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Executives

Katherine Stueland – VP, Corporate Communications and Investor Relations

Mitchell Gold – President and CEO

Greg Schiffman – EVP and CFO

Analysts

Cory Kasimov -- JPMorgan

Michael Yee – RBC Capital Markets

Rachel McMinn – Bank of America

Robyn Karnauskas – Deutsche Bank

Salveen Richter – Collins Stewart

Sapna Srivastava – Goldman Sachs

Eric Schmidt – Cowen

Blake Arnold – Robert W. Baird

Howard Liang – Leerink Swann

Irene Lau – ThinkEquity

Katherine Xu – William Blair

Ren Benjamin – Rodman

David Nierengarten – Wedbush Securities

Ryan Martins – Lazard Capital

David Miller – Biotech Stock

Dendreon Corporation (DNDN) Q3 2011 Earnings Conference Call November 2, 2011 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the Q3 2011 Dendreon 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 on how to participate will be given 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, Katherine Stueland.

Katherine Stueland

Good afternoon, everyone. We’re pleased that you could join us today for our third quarter conference call. Joining me is Dr. Mitchell Gold, President and Chief Executive Officer and Mr. Greg Schiffman, Executive Vice President and Chief Financial Officer.

Before we begin, I’d 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.

I will now turn the call over to Dr. Gold.

Mitchell Gold

Thank you, Katherine. And thank you everyone for joining us today. Over the last quarter we made important progress in laying the foundation for the long-term successful commercialization of PROVENGE. Earlier today we reported our third quarter revenues which were approximately $66 million in gross product sales representing a near 30% increase over the second quarter. We are pleased with these results.

In October we recorded revenues of approximately $26.4 million in gross product sales representing modest month-over-month growth when compared to September’s $25 million. Looking ahead we see our November bookings slightly below our October bookings. As a result we expect to see modest growth in the fourth quarter due to the impact of the Thanksgiving and Christmas holidays in our infusion schedules

As we look at the marketplace we are encouraged by the progress that we are making. We are starting to see an increase in use in neurology community growing from approximately 7% earlier this year to nearly 20% of our current prescriptions today. We are also seeing a similar increase in use in the community setting with the community setting now representing approximately 70% of our business.

Many of the key questions we’ve heard from the investor community are related to the underlying demand for PROVENGE what we are seeing is that sales from old account have continued at a consistent rates this year. In addition new accounts opened for approximately 90 days have become consistent prescribers of PROVENGE. Our long-term goal is increased utilization in all of these accounts. However, it does suggest that once physicians become comfortable with PROVENGE it is becoming an integral part of their practice.

It’s clear that we need to continue to execute against the three pillars as we highlighted for you in August, reimbursement confidence, patient identification and customer service. As far as reimbursement confidence goes there has been a meaningful improvement in the reimbursement landscape for physicians we continue to see the consistent time to payment period reduced on several months to an average now of about only 30 days. This is in part due to the standardization of the National Coverage Decision that was transmitted in mid August and in part due to the activation of the Q-code which accelerates the electronic adjudication of patient claims.

Our field team in constant with our third party partners communicated these reimbursement changes and did so successfully. While awareness of the changes in July was 25% amongst neurologist and oncologist is now approximately 70%. In addition we have made meaningful improvements to the patient assistance process. A recent analysis suggest that up to 74% of patients had no out of pocket costs for PROVENGE and of the remainder of those patients we are supporting other assistance programs to ensure all patients have access to PROVENGE.

So considering our third quarter in October results as well as our early November bookings we believe that the market is gradually becoming more comfortable with its new paradigm and successfully integrating PROVENGE into the practice.

However, as we’ve indicated we continue to expect modest growth for the next several quarters while physicians continue to gain experience in the use and in the confidence in the payment for PROVENGE. In our recent market research we’ve learned that in neurology practices approximately 90% of metastatic CRPC patients are asymptomatic and minimally symptomatic and within the PROVENGE label of diagnosis.

In oncology practices more than 50% of patients are within our label. In addition our research informed that approximately 70% of these men at PSA levels of less than 20 nanograms per ml at diagnosis. Therefore, our message to physicians has been three fold. First, to educate both neurologist and oncologist to screen their castrate resistant patients earlier for metastatic disease. Second, to utilize PROVENGE as a foundation of care for men within the PROVENGE label ahead of other therapies based on the clinical data and the NCCN Guidelines.

