzgerald

Wes Nurss - ISI Group

Difei Yang - R. F. Lafferty & Co.

Michael Yee - RBC Capital Markets

Ying Huang - Barclays Capital

Arlinda Lee - CRT Capital Group

Operator

Good morning, ladies and gentlemen, and welcome to Dendreon's Fourth Quarter and Year End 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow 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, Lindsay Rocco. Please go ahead.

Lindsay Rocco

Thank you, and good morning, everyone. We are pleased that you could join us today for Dendreon's fourth quarter and year end 2013 conference call. With me are John Johnson, Chairman, President, and Chief Executive Officer; Greg Cox; Interim Chief Financial Officer; Silvio Pacheco, Chief Customer Officer; Bill Jenkinson, Chief Marketing Officer; and Andy Sandler, 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. 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 fourth quarter 2013 earnings release, which has been furnished on Form 8-K.

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

John H. Johnson

Thank you, Lindsay, and thank you for joining us today. We will begin today's call with a review of our fourth quarter results. Adjusted net product revenue for the quarter was $74.8 million compared to net product revenue of $68 million for the third quarter of 2013. We continued to see a stabilization of our business and the fourth quarter was the first time that we have seen greater than 10% growth quarter-over-quarter since competition launched in our space.

In terms of the first quarter, enrollment trends are consistent with what we saw in the first quarter of 2013. As we look ahead, we expect our Q1 2014 revenues to be consistent with our Q1 2013 results. This will make Q1 the first quarter since the introduction of competition where we see revenues to be stable or growing as compared to the prior year. As you know, it is not unusual for Q1 to be slightly behind Q4 due to seasonality, but we believe that our expectations for Q1 demonstrate an overall stabilization of our business.

To continue to maximize the PROVENGE opportunity and improve the top line, we have recently put into place a new commercial model that is gaining traction. We have also identified additional important efforts to improve commercial effectiveness. First, we have a newly appointed commercial leadership team committed to working closely together to ensure the commercial organization operates seamlessly and efficiently.

Silvio Pacheco has been appointed to Chief Customer Officer. He will focus on creating and maintaining our invaluable relationships with our customers and has all customer-facing organizations reporting directly to him. Bill Jenkinson will serve as our Chief Marketing Officer and will be responsible for Dendreon's marketing efforts and strategy for PROVENGE.

By creating two commercial leadership positions, Silvio and Bill, who have both made significant contributions to Dendreon and our business over the last 18 months, will work closely together to focus on the key aspects of our business and will help push us forward to grow our sales trajectory as we proceed on our path towards profitability. Both Silvio and Bill will discuss our key commercial initiatives later in the call.

I'm also pleased to share that we have appointed a new Chief Medical Officer during the first quarter, Andy Sandler, who will provide a clinical update later on during this call. Andy is a board-certified medical oncologist with nearly 25 years of experience within the healthcare industry and oncology setting. He previously served as our Senior Vice President Global, Clinical, and Medical Affairs and has been with Dendreon since 2010.

This morning, we made an exciting announcement regarding our plans to make PROVENGE commercially available in Europe. This marks a major milestone for Dendreon. Both urology and oncology key opinion leaders have expressed the desire to bring PROVENGE to Europe. Based upon our interactions with many European physicians, it is evident that there is pre-market demand for PROVENGE and that they want to be able to offer the product to their advanced prostate cancer patients.

We are pleased to be able to make PROVENGE available to patients within the approved label in this important market. As the first and only personalized immunotherapy approved for the treatment of metastatic castrate-resistant prostate cancer in Europe, PROVENGE provides a new therapeutic option for advanced prostate cancer patients providing a different mechanism of action than existing therapies.

We have a commercially favorable label in Europe which includes PSA quartile analysis and positive correlation between immune response and overall survival. These data will allow for early positioning and strong messaging for our reimbursement dossiers. We are taking a very cost-effective approach to how we will make PROVENGE commercially available in Europe and have determined that the best way to do that is through a two-step process.

The first step is making PROVENGE available to physicians and patients through Centers of Excellence using our Contract Manufacturing Organization PharmaCell beginning with Germany and the United Kingdom. Centers of Excellence are institutions where a high volume of prostate cancer patients are treated by leading prostate cancer experts. These centers will be located in larger cities which will allow for convenient patient access.

In some cases, a Center of Excellence maybe a co-op group of institutions. This approach will help physicians become familiar with PROVENGE, which is important given that we did not conduct our pivotal trials in Europe. We are also working with the Health Technology Assessment Committee to provide necessary information to support reimbursement in Europe.

The second step is to expand further in Europe once automation is approved. We are preparing for our discussions with European regulatory authorities regarding automation, which will occur in the near future. Automation will not only play a key role in our ability to expand in Europe, but it is also an important strategic driver going forward to help us lower our COGS in the U.S.

We recently held a constructive meeting with the FDA regarding the automation of the PROVENGE manufacturing process, and the agency expressed its support for this effort. Dendreon is a pioneer in this area, and the company is working closely with the FDA. The agency recognizes the importance in the long-term for not only Dendreon but other companies to automate this kind of a process for a more consistent and cost-effective product.

