Good afternoon, ladies and gentlemen, and welcome to the first quarter 2012 Dendreon earnings conference call. (Operator Instructions) As a reminder, today’s conference call is being recorded. Now I would like to turn the conference over to your host, Nicole Soley.
Thank you and good afternoon everyone. We’re pleased that you could join us today for our first quarter conference call. With me are John Johnson, President and CEO, Joe DePinto, Executive Vice President of Global Commercial Operations, Greg Schiffman, Executive Vice President and Chief Financial Officer, and Mark Frolich, Executive Vice President of Research and Development and Chief Medical 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.
Now, with that, I will turn the call over to John.
Thank you, Nicole and thank you all for joining us today to discuss our first quarter results. Since joining Dendreon, I’ve had the opportunity to meet with many of Dendreon’s customers and employees, take a deep dive into our business and set clear direction for 2012.
Our top two areas of focus are driving U.S. top line sales and improving our bottom line by reducing the cost of goods associated with manufacturing PROVENGE. First, as we look at U.S. sales, we continue to see growth in the demand for PROVENGE. We reported approximately $82 million in net product revenue which is 6.5% growth over the fourth quarter.
I want to point out that we did see strong infusion patterns in March similar to year-end and it is unclear whether that pattern will continue at the end of every quarter. For the second quarter, we are projecting low single digit sequential growth versus the first quarter. We will discuss infusion patterns in more in-depth during the commercial section.
We continue to reiterate our guidance of modest quarter-over-quarter growth for the remainder of 2012 and I believe based on customer feedback that the long term future for PROVENGE is very bright. Since taking the helm in February, I’ve spent a significant amount of time with our commercial team, taking a close look at our growth strategies and getting to know our customers.
As I said earlier in the year, I was encouraged by the feedback I heard from leading physicians at the ASCO GU about the use of PROVENGE and the role it is playing as a foundation of care for men with advanced prostate cancer. Since then I have invested a considerable amount of time meeting with customers in the field. I continue to be encouraged with the progress we’ve made in establishing PROVENGE as an important new treatment for these patients who are diagnosed with asymptomatic or minimally symptomatic, castrate-resistant metastatic prostate cancer.
That said, we’ve received feedback on areas that we can improve. We’ll talk more about – some of our plans in the commercial update portion of the call. This is particularly important as new treatments emerge for these patients. Physicians realize this is perhaps one of the most encouraging times in the prostate cancer world, and there is a role for these all medicines as a way to combat this disease.
Second, we’ve been focused on how we can more efficiently manufacture PROVENGE in the commercial setting. I am pleased to report that as we continue to make progress on reducing COGS, I continue to be very confident we will reach the 20% to 30% COGS target the company has discussed previously.
Before we turn to the commercial section of the call, I would like to introduce you to Joe DePinto. Joe joined us from ImClone and J&J, and that’s one of the higher performing commercial leaders I’ve ever worked with. During his career, Joe not only has managed U.S. commercial businesses, but he’s also managed J&J’s international oncology hematology business. So we have in place a leader that I believe will position us well for global expansion. He is off to a fast start and he is building a world class team.
With that, I will turn the call over to Joe.
Thanks John. I am really proud to have joined Dendreon and look forward to commercializing PROVENGE around the world. Since joining 60 days ago, I have dug into the business, focusing my time with the team and our customers. Based upon my learnings I share John’s enthusiasm for the progress that has been made as we work to establish PROVENGE as the foundation of care.
As John stated, our overall commercial performance is $82 million net for Q1, 6.5% growth from the previous quarter sales. Beyond our revenue growth, we wanted to share some additional color on the demand we are seeing. I am pleased to report that we are seeing growth in the community oncology and urology market segments of our business. In the academic institutions, our sales are holding steady. We are seeing the community accounts get more comfortable with the science, process for utilizing PROVENGE and reimbursement.
As expected, we continue to face challenges given that this is a fundamental change in the treatment paradigm for prostate cancer patients. It will take time and continued education especially with those unfamiliar with immunotherapy. That said, community clinics now account for 70% of our total business. And within the community setting, oncology now accounts for approximately 72% and urology 28% of our business for the quarter. Urology continues to be the fastest growing segment.
Since launching PROVENGE, we’ve steadily grown our customer base and we ended 2011 with 595 infusing sites. And in quarter one, we added 128 new infusing sites for a total of 723 sites. Our focus moving forward is to not only grow by adding new infusing sites but also critically important is the deeper penetration into our existing customer account base. We have plans in place to do a better job in further penetrating existing accounts.
We have had many questions on concept of same account sales. There are some important considerations as it relates to same account sales to understand in order to make this calculation appropriate and meaningful. First, it is important to understand the terminology the company has used regarding infusing sites. The 723 sites I referenced earlier include satellite offices of an existing practice.
