Wednesday afternoon, Dendreon Corporation (NASDAQ:DNDN) got the "all clear" from Medicare for coverage of its breakthrough cancer treatment, Provenge. The agency's decision memo is technically a "proposed draft", subject to a 30 day comment period and possible revision before a "final determination" on or before June 30, 2011. But for all intents and purposes, the language and supporting reasoning of the memo make clear that coverage by Medicare for Provenge is going to happen.
For Dendreon this is huge. Shares traded into the 50's immediately after FDA approval of Provenge in April 2010. They then drifted into the 40's after the initial spike, and were knocked as low as the 24's after-hours on June 30, 2010 when Medicare announced that it was going to conduct a review of coverage. This price action was certainly understandable, since most men who suffer from the labeled indication for Provenge--late stage metastatic prostate cancer--are in the Medicare population. The treatment is expensive, at $93,000 for a full course of therapy. If Medicare had decided not to cover it, it would likely have been devastating to the company.
Now it's clear sailing.
Many had speculated that the review was a result of Provenge's pricing--in spite of the prohibition in the FDA Act that pricing be a factor in coverage determinations. There was a veritable media frenzy questioning whether "Four extra months of life is worth $93,000". As I have written before, this frenzy is totally misguided. The four month survival advantage conferred by Provenge is the MEDIAN advantage, not the AVERAGE advantage. In short, while half the men got less than an extra 4 months, half got more and many much more--living extra years longer than predicted without treatment. A much more telling statistic is that Provenge enabled treated men to improve the three year survival rate by a whopping 40%.
In any event, Medicare has taken note of public comments--and heard from all the biggest hitters in cancer treatment (American Society of Clinical Oncology, National Comprehensive Cancer Network, American Medical Association, etc.) that Provenge is a fantastic breakthrough treatment and deserves coverage. Medicare held an expert panel that recommended coverage, it commissioned its own Technology Assessment that also recommended coverage, and now the health insurer has issued its draft decision memo granting coverage.
Dendreon has been constrained recently in meeting the massive demand for Provenge, filling orders out of its New Jersey plant that is just 25% completed. Just this past month the FDA approved the completion of that plant. Two additional plants are completed--one in Atlanta and one in Los Angeles--and once approved by the FDA at midyear, the plants will increase capacity tenfold. Management has guided that maximum capacity of the three plants will allow production of up to $2.5 billion worth of Provenge. Guidance for revenues for the year is between $350 and 400 million, with half that coming in the 4th quarter as the three plants are brought online in a staged fashion.
JP Morgan recently reiterated Dendreon as its top Biotech pick for 2011, with a price target of $66.
The removal of the Medicare coverage overhang should allow Dendreon shares to begin a steady climb to new highs as management demonstrates its ability to execute on the promise of Provenge.
Dendreon owns 100% rights to the treatment and the immune system-training technology behind it (a trial begins this year in advanced bladder cancer). The company has also announced its intention to seek European approval for Provenge by the end of 2011 or the beginning of 2012 and has plans to build an additional plant in Germany. The European market for Provenge is predicted to match or exceed that in the U.S.
For Dendreon it's onward and upward.
Disclosure: I am long DNDN.