Automation will allow for a very small manufacturing footprint enabling us to move into a given market quickly and efficiently, which will be key to making the product more broadly available in Europe and other world markets. We have transitions on the automation prototype model which was used for feasibility studies to an alpha model, which will be used to generate data for our submission to the FDA. The alpha model will, for all essential purposes, become the commercial instrument once the software package is finalized.

We are moving with a laser like focus on this project. We are confident that automation will help unlock value for our shareholders in the years ahead. Beyond that, we continue to explore additional strategies for incremental improvement in process without compromising quality. Following the implementation of automation, we believe that we can reach COGS in the 30s on a percentage basis given our internally forecasted revenues.

As we have discussed, accelerating the path of profitability has been a top priority for Dendreon. We began to implement our restructuring and cost reduction plan in November to help Dendreon succeed as a leaner, more nimble biotechnology company focused in immuno-oncology. We are continuing to make progress and are already seeing net benefits begin to be realized in Q1 of 2014. We will provide an update on our next earnings call. We are focused on becoming cash flow breakeven as soon as possible.

On our third quarter call, we indicated that we would provide an update regarding our convertible debt. Over the last quarter, we have spent considerable time exploring our options with our advisors and have made significant progress in our thinking. As you would expect, we are not going to provide details at this point in time except to say that addressing our convertible debt remains a top priority and we are well advised.

We have cash, cash equivalents, and short and long-term investments at December 31, 2013 of approximately $199.4 million. Our restructuring plan is enabling us to slow our cash burn and be better positioned to achieve profitability while continuing to make strategic investments and initiatives that we believe will create value for our shareholders, physicians, and patients. Our goal remains to get our cash flows and balance sheet aligned.

With that, I'll turn the call over to Silvio to discuss our commercial efforts.

Silvio Pacheco

Thanks, John. I'm pleased to be in this new role as Chief Customer Officer having previously served as the Vice President of our strategic customer group. I'll review our key commercial highlights and then Bill will discuss some of our new commercial strategies.

During the quarter, we added 31 net new accounts. In terms of customer composition, community clinics accounted for 72% of total sales. Within the community setting, oncology accounted for 40% of our total business for the quarter and urology accounted for 32%. Academic accounted for 18% of total sales.

Our fourth quarter results were driven by strong growth in our oncology accounts as well as improvements in urology and academic accounts. On a quarter-over-quarter comparison, community oncology grew 19%, community urology grew 2%, and academic grew 5%.

Our new commercial model focuses on targeted accounts, which also includes large accounts as well as those that we are aspiring to grow in this same class. As a reminder, we define a large account as having an annual run rate of more than $1 million in sales.

We continue to experience growth in our large accounts and ended the quarter with 100 large accounts, almost double the number we had in the first quarter of last year. Our goal in adopting an account-based model is to drive depth and penetration in those accounts that have historically prescribed PROVENGE. Targeted accounts represent approximately 84% of our business via this new model. By focusing on these accounts, we can improve top line sales through incremental growth.

This strategy is also more efficient in managing costs and resources. Additionally, this focus will help patients by improving their PROVENGE experience. This new commercial model allows our sales force to focus on our top tier customers in all of our key market segments and execute more effectively. As a testament to our increased efficiency, we were able to deliver our solid Q4 results with approximately 30% fewer sales people in the field as compared to our peak.

With that, I will turn the call over to Bill.

Bill Jenkinson

Thanks, Silvio. I have been with Dendreon since 2012 in the marketing leadership position, and I'm pleased to now serve as Chief Marketing Officer. As you know, PROVENGE is a personalized immunotherapy and a first product of its kind. As we have learned, with a unique therapy comes unique commercial challenges. To be more successful with our patients throughout their therapy, we found a common theme amongst our top customers and that in all of our successful accounts we have multiple stakeholder champions.

First, we have a clinical champion defined as a physician who understands the role immunotherapy plays, understands what to expect from PROVENGE and has a thorough understanding of the PROVENGE efficacy data. Second, an operational champion is someone who understands and implements a process for PROVENGE and helps to manage patients to and from apheresis for each of their three subsequent infusions.

Finally, an administrative champion is needed to help with reimbursement. This includes assistance with co-pays, knowing what services are available and understanding our contract. Additionally, we have won the physicians who have a solid baseline understanding of immunotherapy and how it differs from traditional therapies, more receptive to our subsequent PROVENGE messages.

With this in mind, we are proud to share that we recently received an award for our disease state education campaign. The campaign focuses on educating healthcare practitioners about the important role the immune system plays in fighting cancer and the unique benefits associated with immunotherapy.

Consistent with our efforts to increase education and awareness, our DTC advertising has been running since March 2013, and the campaign has been effective in helping to differentiate PROVENGE with patients and with caregivers. We will continue to make data-driven decisions about when and how we use DTC moving forward.

In conclusion, I look forward to working with Silvio and the entire management team as we bolster our efforts to improve commercial performance, creating value for our customers and our shareholders alike.

