Can Dendreon Become The 'Next Dendreon?'

Mar. 7.12 | About: Dendreon Corporation (DNDN)

By Jay Wong

OnTuesday, Dendreon (NASDAQ:DNDN) CEO John Johnson appeared on CNBC to discuss the company's flagship drug Provenge and its future prospects. Provenge is a revolutionary treatment for prostate cancer, and has allowed patients to live up to 4 months longer. Johnson stated on CNBC that he felt positive about the momentum of the business, citing strong earnings last quarter. Investors, on the other hand, have voiced concerns over the past few months over the drug's high cost as well as smaller than expected margins.

Previously, Dendreon has reported cost density problems related to sales and marketing of Provenge. The drug's hefty upfront cost of $93,000 has posed a serious problem for prospective doctors, as they would need to cover the cost upfront while awaiting reimbursement from insurance providers. Consequently, many doctors have found it difficult to prescribe Provenge given the constraints it could have on their business. While most cancer treatments retail for $6,000 to $7,000 a month on average, the monthly costs can be spread out over time, lessening the burden on doctors' office budgets.

Dendreon faces a problem in that Provenge cannot be mass manufactured and must be specially tailored for each patient. A patient prescribed Provenge must have a sample of their white blood cells extracted, and these cells are sent to a production factory, where they are incubated to create the vaccine. From there, the vaccine must be transferred to an incubation center to be infused into the patient.

Once the patient finally receives the vaccine, an immune response begins that fights off cancer cells. Taken in its entirety, the process is incredibly time and resource intensive, and may restrict Provenge to a small niche of cancer patients. Dendreon faces further problems, because new prostate cancer therapies have emerged since Provenge was approved by the FDA in 2010. Johnson & Johnson's (NYSE:JNJ) Zytiga and Sanofi's (NYSE:SNY) Jevtana have proven to have similar anticancer profiles, without the complexity or cost.

While Dendreon believes that it can break even on Provenge, with $500 million in annual sales, it does not appear that it will obtain the blockbuster status that investors had originally projected a year and a half ago.Thankfully for Dendreon, there are a few silver linings in the pipeline.

Dendreon still owns the full rights to Provenge, for example, and plans on applying for European approval in early 2012. Domestically, Medicare announced that it would give the drug full coverage, and issued a Q Code, which would allow physicians to claim reimbursement within 30 days. In addition to that, the number of sites approved for Provenge treatment increased from 135 in March 2011 to 680 last September.

Currently, Dendreon also has $500 million in cash, roughly equivalent to $3.36 per share. The company recorded strong earnings last quarter, as the company posted revenues of $202.10 million versus $120.80 million estimated, including a royalty payment. While some investors showed concern that the company's guidance was conservative, a Dendreon analyst stated that the guidance was consistent with previous Dendreon statements.

While Dendreon faces major hurdles in Provenge distribution, one cannot argue against the fact that the company's revenue from the drug has grown every quarter since its release. Investors who believe in modest growth potential could snap up some shares now if they still believe in Provenge's potential.

However, there are still risks in regards to the drug's costs, margins, and potential competitors, so it may be wise to monitor these factors and how they affect Provenge in the coming quarters before jumping in.

Action Items:

If you believe that Provenge will continue to be demanded by prostate cancer patients, you should consider these trades:

  • Go long Dendreon. Dendreon shares are trading well off their 52 week highs and could have additional upside if the drug sells well in the coming quarters.
  • Go long a biotech ETF. There has been bullish sentiment over biotech stocks in 2012, and further optimism could drive stocks in this sector higher this year.

If you believe that Provenge's high price will make it difficult to gain market traction, consider these trades:

  • Consider put options in Dendreon. The stock previously sold off on weak guidance, and if doctors continue to hesitate to prescribe Provenge, it could happen again.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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