Dendreon: Profits Ahead as Provenge Gets Reimbursement Approval From Medicare

| About: Dendreon Corporation (DNDN)

Shares of Dendreon Corporation (NASDAQ:DNDN) have plummeted since its last earnings conference call this past August 3.

Rather than reiterating past guidance of $350-400 million in revenues this year from the launch of Provenge, the landmark breakthrough prostate cancer treatment approved last April by the FDA for late stage prostate cancer, the company reported that Q2 had missed consensus estimates by several millions, that the launch was going more slowly than expected previously, and that it was pulling past guidance in favor of a prediction of "modest" quarter over quarter growth for the remainder of the year. Sales for July were $19 million. It also announced future temporary layoffs would be made to match work force and ramp.

The company explained the slower ramp as a product of a number of factors: The Medicare review that for the past year engendered fear in all involved that Medicare was not going to cover Provenge, slow reimbursement of Provenge owing to its not having yet received a "Q Code" to allow for swift computer processing of claims with Medicare, small practice urologist concerns about carrying the hefty price for Provenge ($93,000 for a one month full course of treatment) on its books while the slowish reimbursement by hand happened, and doctors not quickly prescribing to all eligible patients in its practices while it waited to see how the reimbursement issues would play out.

The company reported that its surveys indicated only 25% of doctors were aware that Medicare had decided to cover and had issued a Q code. The numbers before March reflected constrained production capacity as the FDA just approved the remainder of an additional 75% of capacity at the company's New Jersey plant, and the entirety of an additional plant in Los Angeles.

The company offered a bright side: At the end of July Medicare had in fact issued a final decision to fully cover Provenge on label. It also announced that a Q Code had been issued and that henceforth reimbursement would be streamlined and likely be made within 30 days. 360 infusion centers were online and had either administered or prescribed Provenge and the company was on track to sign up 500 centers by the end of the year. It was already on track to sell at least $200 million in Provenge this year.

To say the least the market was not impressed. In a perfect storm of bad timing, the pulling of guidance coincided with the federal debt crisis and S&P's downgrading of US debt. Afterhours on August 3rd shares traded into the 12s from 35 the day before. The havoc continued into the following week with the shares hitting the low 9s.

Markets don't like uncertainty which is funny since uncertainty is always there as the risks associated with uncertainty are what allow investors to make money and markets sometimes panic and overreact.

In my opinion, the market's reaction to Dendreon's call was a perfect illustration of a panic.

From comfortably expecting $350-400 million for the year, and believing the risk of a miss on that was small, and basing valuations on just that small amount of risk, Dendreon holders in an instant went to tremendous uncertainty: "We are currently selling at an annual rate of only $200 million and only expect gradual (what does that mean?) moderate (what does that mean?) month to month improvement (for how long?)".

No question the sudden announcement with no plan for more certainty or guidance for more certainty, was a botch job. And no question that the punishment was exacerbated by coming in the midst of the "debt crisis" and the S&P downgrade.

Still, I believe the crash to <10 was not and is not justified based upon fundamentals.

Smart investors make money on panics by recognizing them and having the courage to go against them.

Dendreon still has 100% rights to a major cancer breakthrough, which offers the greatest survival benefit EVER in late stage prostate cancer, with almost no side effects and 40% improvement in patients' three year survival rate. It has been selling it, even with no Q code and with slow reimbursement, and with a scare that Medicare might not cover it, at a rate better than $200 million a year (since the company has already said August will top July).

It now has a Q Code and should have 30 day reimbursement. It has continued to sign up infusion centers and by the end of the month will have had 360 actually give or prescribe Provenge. Over 600 centers have been trained and the company is well on its way to having over 500 actually having provided Provenge by year's end (its previously stated goal).

Yes, it needs to up the 0.8 patient per month average at the approved centers, but shouldn't that happen in due course? The 0.8 figure is with a CMS overhang (or just lifted), capacity constraints, and no-Q code. Doesn't it make sense that with 30 day reimbursement the docs who have been shy and have been testing out the system a patient at a time will get comfortable and prescribe as the patients need it? And that more education and more help identifying eligible patients will increase the flow? If only 25% of docs realized that the CMS issue had been resolved doesn't that leave tremendous space for simple education as to that fact to lift revenues?

One can also look at other scenarios to identify the current valuation as a panic. 39% of the revenue stream from Erbitux (<$500 million) got Imclone bought for $6.5 billion. Lilly (NYSE:LLY) paid $2.5 billion for <$400 million in Cialis revenue when it bought Icos. There are many examples to suggest that a takeover, should there be one, would be well above current levels.

The skeptics are of course correct here, no one knows exactly how much Provenge the company is going to succeed in selling. There's the uncertainty. And as I have said, management has done longtime shareholders an unfair disservice by not clarifying.

On that score, I have just had a private communication from Greg Schiffman, the company CFO, indicating that it is in fact feverishly working on solidifying a restructuring plan which will be shortly revealed to the investment community and which will feature a new emphasis on transparency, with frequent metrics to allow assessment of progress of the launch, to counteract the distrust created by the bombshell dropped on August 3.

One who believes Provenge works, and probably even better than the pivotal trial indicated owing to crossover to frozen Provenge (which a Duke University analysis suggests may have conferred its own survival benefit to the "placebo" group), and believes that it will prove a commercial success and sell a billion or more at peak, would be wise to hold through this panic and even to buy more.

Of course time will tell what was the smart move, but for my part I still see profits ahead. The market has grossly overreacted--and that is almost always the time to buy.

Disclosure: I am long DNDN.