With that, Greg will discuss the financials.

Gregory R. Cox

Thanks, Bill. I will now walk through the financial review of the quarter. Earlier today, we reported our financial results for the fourth quarter of 2013. Net product revenue for the quarter ended December 31, 2013, was $74.8 million compared to $68 million for Q3 2013. Net product revenue for the year ended December 31, 2013, was $283.7 million compared to $325.3 million for 2012.

For the fourth quarter, excluding the antigen impairment of approximately $40 million, we had a cost of goods sold on a pro forma basis of approximately $38 million or 51% of revenue, as compared with the pro forma cost of goods sold of approximately $41 million or 60% of revenue for the third quarter of 2013, which excludes the antigen impairment of approximately $6.8 million.

The majority of the benefit in the fourth quarter was due to the volume of revenue. Therefore, in the first quarter of 2014, we anticipate our cost of goods sold to be approximately 54%.

For the year ended December 31, 2013, we recorded a charge of approximately $46 million related to antigen inventory, which did not meet product specifications. We have insurance coverage for up to $30 million for antigen losses of this type to have filed an insurance claim to seek recovery for these losses. We are awaiting further information and ultimately reimbursement from our insurance carrier.

In addition, we are continuing to investigate remaining loss and are exploring all available options for additional recoverability. We expect our cost to goods sold to decrease in the future with the benefits of automation in the manufacturing process and we'll continue to advance through the regulatory process, as John mentioned. While in the implementation of automation, we believe we can reach the cost of goods sold in the 30s on a percentage basis given our internally forecasted revenues.

Sales, general, and administrative expenses were approximately $47 million this quarter, down from approximately $56 million last quarter, the decrease in SG&A expenses is consistent with the guidance we provided last quarter and was driven primarily by lower costs associated with reduced headcount and lower spending associated with external vendors. Our SG&A expenses for the year ended December 31, 2013, were $233 million, down approximately 27% or $84 million from 2012.

For the year-ended December 31, 2013, research and development expenses were approximately $71 million compared to $75 million for the year-ended December 31, 2012. Research and development expenses for Q4 2013 were approximately $17 million as compared with approximately $18 million from last quarter.

Our non-cash stock compensation expense for the quarter was approximately $2 million which was down from approximately $6 million last quarter, and this was primarily driven by the variables associated with the Black-Scholes model.

For the year-ended December 31, 2013, we had a GAAP loss of $1.95 per share. This includes a one-time antigen write-off of approximately $46 million plus an additional $11 million associated with the restructuring. Excluding these charges and the non-cash charges for the year ended December 31, 2013, we had a pro forma loss of approximately $168 million or $1.11 per share.

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

For the quarter-ended December 31, 2013, we had a GAAP loss of approximately $0.58 per share. This includes the antigen write-off of approximately $40 million and a restructuring adjustment of approximately $8 million. Excluding these charges and the non-cash charges for the quarter-ended December 31, 2013, we had a pro forma loss of approximately $25 million or $0.17 per share.

As I previously discussed, accelerating the path of profitability has been the top priority for Dendreon. We began to implement our restructuring and cost reduction plan in November, and we continue to be on track for the cost reduction previously announced on our Q3 call. In addition, we are already seeing net benefits begin to be realized in Q1 2014.

We have cash, cash equivalents, and short and long-term investments at December 31, 2013, of approximately $199.4 million. For the quarter, the company had a net cash usage of approximately $34 million. This is consistent with our expectations for Q4 and down substantially from our Q3 cash usage of approximately $47 million. In Q1 of 2014, we anticipate our cash burn remain consistent with our Q4 spend when you exclude the $9 million semiannual interest payment.

With that, I will turn the call over to Andy for a clinical update.

Andrew S. Sandler

Thank you, Greg. From a clinical point of view, the rationale for positioning PROVENGE as frontline therapy in metastatic castrate-resistant prostate cancer continues to gain momentum and in fact has never been stronger. As we discussed last quarter, there was an increasing amount of data surrounding PROVENGE coming into the marketplace, including combination data with other agents.

We also see a further understanding and validation of immunotherapy in general accompanied by a broadening base of KOL support. In fact, immunotherapy was center stage at the recent ASCO-GU meeting with an entire section of the general session dedicated to discussing the current role of immunotherapy in the clinic.

Additional data from the Phase III IMPACT study were also presented which demonstrated that treatment with PROVENGE may result in what clinicians categorize as antigen spread, which was found to be associated with improved overall survival. These results are particularly compelling as we further our understanding of immunotherapy and the PROVENGE mechanism of action and may enable identification of post-treatment biomarkers of clinical outcome.

PROVENGE continues to be an important first-line treatment option for patients with asymptomatic or minimally symptomatic metastatic castrate resistant prostate cancer, and we are continuing to see physicians sequencing PROVENGE as initial therapy or in combination with other therapies. Only PROVENGE has the unique combination of a clinically and statistically significant overall survival benefit and a sustained immune response.