To really understand same account sales growth, we analyze sales at the total practice or as we call it the parent level. Obviously if a practice begins to spread their patients over multiple sites, you can see dilution even though the whole practice is growing. Based on this analysis the 723 sites actually roll up to 572 patent accounts. We are encouraged by the same account sales growth in large community accounts. Moving forward, we plan to share growth in terms of accounts, not sites.
Second is the concept of geographic dispersion. Shortly after launch, as you would expect, there were fewer sites in any geographic area and as patients heard about PROVENGE, they were funnelled into a single site in many cases. As new customers came on, especially urologists you saw referrals being reduced into some sites, including academic centers. This shift in referral patterns is illustrated by our urology LUGPA same account sales which have continued to grow over the last six months.
Finally, I would just like to point out that this business can be somewhat lumpy. Since PROVENGE in essence is an acute therapy, you may see a big of an initial bump in some practices with existing patients and then growth is somewhat dependent upon referrals or new patient flow and how the practice deals with the cost density issue. This is illustrated by accounts that infuse three patients initially, have no infusions for six weeks, and then may infuse two patients. Adding to this lumpiness is the process patients need to go through with regard to scheduling, apheresis and infusion.
Another example of lumpiness given our supply chain is how many infusing dates are in a month. March was an ideal month in terms of infusing and apheresis dates. Moving forward, we will see if international conferences like AUA and ASCO may impact infusions in the second quarter.
As John mentioned earlier, we have plans in place to help us penetrate our existing accounts with new patient enrolments, in addition to adding new sites. Our focus on increasing the depth of accounts is beginning to pay dividends. In some of our large community urology oncology accounts in the past six months, we have seen them grow from small accounts to become some of our largest accounts. We believe over time this trend will continue.
Here are some of the highlights of what we are implementing. We recently launched a new program we are calling PROPEL. PROPEL is a new branded patient education series consisting of physician presentations to prostate cancer patients at local and regional meetings of the largest prostate cancer support groups throughout the country. The goal is to educate appropriate patients and their caregivers and to encourage them to discuss PROVENGE with their doctors. Response has been very positive to date.
We also know that getting urologists to proactively screen and diagnose patients with metastasis early in a fundamental change to the treatment paradigm which takes time and significant education. Our urology sales and marketing team and our medical affairs team have made this a top priority and that we are working closely with the urologists and the key opinion leaders on numerous initiatives to move this forward.
We have strengthened our commercial team with the addition of Tom Riga (ph), our new VP of sales, a top performing sales leader from Amgen. In addition, we’ve hired Sofia Pacheco to head up our strategic customer group and Dan Durant, regional sales direction of the Southeast region, both joining us from Johnson & Johnson.
We’ve also built out a urology key account team focused on messaging and have them preparing for ASCO and AUA where we plan to have a significant commercial presence. I am excited to join the company at such an important time and look forward to interacting with many of you at upcoming conferences. Let me now turn the call over to Greg.
Thanks Joe. Earlier today we reported our financial results for the first quarter of 2012. Net product revenue for the quarter ended March 31st, 2012 was approximately $82 million, compared to $77 million for the quarter ended December 31, 2011. For the quarter ended March 31st, 2012, we saw approximately $5.7 million of rebates and charge-backs, consistent with the December 31, 2011 quarter of approximately $5 million.
In addition, we recorded approximately $1 million of charges associated with GPO administration fees. These fees are included as a reduction of gross sales. As such, for the first quarter we had a gross to net revenue adjustment of approximately 7.5% which is approximately 1 point above our historical gross to net adjustment of 6% to 6.5%. going forward, I would expect to see our gross to net adjustment around the 7.5% range.
As Joe indicated, we now have the capability to provide insights into the parent accounts that infusing PROVENGE. We believe that this information is much more insightful than our prior metric of number of sites infusing PROVENGE. As such, we do not intend to continue to provide site data points going forward.
To provide historical context, the information regarding accounts that had treated a patient with PROVENGE for last year was for Q1 119, Q2 235, Q3 358, and Q4 488. For this quarter, we had 84 new accounts infused PROVENGE bringing the total number of accounts to 572. For the quarter, we had a cost of goods sold of approximately $60 million, and as percent of revenue, cost of goods sold was approximately 73%. This is slight improvement over last year cost of goods sold of 74%.
However, for the first time two of our facilities have totally utilized the zero-cost antigen in inventory. Therefore we recorded approximately $2 million of antigen to cost of goods sold. For comparative purposes, if we examine our cost of goods sold on a quarter-over-quarter basis and exclude the $2 million of antigen from our cost of goods sold this quarter, our cost of goods sold decreased from 74% in Q4 to approximately 71% this quarter. Next quarter, we will see higher antigen expenses flow through all of our manufacturing facilities.
As you can see, we are continuing to show good leverage in our manufacturing cost structure. Reducing the cost of goods sold is one of our top two key priorities. As we have discussed previously, there are three factors that will drive our cost of goods sold down over the next couple of years, above and beyond the benefit gain by growing our revenues.