And third, to educate neurologist in integrating infusion based buy-and-bill medicines like PROVENGE into their practices. And these messages are resonating. In fact one of the largest neurology group practices in the country has just implemented treatment guidelines to fit in their all patients within the PROVENGE label, the offered PROVENGE as a first line of therapy.

In addition we are about to begin working with several group purchasing organizations or GPOs which will provide us a greater access, reach and frequency to a large group of relevant physicians. An important area of focus for us is customer service which is a critical element when delivering a novel, first line product to patients. During the third quarter we have begun to streamline our scheduling process and have shorten the time for benefit fabrication to schedule request by 21% over Q2.

Our goal is to continue to improve every aspect of our customer experience from prescription through infusion to ensure that is a simple straightforward process for nurses, physicians and patients. So we are making progress and it’s essential for the long-term success to PROVENGE in the market place. The quarterly results and market research that we share today further reinforces the market potential for PROVENGE is significant and there is demand amongst physicians and patients.

It’s up to us to execute and I believe we will. With that I’ll now turn the call over to Greg for a financial update.

Greg Schiffman

Thanks, Mitch. Earlier today we reported our financial results for the third quarter of 2011. Gross product revenue for the quarter ended September 30, 2011 before rebates and chargeback were $65.8 million compared to $51 million for the prior quarter. For the quarter ended September 30, 2011 we had net product revenues of approximately $61 million compared to approximately $20 million for the quarter ended September 2010.

For the quarter we saw approximately $4.3 million of rebates and chargeback associated with either Medicaid patients or other pricing discounts offered pursuant to mandatory federal and state government programs. In addition the company booked approximately $3 million of royalty revenue this quarter related to intellectual property, licensed to Merck and associated with its newly launched product Victrelis for the treatment of hepatitis C.

For the nine months ended September 30, 2011 gross product revenue before rebate and chargebacks was approximately $146 million. Net product revenues for the nine months ended September 30, 2011 were approximately $137 million compared to approximately $23 million for the nine months ended September 30, 2010.

For the nine months ended September 30, 2011, we recorded approximately $9 million associated with rebates and chargebacks which includes aggregate rebates for the first three quarters of 2011 of $1.4 million in the first quarter, $3.3 million in the second quarter, and $4.3 million in the third quarter.

We believe that we now identified the majority of the institutions which infuse PROVENGE and may qualify for rebates and chargebacks. As such we do not anticipate revenue adjustments of this type for prior periods going forward.

Based upon the new claims we are seeing a net to growth revenue adjustments of approximately 6%. Labor and other expenses associated with starting up of our manufacturing operations prior to their approval by the FDA to sell commercial product flow through our SG&A line of startup expenses.

Atlanta, our final manufacturing facility received FDA approval and began commercial operations this quarter. Thus this will be the last quarter that we will be recording startup expenses to SG&A for any of our current operation. We’ve tried to be very transparent in the cost associated with the start up activity as these are not typical for a biotech company. These startup costs are detailed in our quarterly SEC filings. For the quarter we incurred $15 million of startup expenses and for the first nine months ended September 30, we incurred approximately $87 million for the startup expenses.

For the quarter we had a cost of goods sold of approximately $55 million and as a percent of revenue cost of goods sold was approximately 85%. For the nine months ended September 30, 2011 we had a cost of goods sold of approximately $102 million and as a percent of revenue cost of goods sold for the first nine months was 73%. Our cost of goods sold for Q3 consisted of approximately 60% labor or other headcount related expenses, 15% raw material and apheresis costs, and 25% rent, utilities and depreciation.

Excluding the raw material and apheresis costs which are 15% of our cost most of the remaining costs are substantially fixed until we grow into our labor capacity at the facility. Sale, general and administrative expenses were approximately $85 million this quarter compared to approximately $74 million for the same quarter a year ago.

The 2011 expenses included approximately $15 million of manufacturer related startup expenses. And for the nine months ended September 30, 2011 our SG&A expenses were approximately $285 million compared to approximately $150 million for the same period a year ago. Again the 2011 number included $87 million of manufacturing related startup expenses.

The company recorded restructuring in contract termination expenses of $38.5 million. This included restructuring expenses related to the workforce reduction of $19.4 million. The company expects to incur $700,000 of restructuring related expenses in the fourth quarter related to severance and other termination benefits related to employees with retention period. In addition as we disclosed on September 6, in accordance with the terms of the agreement the company terminated their development and supply agreement with GlaxoSmithKline. The company recorded expenses of approximately $19.1 million associated with this contract termination.