PROVENGE has a short duration of therapy with manageable adverse event profile. Early use of PROVENGE ensures patients will receive the only approved agent with an immunologic mechanism of action. The emerging data on cross resistance between hormonal agents demonstrates the importance of appropriately sequencing therapies with different mechanisms of action, emphasizing the need for using immunotherapy first in the treatment algorithm of metastatic castrate-resistant prostate cancer.

We also believe that PROVENGE has the potential clinical benefit to demonstrate synergy with other approved and investigational agents given a strong biologic and clinical rationale. We are continuing to pursue our clinical program to investigate these potential synergies designed to provide physicians data on the safety and efficacy of combining PROVENGE with other agents.

Finally, we are continuing to advance our promising immuno-oncology pipeline. We've continued to enroll patients in a randomized Phase 2 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 targeting the tumor antigen HER-2/NEU.

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

John H. Johnson

Thanks, Andy. As a pioneer in immunotherapy, we continue to believe that PROVENGE has upside potential, particularly given new data released on sequencing and combination studies. We are excited to make PROVENGE commercially available to patients in Europe and KOLs share our enthusiasm.

We believe the long-term potential for PROVENGE and for Dendreon remains significant and are confident that with the successful execution of our plan, we can create value for shareholders, physicians, and especially our patients.

Before we take your questions, on behalf of the Board of Directors and the executive committee, I want to extend our sincerest thanks to our employees who demonstrated the power of true team work during the difficult weather conditions this winter. Our employees remain determined to ensure that patients receive their treatment, and I am proud to be part of a company that truly puts patients first.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Salveen Richter with Canaccord. Your line is open.

Andrew Goldsmith - Canaccord Genuity

Good morning. This is Andrew on the line for Salveen. Thanks for taking my question. I just had a couple on Europe. Do you plan on enrolling patients in Q1? And then what's the timeframe that you see automation playing out there?

John H. Johnson

Thanks, Andrew. We would see our first patient coming on PROVENGE sometime early in the fourth quarter. As you can imagine establishing the logistics around PROVENGE, moving to the commercial manufacturing from the clinical and finalizing reimbursement will take a little bit of time, but we would anticipate that in Q4 of this year. And as it relates for a timeline on automation, I'll refrain on providing a specific time until post our meeting with the regulatory authorities and we'll be happy to share light as that becomes more apparent to us.

Andrew Goldsmith - Canaccord Genuity

Great, thanks. A quick follow-up, are you still looking for a commercial partner here to move out the Centers of Excellence or is this kind of your strategy going forward to just focus on these large centers?

John H. Johnson

At this time, we're going to go it alone. We evaluated partnerships and we did not find a deal that we felt was in our shareholders' best interest. With a contract manufacturer and as you know with historically lower prices in Europe and the U.S., it was difficult to find the partnership that we believe created value for our shareholders in this long-term important strategic market. Therefore, we've decided to go it alone. As we get automation and expand our footprint across Europe and the rest of the world, we'll certainly be open to future partnerships but given the KOL interest and the feedback we've had and the strength of our label in Europe, we believe we can go it alone with minimal commercial investment.

Andrew Goldsmith - Canaccord Genuity

Okay, thanks. I'll get back in the queue.

Operator

Our next question comes from Lee Kalowski with Crédit Suisse. Your line is open.

Lee Kalowski - Crédit Suisse

Great, thanks. I have a couple of questions here. So, my first question is on net sales expectations for Q1. So you're saying it will be consistent with what we saw here in Q4 and that it's a sign that the business is finally stabilizing after entry of competition. I'm wondering if there are any trends you're seeing yet or if it's too early that the stabilization can continue through a potential second product launch in the pre-chemo space, potentially Q3, Q4 potentially this year?

John H. Johnson

Thanks for the question, Lee, and just for clarity we expect our Q1 revenues to be consistent with last year's Q1 revenues, and that is the first time since we've seen competition come into this space, but we have seen this stabilization on a year-over-year basis, so we feel good about that. As it relates to further launches in this space, we're not going to comment on any yearly guidance right now. I will say that the recent meeting at ASCO-GU, there was a lot of discussion about the need to have more than one product especially as it relates to different mechanisms of action available and to be used with patients, and that strength from a podium was as strong as we've ever seen. I don't know, Andy, if you want to comment a little bit about what we saw at ASCO-GU?

Andrew S. Sandler

Yes. ASCO-GU was a very strong Congress for us. We were able to absolutely recapitulate and discuss some additional information and data on our proceed registry from analysis on elderly patients to the effects of prior abiraterol and enzalutamide to prior radiation on product parameters. In addition, there was an analysis on the impact data that looked at antigen spread with subQ resulting in humoral antigen spread that it was associated with improvement in overall survival in the impact data versus control. And then of course, our new app study, which was an updated analysis looking at tumor specimens with HER-2/NEU expression being consistent at 75%, which has been a really great thing for that study. So it's a really exciting study and I think as John alluded to, the podium presentation regarding immunotherapy in general was really very powerful and probably the highlight of ASCO-GU.