First, as our experience of manufacturing PROVENGE increases, we are continually refining and improving processes to gain efficiencies. This is the primary driver for cost of goods sold reductions this year and we expect to continue to find areas of leverage in our manufacturing process over the next several years as we gain experience with producing PROVENGE in ever increasing volumes.
Second, we’ve been focusing on improving the electronic systems in our manufacturing process and this year we expect to complete the implementation of electronics batch records and electronic interfaces between our test equipment and our laboratory information management systems. This will provide leverage in our cost structure next year.
Finally, we have been pursuing automation activities over the past year, and based upon the research work performed to date, we expect to implement automation into our testing processes next year, and we expect to be able to implement automation activities into our manufacturing processes in 2014.
Through these activities we would expect to see our cost of goods sold move from today’s 70% range to approximately 50% when our volumes reach a $500 million net revenue run rate and continue to improve to a range of between 20% and 30% when we gain all of the benefits of automation.
Sales, general and administrative expenses were approximately $95 million this quarter, flat with Q1 of last year and up from approximately $76 million last quarter. The growth over last quarter was primarily driven by the charges associated with executive severances of approximately $17 million, of which approximately $12 million were non-cash charges. In addition, first quarter 2011 sales, general and administrative expenses included approximately $38 million of manufacturing start-up costs.
We have provided a pro forma financial representation on our press release which excludes these severance charges to improve quarter to quarter comparability and provide a better reflection of our cash based financial results as we are focused on moving to a cash flow breakeven position.
Research and development expenses for the quarter were approximately $17 million compared with approximately $18 million for the same quarter a year ago. We would expect to see research and development expenses increase around $25 million next quarter as our clinical enrolments begin to increase.
The company had a GAAP loss of $0.70 per share. As we indicated, this included $0.11 associated with contractual obligations on recent executive departures generating a pro forma loss of $0.59 per share. We’ve consistently provided a pro forma representation of our financials excluding our non-cash related charges to provide better insight as we move toward cash flow breakeven. For this quarter, we generated an EBITDA loss of $0.35 per share.
We have a strong balance sheet with cash, cash equivalents and short- and long-term investments at March 31, 2012 of approximately $559 million, compared to December 31, 2011 of approximately $618 million. For the quarter, the company had a net cash usage of approximately $59 million. This is approximately $16 million less than the prior quarter net cash usage of approximately $75 million.
As you can see, we are working to become more efficient with our cash. We expect to achieve a breakeven cash flow in the U.S. at approximately $500 million net revenue run rate. We believe that we have the resources to get us to a cash flow breakeven position in the U.S. with our current cash on hand.
I will now turn the call over to John who can provide an update on our clinical developments and in the U.S. and abroad.
Thanks Greg. Let me close by saying we continue to work on generating data for PROVENGE and our pipeline, and we are preparing PROVENGE for global expansion. Our application is under review at the EMA. And we expect the 120-day questions soon.
I am also encouraged by the work we are doing to appropriately advance our pipeline, taking our ACI platform and finding ways to treat other cancers. Enrolment is currently underway in a randomized phase two study of our HER2/neu directed ACI in invasive bladder cancer. We look forward to making clinical development advances by completing enrolment for our ZYTIGA sequencing study as well as completing enrolment for our androgen deprivation therapy sequencing study this year.
I would now like to open the call to questions.
(Operator Instructions) Our first questioner in queue is Mark Schoenebaum with ISI Group.
Hi everyone this is Wes sitting in for Mark. I had a question about the new account data that Greg provided. I think it was 119 starting in the first quarter of 2011 increasing to 572 accounts in the first quarter of this year. Can you give us some information about same store sales growth for this time period for this new account data?
So we have seen some – in this quarter what we’ve seen is our growth, especially in large community oncology practices and large community urology practices grow significantly in same store sales in this quarter with those accounts. So we have seen significant growth in those same store accounts especially in those two components. We’ve seen the large community oncology and large community urology accounts grow nicely.
And if you look at the accounts that you’re mentioning, we don’t have all of the historical data to break that down with us today. But what we really look hard at is what has taken place in especially over the last six months on a monthly basis, in the large accounts Joe mentioned and we’re very encouraged by what’s taking place in the community and we think that’s really what’s going to be driving our sales going forward and one of the reasons we’re so bullish.
Next questioner in queue is Cory Kasimov with J.P. Morgan.
Cory Kasimov – J.P. Morgan
I wanted to ask you about your continued guidance for low single digit percent growth on a sequential basis. And you mentioned in your comments that you are not sure at this point. What type of impact, if any, AUA and ASCO may have and I am wondering if that guidance does assume that there is indeed an impact on infusion trends. And just along those same lines, if I may, can you talk a little bit about your presence at AUA this year and the efforts you will have there to continue to drive greater utilization among urologists? Thanks.
Sure, I will talk about the first part of the question, Cory, then I will turn it to Joe to talk about AUA. As it relates to the guidance, we’ve looked at this business and we wanted to give you a little bit more in-depth from the standpoint of what Joe did, from everything around geographic dispersion account growth as well as some of the lumpiness that we’re seeing. In many of our accounts, Cory, what you will see is that there is one or two key people who are really the PROVENGE champions and the PROVENGE experts and a lot of times what you see is there is one or two on the physician side – there is one or two on sort of the scheduling reimbursement side.
