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Dendreon (DNDN), the maker of Provenge for prostate cancer, had some tough news last night. The shares plunged 62% to about $14 last night after hours. Sales were much softer than expected. Provenge sales in the first half of the year totaled $78 million.

The reason? Doctors were not buying as much as expected. For those not familiar with reimbursement, here is an expensive lesson. Unlike pills, which the patient gets from the pharmacy and pays for, biologics that are administered in the physician's office are different. The physician has to buy the drug, keep it in his/her office, and is reimbursed by the insurance company after it is given to the patient. And that is where the problem lies. For the physician, there are two risks:

  • S/he has to spend that much money up front ($93,000) on a drug that then sits on the shelf until used. That money is dead until reimbursed, which can be a month or two. Why take that financial risk?
  • What if the insurance company denies, partially or completely, the claim? The physician then faces financial loss. Once again, why take that financial risk?

That is basically what happened, what Dendreon calls cost density. Not only did Dendreon miss its sales, but it removed the 2011 Provenge forecast of $350 million to $400 million. It now expects "modest" growth in the third and fourth quarters, whatever that means. Just another example of how investing in biotech can be fraught with perils, known and unknown.

Source: Earnings: What Happened to Dendreon?