John H. Johnson

I think the fact, Lee, is that none of these therapies are a cure. And I think what w’v heard and continue to hear from our KOLs is that patients should benefit from using all the different mechanisms of action, and the message on using an immunotherapy earlier in the treatment sequence really appears to be getting traction, so from that strongpoint we would see less of a potential impact than one might have expected prior to the shift in KOL thinking.

Lee Kalowski - Crédit Suisse

Okay, that's helpful. Thanks. And may I ask in Europe just real quick, can you give us some sense for what the European product awareness is for PROVENGE? And is there any chance that there's a perception based on what we've seen in the U.S. that this perception in Europe that PROVENGE is a very high priced product that might be difficult to get a reasonable reimbursement on?

John H. Johnson

Yes, I'd say a couple of things to that. First and foremost, I would say keep in mind in our label we have the quartile analysis described there, which in patients with PSA of less than 22 saw median overall survival benefit of 13 months compared to control, and that's significant. I think what you're likely to see there is that the reimbursement authorities are going to position PROVENGE earlier, which we think is the perfect place for the product and certainly where physicians have told us, and that's what has shaped our thinking. So, from a reimbursement standpoint I would say that our discussions thus far I would characterize them as extremely positive. I think the label really helps inform where the most important patient benefits lie, and I think that will help direct reimbursement. As far as awareness goes, there is awareness with both physicians and patients in Europe and clearly in the KOL community and that's really what drove our decision here was the feedback we received from them and them wanting it available prior to automation, whether we have a partner or not. And so, we think we're going to be able in a very cost effective manner make the product available, and let's keep in mind, as I said in my script, we did not have any clinicians in Europe in our Phase III pivotal trial, so the KOLs will now begin to get experience which will then drive further awareness before we go into the second phase of the launch in Europe which is a broader scale availability following the approval of automation, which also financially from a cost of goods standpoint makes it much more efficient and profitable for us in those markets.

Lee Kalowski - Crédit Suisse

Got it, okay. Thank you.

Operator

Our next question comes from Cory Kasimov with JPMorgan. Your line is open.

Matthew Lowe - JPMorgan

Hi. Actually, it's Matt Lowe in for Cory today. Thanks for taking my questions. Just a couple, I guess the first one is just on automation. Is there any additional color you can provide on what parts of that process specifically would handle? Any more detail on the technology or machinery that you're using and how it's being modified to fit the process? And then just secondly on the DTC plans going forward, anything else you can give us there, maybe in terms of spend on those kinds of programs in 2014? Thank you.

John H. Johnson

Sure. Thanks, Matt, I appreciate the question. So on automation, we won't unveil for competitive reasons at this point exactly the machinery that we're using, but as I said in my script, we essentially now have the machinery that will be used once we get FDA approval all that will change is the software. And so, at this point we feel good about the progress we've had there. I think the FDA certainly sees the benefits of standardizing this process and removing the potential for human error, and obviously from an efficiency standpoint, it's much more efficient for us not only in the U.S. but I would also say around the world. As it relates to DTC, I'll start with a comment and certainly Bill can answer and provide some more color, but from a spend standpoint, when we're running it, we're probably running at about $1.5 million run rate on a given month. But keep in mind we don't run it all the time. We use our pulsing strategy which has proved to be pretty effective and efficient for us, and the results we've seen so far have been pretty good. Bill, I don't know if you'd like to provide any color on that.

Bill Jenkinson

Sure. As you guys know, we're approaching the one-year mark of running our DTC advertising and we plan to conduct a thorough analysis and do an assessment of DTC in the not-too-distant-future. So when we assessed the campaign. And as we already said, we're going to make data-driven decisions going forward. I just want to remind everybody that to-date, our DTC campaign has achieved our expectations, including raising awareness and driving registrations. But most importantly, it's also driven verified patient enrollment and actual infusions. So we're going to continue to monitor and assess our ROI and we can dial this campaign up or down as needed.

John H. Johnson

I would add to that. If you look at – our focus is now really on the series of targeted accounts and large accounts. That's the model we're focused on and we've got away from the reach and frequency model. And despite that we still saw significant new number of accounts come in, in the fourth quarter and much of that frankly was driven by DTC where the accounts were coming to us. So it is working. How we use it, when we use it, as Bill said, we'll make data-driven decisions. But it is the first of its kind, in that it's the first oncology product to feature survival benefit. That's allowed us to be cost effective in deploying this strategy and we think it's been good for us and certainly been good for patients as we've increased their awareness and understanding.

Matthew Lowe - JPMorgan

Okay, that's helpful. Thank you.

Operator

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

Geoffrey Porges - Sanford C. Bernstein

Thanks very much. First, could I just ask for a little bit more explanation on the 40 million charge and specifically what went wrong with that material, did it fail internal or FDA specs and should we anticipate further such write-offs in the future? And secondly, could you talk a little bit about what you expect your gross margin to be in Europe given the model that you're going forward with? And then could you talk a little bit more about the community urology segment. We understood that that was going to be a real focus of your efforts and that's one segment where you're not seeing much of an uptick sequentially and wondering if that's hit a plateau now? Thanks.