When they are out of the office, you really see a change in the order of pattern. It doesn’t mean that we lose those patients but you can’t see those patients pushed off and those infusions pushed off. We’re not sure exactly how since we really don’t have a good handle on how order patterns could change during this time, we wanted to make sure that we were giving guidance and setting appropriate expectations. We do think that there will be some impact this quarter but it’s hard to quantify what that will be which is why Joe said we’re going to have to see and track and understand what kind of effect these conferences are going to have. That said, at the conferences per se, we feel very good about our presence of what’s going to take place in long term. So that’s going to grow.
I think when you look at it for us, we saw a very strong March and March was a very good infusing month for the company especially of the way that days fell on the calendar. And so as we look at it, we didn’t want to get -- have expectations get out in front of us given some of these events and the lumpiness that we can sometimes see. As it relates to AUA, I will turn it over to Joe.
So Cory, at AUA we plan on having a very comprehensive plan to position PROVENGE as the foundation of care. It breaks out into three different areas. I will talk about two, then I will turn the data area over to Mark to talk a little bit about that. But our commercial activities really revolve around our new booth experience. It’s really an immersive booth experience with our new campaign. We will have multiple promotional activities on site, we will have a clinical update theater and a lot of cross-functional activity and interactive activity commercially. We will have multiple one on one dinners and one on one activity with key opinion leaders, key big log-book (ph) accounts and we really try to live with the customer at the conference because this is an opportunity where everybody is together.
From a clinical data, Mark can walk you through some of the abstracts and some of the data that we’ll be presenting at AUA? Mark?
Apologize for the technical difficult. We are in two different sites because everyone is traveling, being busy with customers. See if this is corrected in a second. Why don’t we go ahead and – we will take the next question and we will come back. And once we get the technical difficulties figure out, we will go ahead and have Mark give you an update on that. So operator, we will take the next question.
Yes sir. Eric Schmidt with Cowen and Company.
Eric Schmidt - Cowen and Company
Thanks. Maybe a follow-up question on Cory’s, I guess I am wondering do you think there is now this pattern of seasonality in the last month of each quarter? It seems like this is the second straight quarter, maybe you’ve alluded this, is there something along those lines, John but could you further discuss? And then maybe I was just kind of wondering given that this is now the second quarter of low single digit quarter on quarter growth, obviously you did a little bit better in the end in Q1. But the guidance for now two straight quarters has been below single digit. What’s kind of allow to break out on to a better growth rate especially with the pending competition here?
Great question. And we have seen this trend the last two quarters and I don’t want to take two data points and make it into a full blown fact pattern going forward. But I think what we have seen and whether it was the holidays at the end of the year, whether it was prior to spring break and some of the vacations, Easter holiday, whether some patients being moved into the offices, we’re not sure exactly what is driving each of the pieces of this. You also do see Eric, some – I think inherent to some of their GPO contracts may be driving some of this as well. So we are trying to better define this and it’s unclear to us whether we will see that again in June or not which is one of the reasons that we’re tampering our guidance a little bit and being a little bit more conservative than one might be just simply because we haven’t been here in this kind of a situation before.
Looking forward I think what encouraged us around the breakout is we’ve seen some accounts, and Joe mentioned this in his script, some accounts that were really small accounts that just have over the last few months exploded and become our largest accounts. And this is in the community setting. And so when we talk to people, and I have been with a lot of customers and Joe has been living with the customers. We’ve found that this is going to happen in a large number of other accounts especially community – urology and community oncology. So that’s where we saw the lion share of our growth in terms of new accounts this year. We saw academic centers come on. We saw some community hospitals come on but the lion share is the community is really picking it up. I think part of that is because of the better reimbursement environment, part of that’s due to educational efforts. Clearly we see urology as being very important here and this is the fastest growing segment.
So exact timeframe I am not going to try to project that today but I certainly feel very good based upon what we are hearing and some of the progress that we are making out in the field.
Thank you. Our next questioner in queue is Yaron Werber with Citigroup.
Brian Hong - Citigroup
Hey it’s Brian for Yaron Werber. Hi thank you for taking the questions. A quick question on the cost. I was wondering if you can break out the fixed and variable cost and what the percentage is for the first quarter?
Are you talking about as cost of goods sold component?
Brian Hong - Citigroup
Yes, what’s the fixed and variable costs?
Yeah so from that standpoint, I think we’ve talked about this on other calls, it’s a little bit difficult in that our labor component right now is essentially all fixed. And so really the only variable component we are seeing is raw material that’s flowing through in our costs of goods sold. And the raw material component of COGS, I think we shared it in our last one, get you to around 20% of your COGS right now. And the rest of it has been essentially fixed. If we look at this quarter, we saw our costs go up $1 million on a quarter over quarter basis if you pulled out the fact that for the first time we had antigen flowing through on a actual standard cost although we have always used the antigen as the raw material previously. And so you can see revenue growth versus the COGS component is sort of in line with those ratios we just said.
