A renewed area of focus for many pharmaceutical and biotechnology companies is anti-cancer drugs, but, unlike the past, these drugs target smaller groups of patients for specialized treatment as well as larger groups suffering from more general forms of cancer. Unfortunately, these more specialized drugs can be extremely expensive, which can have the effect of depressing demand despite their proven effectiveness. One example of such a company is Dendreon (DNDN). Since 2010, Dendreon has produced an FDA approved drug called Provenge, which is a vaccine used in the treatment of prostate cancer. It works by boosting the functioning of the immune system. Unfortunately, because the treatment has to be tailored for the requirements of each specific patient, it can cost up to $100,000 per patient, inclusive of doctors' fees. These kinds of costs have the effect of diminishing the return to the investor.
Provenge is the only drug that Dendreon currently produces, though it has drugs in the development pipeline that include treatments for cancer of the kidney and the colon as well as solid tumors, but these still have to be tested and approved by the FDA. The time frame for this process is uncertain, with no guarantees that approval will be successfully obtained. It is abundantly clear that the fortunes of the company and its investors rest fairly and squarely on the prospects of Provenge. The substantial upfront cost arises because the drug cannot be manufactured in bulk and must be customized for each patient. Patients must provide samples of their white blood cells which the company then incubates to produce the vaccine. Other courses of anti-cancer drugs cost about the same, but the cost can be spread out over a period of time and need not be paid upfront as a lump sum.
Medical practitioners are unwilling to prescribe Provenge because it may restrict their own business and, for the patient, the entire process of using the drug takes time and money. I consider it quite evident that it must be viewed as a niche drug rather than the blockbuster it once promised to be. However, the drug continues to generate steady revenue growth, and the company believes that it will break even when yearly revenues reach $500 million. Cash burn is not a problem, as the company is currently sitting on about $500 million in cash.
The company has issued warnings about Provenge numbers for the first quarter of the current fiscal (the expectation is for single digit growth), and the stock price has accordingly slipped. What is more disturbing are the reports that Zytiga, the prostrate cancer drug being developed by Johnson & Johnson (JNJ) is poised to be a major threat to Provenge based on later stage studies, and the trial has been terminated early so that patients on placebos are denied the drug. For a company of this standing, the termination of the trial is a clear indication of its success but, in all fairness, I must point out that some of these reports also indicate the possibility that Zytiga could possibly be used in combination with Provenge.
In the light of these developments, what course of action should Dendreon pursue to improve its future prospects? Obviously, the company should aggressively pursue a course of action to establish Provenge as a treatment for men in all stages of prostate cancer rather than a selected and restricted trial group. Patients with prostate cancer have a limited number of options, many of which are not particularly pleasant, and with no assurance that any of them is going to succeed. Surgery can be successful if performed in time, but the patients face the prospect of a long and painful recuperation. Neither chemotherapy nor radiation has proved to be particularly successful, and there are undesirable side effects. Androgen deprivation therapy [ADT] treats prostate cancer by what may be termed as castration by chemicals, but once again, is accompanied by a number of unpleasant side effects. Naturally, the prostrate cancer patient would prefer treatment that is effective without any side effects, but it still needs to be established that Provenge is the answer.
However, this aggressive course of action is much easier to recommend than it is to implement. Everybody agrees that life-saving therapy should be available to anyone. At the same time, the role of the FDA is to ensure that the therapy is both effective and safe. Setting up a trial properly and analyzing the data and the results takes both time and a good deal of money. As a result, the best course for companies is often to design a trial that has the best chances of securing FDA approval and then expanding the scope of the trial over time. Consequently, it is apparent that the success of the process does not entirely rest with Dendreon.
As far as the competition is concerned, in addition to Zytiga from Johnson & Johnson, Sanofi is also developing a drug with a similar anticancer profile called Jevtana. Neither of these drugs suffers from the complications and cost problems that plague Provenge. Progenics Pharmaceuticals (PGNX) is regarded as another dangerous competitor with a chance of overtaking Dendreon especially since a new medication which is reported to be successful is expected to launch in the middle of 2012. Medivation (MDVN) has a candidate in the development pipeline that is reported to have generated positive feedback and could well end up providing intense competition to Provenge.
After taking into account all these different factors, I would recommend holding Dendreon stock for now. The positives are that the drug is successful and generating steady revenue growth already, and it will do no harm to just wait and see.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.