Research and development expenses were $20 million compared with approximately $14 million for the same quarter a year ago. R&D expenses for the nine months ended September 30, 2011 were approximately $57 million compared to approximately $64 million for the nine months ended September 30, 2010. For the nine months ended September 2011 expenses were down year-over-year as expenses associated with our manufacturing operation are now classified as costs or startup costs and no longer flow through research and development.

Interest expense for the quarter was approximately $13 million and approximately $34 million for the nine months ended September 30, 2011. This expense is primarily associated with our convertible debt. The convertible notes have embedded features that require us bifurcate the bond into an equity indebt component for accounting purposes.

The company will record interest expense at a rate of 8.1% for GAAP reporting purposes. The actual cash interest paid is 2.78%. This added approximately $21.3 million in non-cash interest expense for 2011. We will report the non-cash component of interest expense is one of the non-cash adjustments we make for GAAP reported financial statements as we think this provides important insight in the company's ongoing financial performance.

On a GAAP basis the net loss for the quarter ended September 30, 2011 was approximately $147 million or $1 per share compared to a net loss of approximately $79 million or $0.56 per share for the same quarter a year ago.

When we look at the business on a pro forma basis excluding non-cash expenses and the restructuring charge the company recorded a non-GAAP loss of approximately $81 million or $0.56 per share. We think that this pro forma reporting is important because it provides insight into how the business is performing on more of a cash basis as we look to move to a cash flow breakeven position.

On a GAAP basis the net loss for the nine months ended September 30, 2011 was $376 million or $2.58 per share compared to $348 million or $2.54 per share for the nine months ended September 30, 2010. On a pro forma basis, excluding non-cash expenses and the restructuring charge, the net loss for the nine months ended September 2011 was $253 million or $1.73 per share compared to $330 million or $2.29 per share for the nine months ended September 30,, 2010.

The net loss for the nine months ended September 30, 2010 includes non-cash charges associated with revaluation of warrant of $143 million or $1.04 per share. The warrants were exercised during the second quarter of 2010 and as such the company will not be recording any further non-cash charges associated with the revaluation of our warrant liability.

We have a strong balance sheet with cash, cash equivalent and short and long term investments at September 30, 2011 of approximately $568 million compared to the December 31, 2010 of approximately $277 million. For the quarter the company had a net cash usage of approximately $106 million. We have taken appropriate actions to curtail cash usage to ensure that we can finance the commercialization of PROVENGE with our cash on hand and we believe that we have the resources to get us to a cash flow breakeven position in the U.S.

I will turn the call back over to Mitch.

Mitchell Gold

Thanks, Greg. Clearly our foremost priority have been and continues to be the successful launch of PROVENGE, but it’s important to take a look at our entire ACI therapeutic platform and its potential to treat other cancers. We’ve begun enrolling patients in our Phase II bladder cancer trial called Neu-ACT. This study is designed to evaluate DN24-02 targeting HER2-neu positive urothelial carcinomas, the most common of which is bladder cancer.

Patients with invasive Her2/neu positive disease will be randomized to DN24-02 or standard of care following surgical removal of the primary tumor. This trial will follow patients for overall and disease free survival. We are also on track to submit our marketing authorization application to the EU regulatory authorities early next year and we are continuing our discussions with potential CMO partners to provide us with the necessary infrastructure to commercial PROVENGE in Europe. We believe the European opportunity is a significant one for us.

But our main focus right now continues to be executing against our plan in the U.S. we are introducing an entirely new treatment paradigm into the medical community and we are making important progress that is foundational for our long-term success. At this time I turn the call back over to the operator and open the phones for Q&A.

Question-and-Answer-Session

Operator

Thank you. (Operator instructions) Our first question comes from Cory Kasimov of JPMorgan.

Cory Kasimov – JPMorgan

Hey, good afternoon guys. Thanks for taking my question. I wanted to ask about this October sales number you gave. And I am really wondering if you have any insight or perspective as to why sales growth decelerated in October relative to what we saw in August and September because it seems like in an unencumbered month with regards to major holidays and with the progress you mentioned insofar as reimbursement bringing new sites online, you think that October would be high, you know, I understand what happens with the major holidays you are going to see in November and December, but what’s the issue with October in your view?

