Dendreon: Following Up On Market Mania

| About: Dendreon Corporation (DNDN)

Back on November 7, 2011, I wrote about Dendreon Corporation (NASDAQ:DNDN) and what I called the "Market Mania" surrounding its "slow" launch of Provenge, the first FDA approved immunotherapy for the treatment of advanced prostate cancer.

In that article I recommended that anyone with cash on hand avail themselves of the insane opportunity to buy shares in Dendreon at prices not only below the prices that prevailed before Provenge was approved by the FDA, but below the share price before the clinical trials for Provenge even succeeded.

On November 7 the shares closed at $6.69.

As I write this, the shares are trading at $14.29, a gain of about 114% in less than three months.

What happened? And more importantly (since no one has a time machine and can go back to November 7 and follow my advice retroactively), is it going to continue happening?

What happened, basically, was a return to the beginnings of sanity. Robust Provenge sales for the fourth quarter (gross sales of $82 Million) signaled that the Provenge launch, labeled a "failure" by those gripped by the mania, was in fact very far from that. When the annual Provenge sales were tabulated--$228 Million--the launch stood as a Top Ten oncology launch in history. Doctors have been prescribing it freely and the ramp of sales has been accelerating. Extrapolating Fourth Quarter sales even with absolutely no growth (totally unlikely) would yield an annual sales rate of $328 Million. Even modest Q over Q growth will soon get Provenge to its management guided cash flow break even point of $500 Million in sales.

Is the shares' recovery going to continue happening? My answer is a definite "Yes".

Shares crashed in a Perfect Storm of management pulling guidance -- which they never should have given in the first place, since they were marketing a new, paradigm shifting therapy that was under an unexpected cloud of reimbursement scrutiny by Medicare -- on the same day that the debt of the United States was downgraded for the first time in history. Sales had begun slower than guided because production was constrained (the third plant to produce Provenge was only cleared by the FDA in August) and docs were worried about getting paid -- never a good thing -- because of the surprise Medicare review.

Medicare in fact decided to fully cover Provenge in July 2011 and issued a Q code to speed reimbursement in August 2011, but at the time guidance was pulled, on August 3rd, the effect of the positive reimbursement decision and the speeding up of reimbursement by the Q code had not had ANY time to improve sales. In any event, mania ensued. Then in spite of still increasing sales in the following quarter, management -- perhaps overcompensating for their earlier guidance mistake -- warned that Fourth Quarter sales would show "modest" improvement and might be subject to seasonality. More mania and more crashing into the 6's.

But wise investors look at the fundamentals of the story. Yes, management made a mistake giving any guidance at all for a new type of cancer treatment and with reimbursement in doubt, but long term the story could not be more compelling: Provenge is the first cancer therapy ever approved by the FDA that works by boosting the patient's own immune system to recognize cancer cells and kill them. It is the most effective treatment ever in extending life in late stage prostate cancer. It achieves this with almost NO side effects, in compelling contrast to the horrors of the traditional chemo it aims to supplant. It is a product that is poised to become (as Dendreon has termed it) The Foundation Of Care for men with late stage disease, since the experts recommend that it be given as early as possible on label, when the patient's immune system is the strongest. And the market for men with advanced disease is clearly a multi billion dollar market.

In addition to all that, Provenge also demonstrates the efficacy of the antigen delivery cassette technology that is 100% owned by Dendreon and which can be applied to multiple other cancers -- offering the potential for Dendreon owned technology to totally revolutionize the field of Oncology. In just a glimmer of what the future potentially holds, a Phase 2 trial of the follow-on product Neuvenge, for renal cancer, recently began enrolling.

Looking closer at the near term, as stated above Fourth Quarter revenues seriously exceeded estimates, and in addition management revealed that they have signed up over 500 sites to administer Provenge, with 590 having actually infused the treatment, and expect to sign up an additional 500 in 2012, covering more than 80% of the huge eligible market for Provenge. They announced that the reimbursement time average for Provenge was less than 30 days and that coverage by Medicare and all major insurers was allowing better than 75% of Provenge patients to receive the treatment with NO out of pocket expense.

The effort to keep sales accelerating will include continuing to expand infusion sites overall and to increase prescription rates by existing providers as they become more comfortable with reimbursement, coverage, and with receiving a whopping $5800 for each patient served. A recent interview with a past President of The Large Urology Group Practice Association disclosed his expectation that guaranteed reimbursement, physician familiarity, and fear that patients will go elsewhere if not offered Provenge would result in "logarithmic" growth in Provenge prescriptions in the current year. With the coverage and reimbursement clouds lifted, he himself had just, in November 2011, established the treatment protocol for Provenge in his own practice and identifed 100-200 eligible patients to line up for treatment.

The company is signing up docs who want to prescribe Provenge like crazy, and there is every reasonable expectation that this will continue into the future.

Further, Dendreon announced that they have just completed their application for Provenge approval in the European Union. Because of less PSA screening in the EU, the advanced prostate cancer market there is twice the size of that in the US, but stingier reimbursement makes the monetary size of the market roughly equal to the US market--still in the Billions. European approval is expected in 2013, and the company is currently seeking a European contract manufacturing partner.

So, is there room to go higher still from here? For sure. These are STILL mania prices. I think this is barely the first inning of a nine inning game.

Before the mania the shares were trading consistently in the 30's with forays into the 40's and even briefly, immediately after FDA approval, up to 57 and change. Pulling guidance was bad, for sure, but from 57 to 6's for a treatment selling over $300 Million a year and growing, and with every prospect of getting back to the ramp rates originally forecast--Blockbuster status of over a Billion in annual sales, now that reimbursement and coverage issues are behind them? I repeat: The teens are STILL insanity.

The shares, even after the recent run (on super high volume), are at prices not seen since BEFORE approval of Provenge by the FDA. The company has about $600 million in cash to tide them over until revenues really start to explode. And the science just gets better: The company also announced at the recent JP Morgan Healthcare Conference that they will be presenting "compelling" data at this year's AUA and ASCO meetings regarding the method of action of Provenge (likely evidence of immune cell infiltration in prostates removed from men who had received Provenge before surgery) and a follow up study to the Duke study that suggested the actual life extension benefit of Provenge may be far more than the 4.1 month median survival advantage reported in the pivotal trial (the frozen Provenge given the crossovers in the "non-treatment" group looks like it conferred its own survival advantage--the new analysis may quantify the likely "true" Provenge benefit as 6-8 months or more).

I predict that before 2012 is out Dendreon will be back to pre-mania levels, which would be at least another 100% return from here. All that has to happen is that Provenge sales continue their already steady growth.

Reread my earlier piece, gauge what has happened so far as I have laid it out, and judge my reasoning as to the future prospects for yourself. Long term I personally believe it's a lock. If you missed the first double, you still have a chance to catch the second.

I'll of course follow up with more in the future.

Disclosure: I am long DNDN.