Thank you. Our questioner in queue is Howard Liang with Leerink Swann.
Howard Liang - Leerink Swann
Just regarding the J code, do you have any color from the CMS on the rationale why they say that their Q code is adequate and how you’re able to convince them to change their position in the future?
We haven’t had any color on that at this point. Frankly our reimbursement right now is very good. We are pleased that we have the Q code, we are pleased that we are getting 28 days that we are not getting to contest the decision that they have taken. We appreciate the support that they’ve given to patients by providing the code as well as some of the infusion related reimbursement that they put in at the end of the year. So for us it really is invincible to the practices right now.
Maybe we check quick Mark, we will see if we sold the technical issues. Are you able to get on the line?
Yes, sure. So again the medical affairs team will be having many interactions with physicians at AUA similar to the commercial efforts that Joe outlined. And we’ll also be presenting clinical data there. There will be a podium presentation on the effective crossover and that may have had on the impact results as well as at both the presentations on the outcome of Africa-American subjects in randomized phase three trials who appear to have a particularly strong survival benefits.
Michael Yee with RBC Capital Markets Corp.
Michael Yee – RBC Capital Markets Corp.
Wanted to ask on your manufacturing sites, I know there has been some discussion about whether that’s a spot you could look to either shutdown or change or consolidate to save expenses. Where do you stand on that and what would need to change either positive or negative in the near term to get you to maybe to site one way or the other on something?
We continue to look at cost of goods sold and make no mistake it’s one of our top two priorities. And obviously as we look at our plant configuration that’s something that for us is important to understand how we can most efficiently get production out of those facilities. We haven’t taken a decision on what that optimal configuration will be and will look like going forward. The number one gating factor for me as I review the team’s plans on how to become more efficient is to make sure that we can service our customers and service the demand, and not today’s demand but demand that we are expecting and calling for internally downstream.
And so as I look at that I want to be very sure that we can go ahead and service that demand and make sure that we don’t have any customer service interrupt or have to have customers infused on different days. And so for us we’re taking close look at that, we’re diving into the details. There is a lot of opportunities for us to reduce cost of goods. I feel very good about the team’s plans in this area as I stated. And as soon as we get to that point where we can feel comfortable with what the benefits will be of our efficiencies, that we are trying to gain as well as making sure our service levels will not be interrupted. That’s when we will take that decision.
Michael Yee – RBC Capital Markets Corp.
Can I just ask in a different way? It’s been previously said you would look to make a decision this year, sort of we’re halfway through the year. Do you not think you’d make a decision this year, or you’re holding a talk to that?
Now we’ll make a decision this year.
Next questioner in queue is Rachel McMinn with Bank of America Merrill Lynch.
Rachel McMinn – Bank of America Merrill Lynch
Two questions. One is can you give us a better sense of where you think physicians are for the second time that use the drug whether that’s in like another bulk of patients? Is that time shortening? Are you getting kind of closing in from the time that somebody is in a trial period with the drug to when they feel more comfortable? And just a quick question for Greg, on the gross to net, that’s kind of inched up a little bit from 6% to 7.5%. And just wanted to get a sense of your confidence level that it’s actually going to stay there, should we think that to kind of gradually increase over time?
Maybe let me take the second one first, and then I will turn over to Joe. When you look at the gross to net adjustment, the change that happened this quarter is, as we have been using distributors they are playing a service for us, role as a valuable services that we are getting, we had originally expected to see those services flowing through in our SG&A expenses. As we look at standard account procedures in our industry, those services actually flow through as a gross to net adjustment. And so we had $1 million this quarter flowing through which is related to those administrative services, it is basically a percentage of revenues going through the GPO business. We will end up slightly favorable in our SG&A that we had guided earlier this year and it’s flowing through up there.
And so in essence we didn’t really see any change in what would be a rebates or discounts. We’ve just seen a new expenses are flowing through there that we originally had estimated would be SG&A.
Rachel, it’s John. In response to your first question, I think the answer is yes, we do see that, that second wave or that second patient coming quicker. I think this is illustrated by what we have observed particularly in the LUGPA accounts and some of the community oncology accounts that have recently joined us. And I think this is in part due to the reimbursement now being much more consistent and reliable and fast. And I think beyond that I think our service levels, our customer service and apheresis has improved as well. Make no mistake we still have room to grow both on continuing to drive new patient enrolments and continuing to increase our service levels.
But I think in general I would say the answer to that question is yes. I do what we do know is that people who have had accounts that have had, that tougher experience with reimbursement, that tougher experience with cost density are the ones that are much more difficult to gain right now. As their experience gets better, as they now go through the process we think that some of those folks will be seeing the time to the next patient, or the time to next couple of patients decrease as we go forward.
Next questioner in queue is Robyn Karnauskas with Deutsche Bank.