John H. Johnson

Sure. So let me try to address those, Geoffrey, if I could and I'll ask Greg to join in with me. So, as it relates to the write-offs, this was antigen that had been manufactured and had met our spec, but was stored at a third-party supplier incorrectly. We found the air as we were beginning to manufacturer some product. It didn't meet spec after having met spec before it went there; examined the records and found that it wasn't stored at the temperatures we specified and as a result we had to write that off. We don't expect any more write-offs in this area due to this reason, but it was clearly unfortunate and Greg outlined both the insurance and it will be seeking all other options available to us to recover the antigen and the loss that we experienced here. Now, I'll turn it over to Greg to talk a little bit about margin…

Gregory R. Cox

Yes, so as far as the – and if you have any more questions on the antigen feel free to interrupt, but as far as the gross margin in Europe, we haven't specifically guided to that obviously. It's going to be based upon pricing as established within the countries and volume. And we do have a contract which is specific to our commercial manufacturing which is PharmaCell. So outside of that we have really specifically guided to that. I don't know if John wants to add anything to that or….

John H. Johnson

No. I think that that's fine. And clearly pricing is lower in Europe in general but we think that automation coming in, in the second step of our launch is really what's going to help us make this an attractive market long term for our shareholders. I'll as Silvio to talk a little bit about urology.

Silvio Pacheco

In the urology segment, we are certainly pleased with the growth that we saw in urology in the fourth quarter. And our position is that there remains significant upside for PROVENGE in all of our key segments. With this new commercial model, it would certainly allow us to continue to drive top line results by improving depth and penetration in these top accounts and certainly continue to improve the PROVENGE experience for our patients.

John H. Johnson

I would just add, Geoffrey, that we do see these go up and down a bit and as we look at our enrollment in the first quarter, we've seen urology bounce back. So it's hard to jump on any one given quarter and think it's the trend. That's just a function of the way the patient flows happen within the prostate cancer space at least as it relates to our business.

Geoffrey Porges - Sanford C. Bernstein

Okay. Thanks very much.

Operator

Our next question comes from Mara Goldstein with Cantor Fitzgerald. Your line is open.

Mara Goldstein - Cantor Fitzgerald

Yes. Thanks for taking the questions and I'm going to apologize because I signed on a bit late, but just to go back to the inventory write-off question, I mean it was in your queue about the 40 million, but if I go back to the prior quarter there was an inventory write-down that you thought might be able to be reimbursed under an insurance recoverable and I'm wondering if that procedure is the same for this 40 million write-off? And then on the DTC campaign, just so we understand sort of the concept of dialing up and dialing down, is it possible for you to discuss sort of from a component of overall selling expenditures what percentage of the budget that the DTC campaign has actually been over the past couple of quarters?

Gregory R. Cox

Yes, as far as the inventory write-off, you are correct and third quarter we did take a $6 million write-off. This was the same antigen and we had disclosed that there was potentially some more antigen. After thorough analysis, we did write-off the entire $46 million. Of that we believe we will be reimbursed $30 million from the insurance and outside of that, we're exhausting all our efforts to see how it recovers the additional 16 million.

John H. Johnson

And as it relates to DTC, as we look at it there's a number of ways to dial it up and down. You can go more network, you can do the DRTV buying approach which we have used very effectively and some of that is based upon as well pulsing and what we see in terms of what happens to the hits on our website, what happens to registration and ultimately the patient infusions that we can tie directly back to the advertising. We haven't disclosed what percent of our overall sales and marketing budget it would compose. I would also say that it does fluctuate. It's not always on or off. And do we try some different types of ads as well, what that effect might have on that overall percentage I wouldn't want to speculate on that right now, but it has been a successful program for us and we really do think that it's help encourage a solid dialogue with patients about their prostate cancer with their physicians whether or not they get PROVENGE. From a DTC standpoint and I've been in the business 31 years, I've received more positive comments about this program than any other and frankly haven't had a negative comment from a healthcare practitioner to me about the campaign. It's been seen as nothing but positive for our customers and that's really a credit to Bill and his team and the type of campaign that they've put forward.

Mara Goldstein - Cantor Fitzgerald

Okay. Thank you. I appreciate it.

Operator

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

Wes Nurss - ISI Group

Hi. This is Wes sitting in for Mark. I have three questions. The first is, could you share any detail around the pace and amount of SG&A, R&D and COGS reductions over the next four quarters? Secondly, is it possible to achieve profitability this year and when, if so? And then third question is, has there been any impact on Zytiga and Xtandi into large accounts? And also related to that is how dependant are the large accounts on growth quarter-to-quarter? Thank you.