Mitchell Gold

Yeah, that’s a good question, Cory and I think the October number is probably a little bit artificially lower than you would anticipate, and that’s because on the last day of the month we had a significant weather even on the East Coast that didn’t allow us to recover through the remainder month that occurred in the last day of the month. So, the October revenues are $26.4 million some of that got pushed out.

Operator

Thank you. Our next question comes from Michael Yee of RBC Capital Markets.

Michael Yee – RBC Capital Markets

Thanks. A question on seasonality, on November and December, you talked about the holidays and sort of how that could affect revenue, do you think you can still actually grow in November and December from a reported revenue standpoint and do you think that could be flattish for modeling perspectives? And I am thinking about your number of infusions maybe offsetting the number of days, any thoughts there on those trends?

Mitchell Gold

Yes, Mike, as we’ve guided, we anticipate modest growth in the fourth quarter compared to Q3 even with the seasonality that’s occurring in the fourth quarter.

Greg Schiffman

And maybe on that one, I think as we have said previously, we are not expecting that we will have consistent month over month sequential growth, because the holidays are impacting, but we clearly will be growing in the fourth quarter and this is consistent with the expectations we’ve had all year.

Operator

Thank you. Our next question comes from Rachel McMinn of Bank of America.

Rachel McMinn – Bank of America

I have a bizarre question that it kind of feels [ph] with the (inaudible) I guess one, why are you accounting for royalties as part of your net sales, it’s in the press release, it’s really confusing? And then, just what’s the basis of recognizing royalties, is it really a 10% royalty rate that you have on the (inaudible)?

Greg Schiffman

We have a royalty rate on (inaudible) sales, it is not 10%, but it’s consistent with what we booked. It is associated with full sales. And so, some of those are associated with prior quarter where we at that point were still in discussions on the royalty dialogs in the payment plan. And so, it’s a little bit of a catch-up. It will always be reported in the company’s total revenues. And we have a total revenue, we are trying to break out product revenue, be real precise on product revenues, discounts and net revenues associated with sales of PROVENGE, but there is – total revenues will flow through it, it will include.

Operator

Thank you. Our next question comes from Mark Schoenebaum of ISI Group.

Unidentified Analyst

Hi, this is West [ph] sitting in for Mark. Thanks for taking the question. I had a question specifically around where the components of growth occurred in the third quarter, specifically we saw that you had a nice uptick in the number of actively introducing [ph] clinics, but did the growth come from older clinics that have been consistently using PROVENGE before, or did the growth come more from these first time users of PROVENGE? And also, secondly, I had a quick question about the uptick of the Q-code, do you expect moving forward what percent of – actually my question is, what percent of physicians do you expect using the Q-code moving versus the previous code?

Mitchell Gold

Yes, in terms of the Q-code, I think we expect a vast majority of our physicians to utilize as it is the most rapid way to achieve fame. And in terms of where the growth is coming from, as we said in our comments and our script, once the physicians become comfortable with using PROVENGE in the practice, they become consistent prescribers of PROVENGE, but they still want to get to four to six positive occurrences (inaudible) before the 10-Q to ramp that up a bit. So, as we add new accounts, they are going to need, again, that comfort with PROVENGE as they integrate PROVENGE in their practice. And certain of those accounts that have been on for a while, they tend to be consistent prescribers of the product.

Greg Schiffman

And so, if you look at the growth, you really – it’s a – two important aspects. I mean, we’ve seen prescribers, after they prescribe, they get reimbursed, they are represcribing, we see that as a regular trend. And so, it’s very important they are continuing to do that. And on top of that, we have a large number of new accounts that are coming on board. And so, you have both of those that are driving the growth. We are seeing consistency in the phase I as they come on board, a lot of the growth then is happening further beyond that with new accounts coming on. And I think we indicated in the script the long-term goal is greater penetration in these accounts. We think that that could take a few more quarters as they are still getting comfortable with this new reimbursement paradigm.

Operator

Thank you. Our next question comes from Robyn Karnauskas of Deutsche Bank.

Robyn Karnauskas – Deutsche Bank

Hi, guys. I guess a question first on COGS, you mentioned, looking here, it looks to be like COGS went up quarter over quarter and wasn’t just a shifting from an SG&A and R&D line into the COGS. You said that the fixed costs are fixed, I mean help us understand how much flexibility do you have in COGS and if you don’t see a quick enough rebound for PROVENGE next year, do you have any flexibility and why not shutdown one plant to sort of lower the fixed cost?

