Good afternoon, ladies and gentlemen, and welcome to the Second Quarter 2012 Dendreon Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions on how to participate will be given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.
Now, I’d 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 second quarter conference call. With me are John Johnson, Chairman and Chief Executive Officer; Joe DePinto, Executive Vice President of Global Commercial Operations; Greg Schiffman, Executive Vice President and Chief Financial Officer; and Mark Frohlich, 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 to discuss our second quarter results and the strategic restructuring, which we announced earlier today.
I’d like to begin by reviewing this afternoon’s announcement and provide some perspective on where Dendreon is today and where we are headed into the future, then I will turn the call over to Joe and Greg who will discuss our results in greater detail.
Today is a first call I’ve held since becoming Chairman of Dendreon. Since becoming CEO in February, I’ve spent a significant amount of time with customer’s, visiting at each of our sites across the country and taken a deep dive in the all aspects of our organization from our manufacturing and technical operations to our commercial operations.
Being pioneers of immunotherapy has come with a sheer challenges, making the transition from a research and developed focused organization to a commercial organization, as proved especially challenging for Dendreon with four different individuals having commercial reporting to them over the last two years. During this time we have pioneered new ground in manufacturing and delivering PROVENGE and have learnt a tremendous amount about how to do that efficiently.
In building for the unknown and making that transition rapidly, our thought base grew rapidly and how needs to be brought in line with a company of our size, taking into account of course all the learning’s that we have experienced.
All my confidence in many things Dendreon does well has been reconfirmed. Nevertheless, there are significant opportunities for further improvement and ways to accelerate our path to growth and profitability.
So, what have I learned? First, a meeting with customers’ there are still strong support for PROVENGE becoming the foundation of care and I believe today there are significant growth that can be seen in the future. This was evidenced by the number of new sight and accounts we setup in the second quarter.
Let me be very clear, I’m not satisfied with the commercial performance of PROVENGE and believe more men with advanced prostate cancer should be benefiting from the product. We recognized that we have to rebuild our commercial organization to become more flat and begin with the hiring of Joe in March and has continued through the second quarter. We are not backing down our commitment to PROVENGE, in fact our investment in growing the product will remain constant and we will continue to invest in generating PROVENGE clinical data at the current rate. We will increase our focus on customer service, and this is in line with the top priority that I outlined in our Q1 call.
Second, I learned that we have made important strides in how to manufacture and deliver PROVENGE. Looking at the cost of goods they would be very easy and very wrong to apply conventional wisdom in making decisions about how to lower these costs. After careful analysis we have determined that we can deliver up to $1 billion of PROVENGE from our two manufacturing facilities in Georgia and California without impacting quality or customer service, thereby lowering our cost of goods which was in line with our second priority that I outlined. Since launch we have earned a great deal about the strives in automation that could help us at least double the output of PROVENGE in these two facilities to help us meet any growing demand as well as continuing to lower cost of goods.
Third, I learned that while a company grew it's employee base and invested heavily to build systems and prepare for commercialization, there are opportunities to become more efficient and cut cost from a D&A standpoint to come more into line with benchmark companies.
The decision to these employees are so committed to our patients was not easy and was only taken after careful analysis and study. These changes however, are necessary and essential. We bank all of our employees for their commitment. As a result of the restructuring we expect to reduce cost by approximately $150 million annually. The company believes that we will be positioned to be cash flow positive when that product revenue reached approximately 100 million in a quarter.
With this restructuring, Dendreon expects to reduce our cost of goods sold to less than 50% of revenue following the closure of the Morris Plains facility down from 77% at the end of the second quarter. We expect to continue to reduce our COGS through ongoing operational efficiencies, automation, system improvement and increased sales overtime. The benefits associated with these restructuring initiatives are started to begin to appear on our financial results as early as the first half of 2013.
So, today we set a new course for Dendreon, one I will make is a stronger company, a company focused on increasing customer service and establishing PROVENGE as a foundation of care for advanced prostate cancer. A company committed to delivering a high quality product as efficiently as possible. A company committed to generating clinical data around PROVENGE to help men around the world and their battle with prostate cancer, a company committed to delivering value for its shareholders.