Gregory R. Cox

So as far as – it's actually Greg, Wes. As far as specific guidance in the next four quarters outside of what we've given in Q3, we haven't updated that but we are on-track to hit that. And just to remind you there was the nine-month spend – we haven't really updated the guidance outside of that, but our nine-month spend through September we indicated we'd take about 125 million off of that. And then we gave specifics on bringing that down on a per SEC kind of reporting SG&A. So outside of that we're on-track. We continue to hit that. As far as achieving profitability, I will say it's a focus now have John interject here where he wants or can. We have levers that we continue to examine. We've taken some strategic steps to, we believe, to move PROVENGE forward. But outside of that we look at those levers on a routine basis to say when and where we'll pull the trigger to become cash flow positive and we're working to do that as fast as we can.

John H. Johnson

I would just add that it's an absolute focus and there's not a day we don't think about that and how we get there, and that is obviously a combination of both revenues as well as overhead. The entire company is very aware of the need for us to become more efficient and it's really put forward a number of ideas. We have made substantial progress. I think the COGS being in the 51% range here in the fourth quarter is an important step towards that. I believe that automation will take us even further following its approval and as well, we continue to become more efficient. I think it's important we recognize that the decisions we've taken haven't been easy. We have removed about two-thirds of the employee base from its peak as well as employees and FTEs and we try to do that as strategic a manner as we can. We continue to get more efficient in commercial as Silvio had mentioned and it is a focus of ours to get the profitability as soon as possible, Wes. So we appreciate the question. I'll ask Bill to comment on your question around Zytiga.

Bill Jenkinson

Sure. So in regards to the competitive question, the competitive landscape remains largely unchanged in the fourth quarter. But both Zytiga and Xtandi have increased their share in the post-chemo setting and we've seen some of that of Xtandi in the pre-chemo setting specifically on oncology. And we continue to see the greatest effect of the competition in the small and low volume accounts across our market segments, but we've not seen significant impact in our large accounts.

Wes Nurss - ISI Group

I really appreciate it. Thank you.

Operator

Our next question comes from Difei Yang with R. F. Lafferty. Your line is open.

Difei Yang - R. F. Lafferty & Co.

Good morning. Thanks for taking my questions. Could you walk us a little bit with regards to reimbursement discussion in Europe and the timeline you think reimbursement might occur in both Germany and UK?

John H. Johnson

Sure. So, as it relates to Germany what will take place is that right before we make the product available we will file our reimbursement dossier and we will provide a discount off our initial launch price while they go through that dossier. As it relates to the UK, we continue to work with all of Health Technology assessment committees across Europe. Within the UK we'll be targeting the cash-pay market first and as we work through nice and the other pieces. So for us we feel like there is a really strong story to be told based upon our label and the data that's inside it. I think you can look for about a 12-month review of the dossier once we file in Germany, but we will launch with a price that we set there.

Difei Yang - R. F. Lafferty & Co.

Thank you. Another question is related to the urology portion of the business, I think I have heard that you think Q4 data in urology space maybe just – it's just 1 data point, hard to draw a trend, but could you give us a little bit color of what you're seeing there and are you expecting to see the growth in the urology space in general just going to be less than what we saw a year ago?

John H. Johnson

I'm not going to comment on the overall year-over-year growth in urology but as I said, we saw urology bounce back in terms of the strength of growth there in enrollments thus far in the first quarter. I think you will see these fluctuations from time to time inside of these accounts for various reasons as well as just patient flows. But there hasn't been any signal certainly that I've seen that says that urology is going to slow down or decline. I mean all the feedback we've received from the customers has been positive and if anything we've heard that the urology community intends to use the product more this year than they have in past years.

Difei Yang - R. F. Lafferty & Co.

Thank you. And one last question is with regards to a combination of uses, did you see that being a trend or do you even see some patients started using Zytiga in combination with PROVENGE, for example?

John H. Johnson

Yes. We see that combinations have really had an upswing since Zytiga and Xtandi came onto the market and we think that certainly with our data that has come out on PROVENGE, abiraterone. We currently have the study with PROVENGE Xtandi. We see more and more combinations and views. And again and I just want to reemphasize that immunotherapy was such an incredible hallmark at ASCO-GU this year and it was said over and over again from some of the big names such as James Gulley and Charles Drake, immunotherapy first, PROVENGE first and then hormonal manipulation thereafter.

Difei Yang - R. F. Lafferty & Co.

Thank you, very helpful.

Operator

Our next question comes from Michael Yee with RBC Capital Markets. Your line is open.

Michael Yee - RBC Capital Markets

Hi. Thanks. A couple of questions. First on Europe, broadly speaking, two important drivers with your price and also margins. So, should we be thinking about typical discounts on oncology pricing in Europe versus USA and looking to have your own oncology drug, is that what you're thinking? And then on the cost part, have you said what you owe PharmaCell and how COGS off of it will defer in Europe for you versus USA? That's my first question.

John H. Johnson

Bill, do you want to take pricing?

Bill Jenkinson

Sure. I'll take the pricing question and then I'll turn it over to Greg on PharmaCell. So as it relates to price I think using some historical markers is probably not a bad way to begin to think about how we might there. I think the exception here, of course, is that given our label delineates the responses five quartile. The reimbursement authorities will be looking at that very closely and I think that will help drive our price as well as where they would like to see the product fused [ph] and whether the product offers the most benefit to the healthcare system. And so that could change favorably for us the pricing dynamic.

