Provenge Has A Bigger Market Than You Think

Jun. 7.12 | About: Dendreon Corporation (DNDN)

While - at the time of this writing - Dendreon (NASDAQ:DNDN) shares are hovering around their 52-week lows, new practices are signing up as Provenge providers.

Just as an example, there were 859 Provenge providers on August 1, 2011. On March 28, 2012, there were 999, and on June 1, 2012, they were 1069. I counted them all here. (See "Find a Provenge Provider".) An expanding number of Provenge providers bodes well for Provenge acceptance and product sales.

The main reason Dendreon share price is suffering is, in my opinion, this: sales are not enough to cover the company's expenses. Dendreon is burning cash. Management addressed this concern. On May 7, 2012, during Q1 2012 Results - Earnings Call, Greg Schiffman - the Chief Financial Officer - said that the Company expects to achieve a breakeven cash flow in the U.S. at approximately $500 million net revenue run rate. Management believes that they have the resources to get to a cash flow breakeven position in the U.S. with their current cash on hand. I ran out some numbers on a spreadsheet and I estimate that Dendreon will break even by Q3, 2013. My estimate assumes 7% sequential growth quarter over quarter. I believe it is a very prudent estimate.
But the street wants to see an improved balance sheet before investors react by bidding up the stock price. As a financial website puts it, "Though we are encouraged by the growth of Provenge in the first quarter of 2012, we prefer to remain on the sidelines until we get better visibility on whether the improvement in Provenge's sales is sustainable".

A Bullish Stance

I was very bullish on Dendreon. I still am. I acknowledge that past share price performance is not on my side. But I have reasons to be bullish on Dendreon.

The FDA approved Provenge - DNDN's only approved product so far - for the treatment of asymptomatic or minimally symptomatic, metastatic, castrate-resistant (hormone-refractory) prostate cancer (PC). Market size is 30,000 men each year. What investors should be comfortable with, in my opinion, is that Provenge is an immunotherapy. The first ever FDA-approved immunotherapy, in fact. It works by stimulating the patient's own immune system to target prostate cancer cells. If you were a prostate cancer patient, when would you want to be treated with Provenge? Quick answer is: As soon as possible. It is intuitive, I think. That would make sense. You want to be treated with Provenge while you are relatively healthy, while your immune system is still working well. The goal should be to give it to men who have PC, but want to avoid becoming advanced. Most men with PC, if given an option, would want to try something like Provenge first, before doing surgery, androgen deprivation therapy (ADT), radiation or chemotherapy.

Again, for anyone with reasonable knowledge of the product it is a complete no-brainer to opt for Provenge first, and then go to other therapies as needed. I certainly would.

But the FDA restricts treatments to the group that was studied in the trials for the drug. This means already very sick people. Requiring men to be in bad shape to get Provenge is counter-productive. Men are dying and/or suffering side effects from harsh treatments.

Dendreon management is aware of this and is having a comprehensive plan to position PROVENGE as the foundation of care - i.e. as first line treatment. From a recent Seeking Alpha transcript:

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.

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.

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.

It is obvious that share price performance is important. But I want to focus on how large the Provenge market might be a few years down the road. If the company executes, stock price will take care of itself. From another Seeking Alpha transcript:

In addition, we will look at moving PROVENGE into earlier phases of the current disease and we can probably begin a large Phase III study at some point next year.

ASCO Headwinds

Two items come to mind, headwinds that could impact the company, and that investors should consider.

One is the buzz Johnson & Johnson (JNJ) created at the recent American Society of Clinical Oncology-ASCO-meetings when the results of the Phase 3 trial for the company's Zytiga treatment for prostate cancer were presented. Zytiga is an old product. Its patent is going to expire within a couple of years. As Zytiga results have been spun by glowing press coverage, Dendreon shares suffered a more than 10% decline.

A closer look reveals that Zytiga trial had not achieved statistical significance (stat sig) for overall survival. Another commentary from a well versed analyst basically says that the trial was a failure.

As soon as the reality sunk in, Dendreon's share price started to recover somewhat.

Two is that many investors think that new products (such as Medivation's (NASDAQ:MDVN) MDV3100) might steal market share from Provenge. This possibly is another explanation behind the recent DNDN new lows.
As detailed above, it is not going to be an either/or proposition: it is about sequencing. Dendreon is positioning Provenge to become foundation of care.

Another headwind might be physicians acceptance of Provenge slower than forecast. Again, Provenge providers are on the rise and I believe that DNDN's guidance is prudent - i.e. Company is underpromising and will overdeliver.

It is my opinion that those fears are overblown.

Now some numbers - and some number crunching.

The latest American Cancer Society estimates for prostate cancer in the United States are for 2012. About 241,740 new cases of prostate cancer will be diagnosed. That's Provenge market size some years down the road. If Provenge captures just ten percent of that market, it means yearly gross sales of $ 2.2 B. A twenty percent Provenge penetration means yearly gross sales of $ 4.4 B. You can make your assumptions and do your math. Dendreon is worth less than $ 1B at the time of this writing - and it has roughly $ 500M in cash.

Don't forget also that Dendreon retains worldwide rights of its flagship product and that the European and Japanese markets alone are worth as much as the US market. The Company is looking for EU approval within one year.

Dendreon is a company suited for the patient investor. The reward can be huge.

Disclosure: I am long DNDN and will not alter my position within 72 hours of the time of publication of this article. Material presented here is for teaching and entertaining purposes only. It is not intended to be taken as financial advice, a recommendation to buy or sell the stocks mentioned above. Investing includes risks, including loss of principal.