Greg Schiffman

Sure. As we look at the business, I guess we’ve had this discussion previously, and when we look to the restructuring, we intentionally kept off three facilities up and running. Multiple reasons, one, we get a lot of geographical flexibility. In addition, we do see the opportunity for PROVENGE being one that is going to continue to ramp and the cost associated with shutting a facility down and then bringing that facility back up is very large. It is one of those you would have to have extended period of time where you had no need for that facility at all. And on that basis, as we’ve looked at it, we reduced the headcount appropriately to a level that’s consistent with sort of next year’s revenues that enables to be able to hit that – move towards the cash flow breakeven in our goals and objectives, but also not incur a lot of additional costs on training, hiring and bringing on new employees immediately. And it’s really that trade off of how much do you have associated with severance and individuals leaving versus cost of training and length of time to bring them on board. Shutting down a facility, that becomes a very long number, because you are going to go through an FDA review of your plant. You are going to have to go through the nine months, sort of we did – start-up costs associated with it.

So, that’s why we did not close that facility. It’s one that certainly is a potential if things did materialize like we expect, but I think we are track at this point in time with revenue growth and projections consistent with what we expected when we did the restructuring. And so, we don’t see at this stage any changes to plants we put in place.

Operator

Thank you. Our next question comes from Salveen Richter of Collins Stewart.

Salveen Richter – Collins Stewart

Thanks for taking my question. Can you just give us some clarity on same-store sales, so how uptick trends looked in the urologist versus oncologist offices? And on the September call, you mentioned that utilization in the academic centers was flat, slightly up, how did that look in 3Q?

Mitchell Gold

Yes, I think – well, a couple of things. We are clearly seeing a migration where utilization of the product from the academic setting or the community setting where if you look at the percentage of our business now that’s coming from the community setting, about 70% is coming from community-based physicians. In terms of the academic, accounts are actually staying really consistent. So, we are building our business in the community, but the academic accounts themselves are staying fairly consistent. The urology business, we are very pleased with the progress that we’ve made in the urology marketplace. If you look at from the middle of the year, up and until where we are now, we’ve grown that business from about 70% – excuse me, 7% of our business up to just about 20% of our business. So, we are making good in-roads in getting the urology community educated on PROVENGE and integrating it into their practice.

In terms of same store sales, as I said before, those accounts that have been up and going for a period of time tend to be consistent prescribers of PROVENGE. And commercial teams’ efforts now is going to be the increased utilization within those practices.

Operator

Thank you. Our next question comes from Sapna Srivastava of Goldman Sachs.

Sapna Srivastava – Goldman Sachs

Thank you for taking my question. The first one just is, I still don’t understand why you are costs are so much higher in 3Q over 2Q? Just looking at the trends and looking at what you are talking about fixed costs, could you please explain it to me again as to why you see that big delta over 2Q? And the second question is, why don’t you break out the PROVENGE sales and the royalties, just in the press release?

Greg Schiffman

That’s one that we could look at. From a standpoint of just our P&L as we look at the formatting, we haven't reported thus far royalties. We’ve never broken them out. They weren’t material to our numbers this quarter and so, for revenue line, it’s in there. I think we try to break out the PROVENGE sales and given the detail in the press release where we gave sort of gross sales, we gave the discounts that are associated with those sales. Again, that number is – we can certainly took a look and think through that one. And so, we’ve got thoughts there.

In terms of the COGS, the one that’s probably most important is we had – I think it was $25 million last quarter in start-up expenses that all moved from there up to COGS. These are all – a lot of these are fixed related costs, some of them tied to the facility. Prior to utilization, if you look at the (inaudible) before that facility was approved, all of those COGS flow through star-up expenses. And so, suddenly all your fixed costs start moving up. And so, we’ve had a lot of costs move up. We were still in a growth mode. If you think about the reduction enforced, that only impacted the last month of this quarter. We work, so hiring and recruiting throughout the quarter and so, you had some costs coming in there. And our revenues – although, I think they are growing in line with expectations and growing at a very good rate. It’s certainly, outgrowing at the speed with which the cost we are moving from start-up expenses into the COGS line.

