Highlights of Dendreon's 1Q Conference Call

| About: Dendreon Corporation (DNDN)

Summary and Stock Opinion

Dendreon (NASDAQ:DNDN) reported 1Q results that were in line with guidance and reiterated its full year sales guidance. The 1Q sales of Provenge were exactly in line with my estimate of $28 million. There was nothing on the call that would cause me to change my sales estimates of $60 million in 2Q, $99 million in 3Q and $188 million in 4Q, which would result in 2011 sales of $375 million.

I continue to recommend purchase of the stock. However, there remains some trepidation on the part of more than a few investors that Dendreon can ramp sales in line with the company guidance with which my sales estmates are aligned. Skeptics remain skeptics, and I think that it will take one and perhaps three more quarters of sales meeting guidance before these people become believers.

This note summarizes highlights of the call.

Provenge Sales in 1Q and Yearly Guidance

Dendreon reported a first quarter that was in line with general expectations of the Street. The revenue number in the quarter was $28 million. This equates to $9.3 million of sales per month for the 12 work stations that were operational in the quarter.

In April, as new manufacturing facilities came on in the New Jersey facility, sales increased to $15 million, up from the monthly run rate of $9.3 million in 1Q, 2011.

The company reiterated guidance of full year revenues of $350 to $400 million with half of sales expected in 4Q, 2011.

Infusion Centers: Creating Demand

The number of infusion sites increased from 50 at the end of 4Q, 2010 to 135 at the end of 1Q, 2011. Management stated that it is on track to reach 225 sites at the end of 2Q and 500 by year-end. The expectation is that each infusion site will be treating one to two patients per month at year-end. Assuming a price of $87,000 per patient (allowing for a discount from the $93,000 list), this would translate into a year-end sales run rate of $44 to $88 million per month or $533 to $1.1 billion on an annualized basis.

The company exited the first quarter with 135 infusion sites. This works out to a monthly run rate of $12-24 million per month. Taking the average of $18 million, the quarterly sales rate would be $54 million by this measure which supports my $60 million estimate.

Manufacturing Capacity

The New Jersey manufacturing facility has approval to increase capacity from 12 at the end of 2010 to 36 and the new stations will come on in a staged manner in 2Q, 2011 and following quarters. The company estimates that the average number of workstations in the 2Q will be 24, although the actual number in operation at the end of the quarter will be some number between 24 and 36.

Twelve work stations can support about $9-10 million per month. Thus the average of 24 workstations operational in the 2Q in the New Jersey facility could support $18-20 million per month of sales or $54-60 million in the quarter. This supports my estimate of $60 million in 2Q, 2011.

The action date for the new Los Angeles facility which will add 36 workstations over time is June 30. The action date for the Atlanta facility which will also add 36 workstations over time is August to September.

Patients Treated

The company also said that it is on track to treat 2000 patients with Provenge by the end of July. This translates into total sales of $174 million since introduction. The company sold $48 million in 2010 and $28 million in 1Q, 2011. By deduction this indicates that sales in the four month April to July period could be $98 million or $24.5 million per month in this period. This would suggest that sales might exceed my $60 million estimate for 2Q.

Reimbursement Issues

Reimbursement concerns have been an impediment to sales as providers have been concerned with paying out as much as $87,000-93, 000 before they get reimbursed. The company now expects to receive a product specific Q code from CMS in July. This code allows CMS to pay for Provenge usage electronically so that payment is speeded up. Moreover, confidence in getting paid should increase. This is an important change.

During the quarter, CMS issued a positive draft decision supporting on-label coverage of Provenge. A final national coverage decision from CMS is expected on June 30. This will also increase customer confidence in getting paid.

Europe

The company continues to expect a regulatory filing for Provenge in Europe at the end of 2011 or in early 2012.

Clinical Trials

Dendreon is working with regulatory authorities to plan a worldwide clinical trial of Provenge in metastatic prostate cancer patients who are responsive to hormone therapy. This is an earlier stage of the disease than the current indication in patients who are no longer responsive to hormone therapy. Success would expand the addressable market for Provenge. The clinical trial design will be presented at ASCO in June and the company expects to treat the first patient in Europe in the second half of 2011.

The DN24-02 phase II trial will begin enrollment later this year. This is the second active cellular immunotherapy (ACI) product following on the track of Provenge. Patients with HER2/neu positive bladder, colon and breast cancer will be randomized to DN24-02. The trial will follow patients for overall survival and disease free survival. Details of the trial design will be announced at ASCO in June.

There will be presentations on Provenge this year at AUA, ASCO and other medical and scientific meetings this year. These should give additional insight into the safety efficacy and mechanism of action of Provenge. I think that elucidation of mechanism of action could be very beneficial. Some physicians are cautious on Provenge because there has not been a really clear explanation of why Provenge works especially since it often does not shrink tumors or reduce PSA.

What About Abiraterone?

There has been considerable discussion about how abiraterone and Provenge will interact. Abiraterone was approved April 29th for use in patients who had failed chemotherapy. The drug is priced at $40,000 for an eight-month out of 12-month course of therapy.

Dendreon believes that if abiraterone is approved in the pre-chemotherapy setting in which Provenge is approved that Provenge will remain the standard of care. They believe that Provenge will be given first and then abiraterone will be given at a later period. I agree that Provenge will be used first if the disease is progressing slowly. However, if the disease is rapidly progressing I think that many doctors would go directly to abiraterone.

Dendreon is doing research to determine how long a physician should wait to give abiraterone after initial use of Provenge. Abiraterone is given with prednisone which blunts the effect of Provenge if the two drugs are given too close together. This is a critical question to answer.

Financial

As of March 31, Dendreon had $779 million of cash. As per the subsequent calculations, I estimate that year end cash will be on the order of $509-549 million.

Dendreon is projecting a GAAP loss of $330-370 million this year. This includes about $100 million of non-cash charge related to depreciation and amortization, non-cash imputed interest expense and non-cash deferred stock compensation. Thus the pro forma loss or operational cash burn is expected to be $230-270 million. The latter figure includes $90 million of startup costs in the US and $60 million in Europe, which are one-time non-recurring costs. This means that the US loss from ongoing activities is expected to be $80-120 million in 2011.

The company believes that it can achieve gross margins of 30% on Provenge when the three new manufacturing facilities gain operational efficiency and over time the gross margin can grow to 80%.

Disclosure: I am long DNDN.