Gregory R. Cox

Michael, on your question on the cost for PharmaCell, no we have not disclosed that. We did sign them up. They were originally our clinical manufacturing. We just recently signed up to fund our commercial supply, but again I think as John iterated a couple of questions ago, we do believe that automation is key not only in the U.S. but for a cost effective approach in Europe and as well as worldwide.

Michael Yee - RBC Capital Markets

Okay. So since that's related to the U.S. automation, you mentioned that you'd probably take it down 50% down to 30% COGS given forecast. If you were to maintain sales business where you are now, where do you think the automation could go? In other words, how much of that drop in COGS is related to volume versus actual your automation changes?

John H. Johnson

I don't know that we're going to break out our forecast and what our growth would be as a component of that today. But I will say that the actual benefit of automating the procedure, the footprint required in the overall reduction of expense as it relates to going to a system that is very efficient with automation is significant and it's a significant piece of that.

Michael Yee - RBC Capital Markets

Okay, perfect. Okay. Thank you.

Operator

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

Ying Huang - Barclays Capital

Hi, everyone. Thanks for taking my questions as well. Can you give us I guess a little bit color in terms of the size of the sales force now? And then exactly how much resource are you directing to oncology versus urology community? And then I guess – I hate to beat the dead horse again, but in terms of European pricing I mean if you could share with any color in terms of where you think that price might be in Europe? Is it going to be half, two-thirds of the U.S. pricing, that would be very helpful? Thank you.

Silvio Pacheco

Yes, hi. This is Silvio here, so in terms of the size of the sales force, we won't disclose those numbers for competitive reasons but what we will say is that we continue to focus on our top tier customers irrespective of whatever specialty or segment that they're in. So we're focusing on this new targeted account model that go ahead and drives the key book of business.

John H. Johnson

And then as it relates to the pricing in Europe, we certainly don't see that as being half. I think if you looked at products that are similar to PROVENGE in profile, you might expect something in the 20%, 25% discount range.

Ying Huang - Barclays Capital

Okay. That was very helpful. Thank you.

Operator

We have time for one more question. Our final question comes from Arlinda Lee with CRT. Your line is open.

Arlinda Lee - CRT Capital Group

Hi, guys. Thanks for squeezing me in. I had a couple of questions. One, I know you can't provide further details on the automation but maybe you can give us an idea of the timelines, what are the next steps beyond the software? What timeline as you expecting that software? And also what do you think the next steps are and what are the timelines that we can expect with that? Thanks.

John H. Johnson

I'm sorry, I didn't hear the second piece of it, the second question.

Arlinda Lee - CRT Capital Group

Basically on the timelines of automation and then also on the SG&A is – it looks like it's down 24% from the average of the three quarters. Was wondering if there is any – should we expect any additional efficiencies there?

John H. Johnson

Sure. On the automation timeline because it is obviously subject to regulatory review as well as the fact that we're pioneering here once again at Dendreon, we're not going to provide a specific date. Next steps are for us to continue our dialogue with the FDA, to improve the comparability of the product that's produced in automation vis-à-vis our current manufacturing process. And as we said, the meeting with the FDA was very constructive and certainly they see the advantages to all companies and not only Dendreon going to an automated model here to help remove the potential for human error and provide a more consistent product. I'll now turn it over to Greg on the SG&A section of that.

Gregory R. Cox

Arlinda, on your question on the SG&A so I want to caution, what we guided in Q3 again was on a nine-month burn. So for the nine-month burn, we took a 125 million out. And what we said was approximately 23% of that would come out of SG&A on a go-forward basis. But I do want to iterate kind of what John was saying before. As a business and as we've seen, we continue to look at our expenses on a multi basis and we dial things up and dial things down as we see fit. So it may fluctuate a little bit in there, but again it's probably roughly 22% on a year-over-year basis.

Arlinda Lee - CRT Capital Group

And then maybe I could ask a follow-up. How are you thinking about your tax structure and liquidity given your guidance burn?

Gregory R. Cox

So first of all on the balance sheet, I think we can look at it in two ways. One, we're working effectively and efficiently as possible to become cash flow breakeven. We want to put that plan in place as soon as possible. And second, as John had indicated on the debt, it is front and center in our mind. We spend a lot of time on that and we are well advised. And outside of that I hope you can respect, we're not going to give much color on that.

Arlinda Lee - CRT Capital Group

Okay. Thank you.

John H. Johnson

All right, I want to thank everyone for joining us today. We are truly excited here at Dendreon about bringing PROVENGE here, for making it available for European patients and we're also pleased with the progress that we're making here in our U.S. business. We have seen stabilization. We have seen a significant decrease in our operating costs. We do believe that automation will be a real step forward not only for us here at Dendreon but for the industry as well. I want to thank all of our employees for their dedication in serving our patients, especially in some of the challenges that we've had this winter.

So, thank you. Have a great day. We appreciate you joining us.

Operator

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and have a wonderful day.

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