I think as we look now, I had $15 million of start-up this quarter. That will move into COGS, I will see some benefit from the reduction in force. Next quarter, flowing through because it will be in for the full quarter. We are at that stage where there is no more fixed cost that will be growing here at a constant status. And as I’ve indicated, there is about 15% of the total COGS this quarter which is highly variable. And that’s sort of the material (inaudible) cost. The rest of it, we should see tremendous leverage throughout next year and beyond.

Operator

Thank you. Our next question comes from Eric Schmidt of Cowen.

Eric Schmidt – Cowen

Thanks for taking my questions. Greg sort of beat the dead horse, but with these moving parts on COGS in Q4, the start-up costs moving up and the restructuring costs coming out of the quarter, can you give us some directionality on where cost of goods are going, are they going up or down in Q4 relative to Q3?

Greg Schiffman

So, the challenge on that one to give an absolute number becomes a bit of what revenue turns out to be. And as we haven’t given guidance, I can’t give specifics. We certainly guide expense increases in terms of fixed costs moving up. I think the absolute level of COGS will go up slightly next quarter relative to this, because I think COGS moving up are greater on a quarterly basis in the savings, but those are pretty much non-cash fixed base expenses for once that you would incur whether you’d close the plant or not. As a percentage of revenue, expense on the revenue, we end up looking for the quarter.

Operator

Thank you. Our next question comes from Chris Raymond of Robert W. Baird.

Blake Arnold – Robert W. Baird

Yes, hi, this is Blake calling in for Chris. Thanks for taking my question. On prior calls, you guys have downplayed the threat posed by the (inaudible) your PROVENGE; however, in some of our checks, we detected a fair amount of Zytiga used in the pre-chemo setting. With a few more months now of experience [ph] under your belt, could you talk to what your recent experience has been here with regards any competition from Zytiga? And if your views here have changed at all regarding competitive dynamics in this space? Thanks.

Mitchell Gold

Yes, our views really haven’t changed. And it goes to back the comments that I made in the script which is when you speak to the physicians out there today, the benefits of sequencing PROVENGE prior to other therapies is very obvious then. You get it done in one-month’s time, the benefits then stick around for a while and you could put the patients on other regimens, whether that’s Zytiga or other regimens like that.

So, the sequencing message I think is resonating very well both in the urology and in the oncology community. With that being said, you are seeing, I think, Zytiga start to move in our label, what we are really reinforcing is – and a small very percent, I mean small single digits, but we are really reinforcing the sequencing message.

Operator

Thank you. Our next question comes from Howard Liang of Leerink Swann.

Howard Liang – Leerink Swann

Thanks very much. Just regarding (inaudible) I think the fourth quarter will be a, I think, modest quarter over quarter growth. Can you just help what that means? Is what you saw in the third quarter a modest growth? I guess the question is whether the fourth quarter will be more modest as compared to third quarter?

Mitchell Gold

Sure, Howard. That’s a good question. But I think the 30% growth that we saw in the quarter will probably exceed what we would classify as modest growth and we are sticking with our comments here. We made – back during the summer that we expect modest quarter over quarter growth for the remainder of the year. So, as you move from the third quarter and the fourth quarter, we would like to reiterate that you should expect modest growth in the fourth quarter over the third quarter mostly impacted by the seasonality of the Thanksgiving and Christmas Holidays.

Operator

Thank you our next question comes from Marko Kozul of ThinkEquity.

Irene Lau – ThinkEquity

Hi, thanks for taking the question. This is Irene Lau in for Marko Kozul. A follow-up on a question, the scrip trends, can you describe what kind of community urologists are early adopters? Are they large practices or smaller?

Mitchell Gold

Yes, when you go to the urology marketplace, there is a group of physicians that are part of Large Urology Group Practice Association or LUGPA and that’s the primary group, it’s about a 100 large and larger group practices that we are focusing on today. And those are the primary community adopters of PROVENGE in the urology setting today.

Operator

Thank you. Our next question comes from Katherine Xu of William Blair.

Katherine Xu – William Blair

Hi, just curious. So when you look at the Zytiga right now, of course, post chemo setting, I understand the sequencing argument there. But in a couple of years, when it’s – have data in the (inaudible) and as other agents are moving into your setting as well, I am just curious how do you – what is your marketing message and also if you plan to conduct any sequencing or (inaudible) experiments or studies to sort of inform the community how to use the products?