Robyn Karnauskas – Deutsche Bank
Just a follow up on both Rachel and previous questions around the plant. I guess the first question is it sounds from your guidance though that you’re not going to hit a breakdown point for a while. And you are spending a lot of money, I don’t understand why it will take so long to figure out whether shutting down the plant would hurt the business or not, seems like that was in discussions since last year. Maybe you give some color in terms of what is it really the rate limiting step toward that decision?
And then there is a question on Rachel, you’d previously also talked about 4 to 6 patients needed before you see an uptick in some of these community centers. Do you still think that that 4 to 6 patients number is valid or is it really just going to be more of a gradual uptick in the community based centers?
Sure, as we look at the first part of that, I think what we have said previously and I don’t think there has been any change here is, we are looking at our manufacturing processes, we are looking at the capabilities there, some automation activities. And I think a key that we are going through is getting comfortable with the ability to service the customers, the ability for automation to get some of the efficiencies that we would need to see in the facilities to be able to have long term capacity that we need. A decision to close the facility and truly shut it down is a fairly expensive decision. I think as you are aware we incurred last year alone $90 million, in total close to $200 million of start-up costs bringing our facilities up, the costs were as much as the capital.
And so you don’t want to make a decision like that lightly. I think we are constantly going through the analysis understanding what we can do because we do take very seriously the need to drive COGS down and drive down the amount of cash that we are spending, I think we’re continually seeing that decrease. But the same point, it needs to be thoughtful and I think we always said it’s probably something this year earlier than later is better, but it could still take us a little while to get through the end.
And as it relates to the same account sales question and the four to six patients the company has talked about previously, I think it’s really – I don’t think you can paint a broad brush overall the customers. There are segments of customers, the part of those segments include when did that customer come on, what was their first experience, how experience is their practice with, dealing with infusions. So if urology in particular, a lot of accounts, it’s their first foray into infusing, so they are trading lightly. I think you have seen those people that had less favorable imbursement experience as being little bit slow and are testing the system more as you would expect.
So I think in many cases, you see that as we go through these first two quarters, we are hopeful that we are going to get those folks through this process. And that’s one of the reasons frankly we are bullish as we go forward.
Maybe just as a follow on that, I think that Joe did discuss in his section that we’ve seen both urology and oncology, some of the large potential accounts that were small accounts for six months ago, grow over this six month period to become some of the largest accounts that we have. And so although it’s a limited base, we have seen extremely small accounts grow to become very large accounts. And it’s something that we do expect to see happening in a broader base going forward. And so we have some demonstrable evidence of that trend.
Next questioner in queue is Salveen Richter with Canaccord Adams.
Salveen Richter - Canaccord Adams
Just to follow up on Robyn’s question earlier but John, you’ve mentioned you’ve been meeting with community oncology and urology centers. And as you meet with them, what are the reasons that you get for why a center may have not used the drug yet, or has treated one and there has been an extremely long lag, is there anything that they want to – they need to understand or see in order to get over this hump or to move forward and kind of increasing same store sales?
Well, I will let Joe answer first and then I will add on that at the end.
What we have seen in these particular customers is that they want to make sure that they understand all components of the infusion of PROVENGE. They want to make sure they understand the system, the science, what expectations of the drug are as well as the reimbursement. And typically they will start with one or two to test the waters and then as they become comfortable, you see them moving forward more and more not necessarily waiting at that point of time, as they identify appropriate patients. One of the things we are working on as a team is helping to identify those appropriate patients that should be started on PROVENGE. And that also is one of the components.
While I have been out in the field, I have seen more and more of our activity working around identifying appropriate patients. Once there is that interest to begin infusing and moving forward with PROVENGE, that’s really critical to get them from the one in two to four to five and six appropriate patient selection. John?
Yeah, I think so in my experience too, you have – let’s keep in mind this is a very unique product. It is not a pill, it is not a vial. And so in some cases you see their ability to get access to apheresis. Some of the first patients at some of the sites actually has a fly to get their apheresis, and then were infused back to site. One of the things Joe has done is really work with our internal team. We have a plan in place to increase our apheresis capacity that has been a rate limiting step with some of these practices to get beyond the four to six. But I think that’s an important piece and I think now the imbursement is becoming more clear, I think it’s one of the reasons you are seeing community, oncology community, urology begin to step up.
I think that the thing on depth that we haven’t talked as much as about is when our sales team is winning new account you normally have one or two physicians inside a given account that are very interested in new technologies in the area of prostate cancer. We’ve had those champions come on board. They’ve kind of let us – one of the important aspects of our internal direction to our field in terms of driving depths of penetration is making sure we are hitting all the physicians in the account and making sure that those physicians are as attuned to all the pieces from screening to the benefits of the product and the like as the champions who put the product in there, and we could do a better job there frankly.
Salveen Richter - Canaccord Adams
Just to follow up on that, if you look at a time point like all the centers that were targeted maybe in 3Q, do you see a trend on how they are progressing over time?