Mitchell Gold

Absolutely. So, first off, let me reiterate that when we communicate with physicians, the message that reiterate to them is PROVENGE is the foundation of care. If you get it done in one month’s time, then you have the consistent benefit of that as we’ve shown in our clinical trials that it improves survival. When we think about other agents getting on –board, there are some challenges with Zytiga, because it requires some common steroid administration and so, we think that’s going to be administered later on. We think about other agents that are coming down the pipe such Medivation 3100 or TAK-700. Those will integrate much more easily in terms of – with PROVENGE because they don’t require some common steroid administration.

Operator

Thank you. Our next question comes from Lucy Lu of Citigroup.

Unidentified Analyst

Hey, this is Brian [ph] calling in for Lucy Lu. Thanks for taking the question. A question on the infusion centers, you previously expected that it would exit 2011 with approximately 500 infusion centers. Now, you add 680. I was wondering what is optimum number for you and do you have the average number of patient per month? Thanks.

Mitchell Gold

Sure. As I said, we will be continuing – our goal for the year was originally to have 500 accounts by the end of 2011 that we are infusing PROVENGE and clearly we are on track to exceed that metric. When we think about next year, we are going to continue that accounts throughout the course of 2012, because the number of physicians that we are going after both in urology and the oncology community. And our goal there, we are seeing very consistent prescribing from physicians once they become comfortable integrating PROVENGE in the practice. Our goal as we move through the fourth quarter and throughout 2012 is to increase the number of patients that are flowing through those practices. I don’t think you’ll see that really occur in the number of patients going through the accounts per month average. And so, you see that rate steady state for all the number of accounts that we are adding on a quarter over quarter basis.

Operator

Thank you. Our next question comes from Ren Benjamin of Rodman.

Ren Benjamin – Rodman

Hi, good afternoon. And thanks for taking the questions. I guess just one, again back to this infusion side, how many – can you give us a sense; I understand they are being consistent, but are they consistently increasing? For example, you are starting to put more patients on per month and if so, how many of the sites are starting to do that? And can you talk a little bit about the target burn rate going forward?

Mitchell Gold

Sure. Two things, Ren. So, if you look at the number, the number we told you that it takes. We just got the entity in the Q-code out to physicians in August. Now, they have strong awareness of it. We told you back in August that it is going to take four to six patients for this to really flow through, for the physicians. They have a significant amount of confidence in the reimbursement. I think we are in the kind of middle of that whole processes and working through this repetitive patient flow through process and it’s really started to gain a significant amount of confidence. Our view hasn’t changed that we expect that this will continue for several quarters. That being said, the interest in the physicians coming on-board to become DSR [ph] ready and to increase (inaudible) or patients is I think very strong. And as we had these new accounts on-board and they get comfortable with this 46 patients once they are done, the commercial team is really going to be focused on driving increased utilization in those accounts.

Greg Schiffman

And I think you had a question on the burn rate, as we look at that going forward, again, burn rate, a lot of that ties to absolute levels of revenue growth. I think we’ve given – this quarter we used about $106 million in cash. We clearly do expect to see continuing revenue growth. And this quarter, I think as we looked at our non-GAAP metrics, we were around $80 million or so in terms of non-GAAP profitability. And we did have growth in accounts receivable, (inaudible) growth, normal working capital as well as inventory purchases that drove a bit of the sort of non-GAAP metric to cash.

I think going forward, we are going to be limiting the inventory growth and inventory next year. I think we had indicated it should be just slightly ahead of what we would burn through our normal COGS process. We will expect to see working capital needs growing next year, but as my revenue grows, I can certainly watch [ph] that cash burn that we are at now, dropping down to continually, progressively lower numbers moving towards eventual cash flow breakeven point where we hit somewhere around $500 million in revenue.

Operator

Thank you. Our next question comes from Lee Kozlowski [ph] of Credit Suisse.

Unidentified Analyst

Great. Thanks. The 10-Q out today says the EU filing will be early 2012; anything that may changed and pushed it more towards the back of the previous range? And the filing as it will initially be done with the contract manufacturing organization, does this mean that anything has been signed and are you thinking about doing it yourself for the longer term?

Mitchell Gold

We’ve always planned on using a contract manufacturing organization. That agreement was signed a while back to facilitate the initial filing of our MAA in Europe. That’s different, let me remind you, than what we are going to look at the for the commercial infrastructure for PROVENGE which would be a larger relationship with the CMO that potentially could build out the necessary infrastructure for us in Europe to support commercialization of PROVENGE.

In terms of the guidance and when we are going to file, we’ve always guided late this year, early part next year regarding – you should anticipate it to happen early part of next year.

Operator

Thank you. Our next question comes from David Nierengarten of Wedbush Securities.

David Nierengarten – Wedbush Securities

Hi, guys, thanks for taking the question. I hate to return back to the cost of goods commentary, but I am little confused as to where you are going to get scale of manufacturing. If you look at the product sales minus SG&A minus your cost of goods and adding back in the start-up costs, as we take up start-up costs too, I am seeing a loss here of $47 million or so the first quarter, $50 million in the second quarter and now $63 million, I mean, where are we going to see improvements here?

Greg Schiffman

Sure. So looking at the COG this year, you do have to take all the start-up costs and actually you want to sort of think of it apples-to-apples, put those into the COGS line, so increasing the COGS numbers that we’ve booked in the prior quarters for those start-up costs which equate to about $90 million this year which I think is consistent with the guidance that we provided at the start of the year what we thought would happen.

Once those costs all have left SG&A and hit your COGS line, they will not be growing. In essence, this year they’ve been flat, it’s just where they’ve been recorded. We’ve expected all along that our COGS would deteriorate throughout the year as these facilities came onboard which have tremendous capability in terms of the volume that they can make and we were always going to be using a very small portion of that capability and as we were growing, we were adding fixed costs faster than we were adding revenue. That will start to shift at the point in time now but all those costs have been loaded in and basically in the fourth quarter with that $50 million, you’ve hit sort of a peak level of expenses.

But one thing that we do have moving in the other direction is the reduction in force and we saw one month of that. But as we look at next year, I think we indicated that about 85% of those costs throughout next year will be essentially flat. The area we expect to see growth throughout the year is in our raw material. There are some slight areas in some of the others, you could see growth, but they are essentially fixed and that’s when you’ll start seeing the real leverage come in. This year is not inconsistent with what we expected. I think the fact that we are running revenues a bit lower than we thought at the start of the year maybe a little larger impact, but we always expected COGS to deteriorate.

Operator

Thank you. Our next question comes from Ryan Martins of Lazard Capital.

Ryan Martins – Lazard Capital

Hi, that’s Lazard Capital. Thanks. You spoke about some of the October bookings moving into November, but you also said that November was slightly below October, I was wondering if you could talk to that?

Mitchell Gold

Yes, this afternoon [ph] when talked about the shift from the significant weather event that we had on the East Coast on the last day of October shifted some of those off in early November. But let me reiterate that the November numbers that we are giving you are not November revenues, it’s just early November bookings. And our infusion schedules for both November and December obviously will be impacted by the holidays that occur during both of those months. With all of that being said, let me make clear that we continue to expect modest growth in the fourth quarter over 3Q. And we are not going to get into details of what that means, but we are confident that we are going to continue to see modest growth in the fourth quarter over our third quarter numbers.

Operator

(Operator instructions) Our next question comes from David Miller of Biotech Stock.

David Miller – Biotech Stock

Question, I am being asked quite a bit over the last month or so about the potential bottleneck for revenues coming from the apheresis side. One of the common questions, which I am sure, you’ve probably heard as well begins with an assertion that there are only two apheresis centers in all of Pennsylvania, for example, can you talk about whether that Pennsylvania number is accurate and whether apheresis centers looks to you like a current or future revenue bottleneck?

Mitchell Gold

Dave, this is Mitchell. Let me just say that we are continuing to add apheresis centers throughout the country, not because it’s impacting our revenue, more related to our servicing issues that we don’t want patients to have to travel very far to get access to apheresis networks. But that being said, we don’t see apheresis as being a rate limiter in terms of how our prescriptions are being written today. We continue to see the later limiters, physicians need to get comfortable that they are going to get paid for the product consistently and if they are going to be able to integrate it into their practice. I don’t think apheresis is a big issue that’s holding us back today.

Operator

Thank you. At this time, I would like to turn the conference back to our presenters for any concluding remarks.

Mitchell Gold

Thank you. I’d like to thank you all for joining us today. We look forward to seeing many of you at upcoming meetings and conferences. Thanks again.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may all now disconnect. Have a nice day.

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