You definitely see a trend especially 4Q to 1Q in large community and urology accounts, you see a very pronounced trend there which is one of the things that we are pretty excited about.
Next questioner in queue is Chris Raymond with Robert W. Baird.
Chris Raymond – Robert W. Baird
Just a question on seasonality in sort of the guidance for the second quarter. So Q4 ’11 as I remember I think benefitted about $2 million or $3 million or so of what would have been Q1 revenue. So I guess maybe a two-part question, first, did that dynamic happen this quarter at all, and sort of controls that are in place to sort of work through that? And then the second is how should we think about the low single digit quarter on quarter guidance in that light? I guess is the guidance revenue, if that is, how do we think about patient demand?
I guess a couple of things on that. If you look at March, normally when we go into a month, the number of infusions that we have on the book is really the maximum number of infusions that you would get. What we saw happen in March was we started with a number of infusions and that book of infusions actually built within the month, which is unusual for us. And that’s one of the reasons that March was somewhat stronger than we thought going in.
And so as we look forward, it’s unclear whether that will continue to be the trend or not, we don’t know. And you of course had a holiday, you had reimbursement changing, a number of things happened in the fourth quarter. You had a few things in ideal infusing month in March, you had some holidays coming up right after the quarter, where some patients may have been coming in, or – and you may have had some factors, some of the contracts and I don’t know where the practices stood with all of their entire GPO commitments and how all that may or may not have played into it. So it’s unclear and I think what we are trying to do is be appropriate and setting the expectations that we need to make sure that we see this continue before we try to give guidance that may be something other than this.
One additional thought here is as we look at the ordering trends and ordering patterns, March also lines up as an ideal month in terms of infusion and apheresis dates with no major holidays, which really bode well for the first quarter as well. As we move forward and we look at what will happen in the months ahead, looking at understanding infusion dates, looking at understanding when patients can be apheresis and infused in our processes is important as well as layering over holidays and what the impact that international conferences will have or something that we are looking at as well.
Yeah, and make no mistake we are not making any kind of excuses here. We want to see the sales grow more than that. And we’ve had some very good plans put in place, with some very good meetings with our team. And I feel like we are making real progress and we need to do better in, in penetration in these accounts. There are a lot of these factors that are very real because it’s unique and we just wanted to make sure that expectations were set appropriately.
Next questioner in queue is Katherine Xu with William Blair.
Katherine Xu – William Blair
I am just wondering when you redefine from sites to accounts, how many accounts there are that you can ultimately target in the U.S.? I think previously with accounts, probably we are looking at anywhere between 1,000 to 1,200 or something like that. Now with this consolidated definition of accounts, how many are we looking at targeting?
Actually the 1,000 number that we've given previously was tied to accounts. So, we didn’t have a great sort of view of exact number of site to accounts, and to some degree some sites that have – some accounts that have multiple sites may choose to create a center of excellence and may not expand it broadly, others we see it expanding. So, we never knew an exact number of sites that would be open. So, I would take right now, you’ve got an apples-to-apples in terms of number of accounts to the targeted number of sites for about 80% penetration. Now the reality is you may grow sites beyond that, but that gets you our view into sort of the top two deciles.
Katherine Xu – William Blair
So now you're at 574 so the target probably eventually will be around 800 or so, 800 to 900 something like that?
No, it’s about the 1,000 that was accounts always. And so the goal is right now we're about not quite but around 60% penetrated into the account base that gets to the top 80% of urologists and oncologists.
Katherine Xu – William Blair
So I'm saying that the ultimate accounts opened that you will probably achieve will be around 800. Is that fair to assume?
I think there is far more than the 1,000 accounts. The 1,000 accounts is the top 80% that we're targeting. And that's our goal.
So I think one of the reasons we wanted to lay this out today was because the company had mentioned before the 1,000 accounts, and I’ve used the language accounts. And then there had also been this language around sites. And so what we wanted to do was really consolidated two accounts. There are about 1,000 accounts that make up about 80% of the business roughly. We're just about 60% of our – of the way there to penetrate in those top accounts or accounts we could get beyond that. But right now I think as you try to figure out what kind of growth we might get from new accounts you can figure we're approximately 60% of the way there.
Katherine Xu – William Blair
When you say some accounts that have grown into very large accounts for you, what do you mean by very large accounts? Is that by the number of patients that they have and if you can, would you be able to disclose that?
I think we're talking about number of patients per month, number of infusions or number of patients either and by that metric we've seen accounts that were very small but lot of potential growing into that potential and actually becoming the largest accounts that we've ever had.
Katherine Xu – William Blair
So how large are you going to – are you prepared to disclose that?
I don't know that at this point, we're sort of sharing patients per month at those accounts. But they become – they have moved to the top of our list of accounts.
Next questioner in queue is Ren Benjamin with Rodman.
Ren Benjamin – Rodman & Renshaw
Can you just give us a sense as to from your interactions with the physicians in the 72% of community oncologists, how many – what their thoughts are, what your thoughts are on sequencing right now versus maybe in the previous quarter? And is that impacting discussions or is that creating a new hurdle in getting PROVENGE out there?
I haven't, and certainly Joe can comment as well. I haven't seen that really affect us in terms of what's going on inside of our business. I think most of the physicians we've talked to believe that there is a role for these different agents. Many of them believe that immunotherapy would make more sense upfront. I haven't really heard that in my interactions, Joe, I don't know.
I’ve heard similar. I have heard the physicians talk about the importance of immunotherapy early on in the treatment options and to make sure that, and looking at the sequencing work, not only in accounts, but this has also been stated at the podium at conferences as well, that there is excitement because there are so many options that are going to be either available now or in the future that sequencing is important and that PROVENGE upfront makes a lot sense with the immunotherapy first.
Mark, do you want to talk at all about what you heard from some of the KOLs and what they are thinking?
Sure. I think some of the messages really seem to resonate are the unique mechanism of action of PROVENGE that immunotherapy early intuitively makes a lot of sense and also that we have some data to support that in terms of increased activation of antigen presenting cells early in the actual disease as we presented at ASCO GU. Also have some data that patients with lower disease burden appeared to be benefiting more. And so, I think, really if you think about what's best for the patient in having, availing them as many the treatment options as possible, it really makes sense to use PROVENGE early in the natural history prior to use of other therapies that may contain immunosuppressive steroids along with them.
Ren Benjamin – Rodman & Renshaw
And maybe just a quick follow-up for Greg. Is there any way that you can give us a sense, Greg, as to where COGS could be by the end of the year just based on all everything that you're trying to implement right now from the manufacturing front?
I think the biggest driver as we look at that one of the keys is going to be the absolute level of revenue. I think you saw this quarter that COGS to some degree, you really need to think of net revenue of $1 million higher than that as we think about the volume, because I had a charge move in there that hasn't been there previously. And so from that standpoint, we went from $77 million to $83 million in terms of growth of revenue and my COGS grew $1 million if you sort of didn't look at that antigen.
You probably -- I think we talked in the last call, there is a potential for a slight increase in COGS, but actually it's going to be much less than we were projecting previously because two of the facilities have already started using the antigen. So, you’d probably see a slight increase in the COGS next quarter, but after that there is nothing else that will impact it in an unfavorable way, it’ll just be going down. I think really using that kind of a ratio as we look at that fixed and variable this year as it moves forward, is reasonable with an expectation that we'll probably find more areas of efficiency in some of the fixed and then that will going be down. I don't want to put a percent out there because you really do need to tie to our revenue number when you look at the model.
Operator, we’ll take one more question please.
Okay sir. We have time for one final question, and our final question for today’s event comes from Joe Pantginis with Roth Capital Partners.
Joe Pantginis - Roth Capital Partners
Hi guys thanks for taking the question. Similar on the same vein with regard to the competition or potential sequencing, clearly you're going to be making the case as you mentioned with regard to the role of immunotherapy, et cetera. I guess I'll ask the question this way. With regard to your boots on the ground in the sales and marketing department, you’re making a positive case. I was just curious, have you received any potential feedback or pushback or trepidation from accounts as you look to sign them up with regard to, say, looking towards ZYTIGA or MDV3100 instead of PROVENGE?
So, as far as signing up accounts, we continue to have accounts join up on a quarterly basis. We're sort of right on track where we would be expected. And I believe when we talk to accounts, both large accounts in urology and in oncology, I believe they see the benefits of utilizing all the therapies in this space, and sequencing PROVENGE upfront is what I'm hearing a lot talk about. When you talk about resistance to signing up, they really typically sign up with a patient in mind to start therapy right away. And that's the reason they sign up with us, and we continue to bring on new accounts on a monthly, weekly, daily basis, and that hasn't slowed.
I'd reiterate something that I said on the last quarterly call. And that was when I came into the job, halfway through my first day, I flew down to ASCO GU. And one of my pleasant surprises about taking the job and finding out as I dug in was that when I talked to the thought leaders, it really wasn't an either or type situation. They really do believe there is a very real clinical benefit with PROVENGE and the survival benefit is important, getting it on early is important.
Obviously not every physician is going to believe that, not every patient’s going to want to go through the process required to get PROVENGE. That said, when I walked out of ASCO GU and it's continuous since I've been out in the community accounts. I don't sense this either or type of a competition coming up. It's much more on what's going to be the best way to treat this patient to give them the best patient experience and the best chance of survival.
Joe Pantginis - Roth Capital Partners
Thank you very much. That was helpful.
You're welcome. Thank you. So, let me just close by thanking everyone for your questions. We do appreciate you joining us today. We look forward to speaking with you soon. We expect we'll see many of you at AUA and ASCO and certainly on our next earnings call. Thanks a lot for taking the time this afternoon. Have a great evening.
Thank you. Ladies and gentlemen, thank you for your participation on today's conference call. This concludes the program. You may now disconnect. Have a nice day.
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