Before I turn the call over to Joe and Greg, I’d like to address the commercial performance in the first half of the year. As I said earlier I’m not satisfied with the sales growth. When we examined the second quarter results and why the softness was (inaudible) we found three main issues that hampered our growth.
First, let’s turn over in our sales force. Starting in 4Q 2011 Dendreon began to experience turnover in the sales force. This trend continued into 2012 and when we examined our result we found that those territories that experienced turnover were down 30% in quarter-over-quarter sales in Q2 versus those with the sales reps throughout the quarter. That said, we still have some territories open and we expect to stabilize the sales force in the third quarter. I’m pleased to report that we’ve not had any issues attracting top play sales talent.
Second was schedule yield and build. We saw an unusually high rate of infusion cancellations late in June about double that of our normal run rate. In the last two quarters, we experienced a strong build at the end of the quarter. We were anticipating that this trend would continue but it did not build at a similar rate likely as a result of the higher than expected sales vacancy rate in May and June.
Third was focus and execution. Joe did in depth business reviews of all of the district and we believe there is an opportunity to improve results to better focus in execution. That focus has been rolled out in POA meetings in July. Joe will discuss these three issues in more detail.
Separately, this quarter we presented two important findings at AUA and ASCO. First, our retrospective analysis with (inaudible) patients who participated in the Phase 3 IMPACT trial, those patients were separated in the quartile based upon the baseline PSA. PROVENGE control patients within those groups were compared in terms of median overall survival.
The important take away from this analysis was that patients with lower PSAs appeared to benefit more. For example, patients with a base line PSA of less than 22.1 had a median overall survival benefit of approximately 13 months versus control. The retrospective subgroup analysis suggest that treating patients with PROVENGE earlier on metastatic disease when the PSA is lower maybe beneficial.
Second, investigator findings were presented from an open label Phase 2 trial called NeoACT or patients with localized prostate cancer received three infusions of PROVENGE prior to radical prostatectomy. Investigators found significant increases in CD3 and CD4 T-cell populations at the tumor rim between the interface of benign and malignant tissue when compared with the
pretreatment biopsy tissue. Results from these analyses support further evaluation of PROVENGE in the neoadjuvant setting. We have received positive feedback from physician that this data provide important support for the [immune mediated mechanism] of PROVENGE.
In the near-term we remain focused on leveraging this restructuring, to accelerate our path to profitability, driving execution and serving our customers with the same outstanding personalized service they have come to expect from us. We have a lot of work to do, but I’m confident that we know the challenges we face, we know what we are going to do about them, and I believe we are headed in the right direction.
With that I’ll turn the call over to Joe.
Thanks John. It's now been nearly five months since I joined Dendreon. Over this timeframe, I certainly learned a lot about our commercial operation and what drives customer demand. I shared John’s enthusiasm about our ability to establish PROVENGE as a foundation of care for men with advanced prostate cancer. And I also share his views that we have a significant opportunity to improve our commercial team infrastructure and execution to position Dendreon for long-term success.
I will discuss in greater detail some of the factors that have affected sales this quarter and take you through how we are addressing each challenge head on, but first allow me to review the results.
During the quarter we generated $80 million in net revenue which is 66% higher than then second quarter of last year, but 2.4% lower than the first quarter. We continue to steadily grow our customer base across all practices, neurology, oncology and academic.
In the second quarter we added 115 new accounts for a total of 687 accounts since launch. We also added 151 new infusing sites that are aligned to parent account, resulting in 874 infusing sites since launch. As John mentioned earlier, while adding new infusion account is important, our focus must be on penetrating our existing customer account base to in our debt-to-sales which drives volume.
In terms of our customer composition, we ended the quarter with community clinics now accounting for 65% of our total business. Within the community setting, oncology now accounts for 70% of this business and necrology accounts for 30% during the quarter. There are number of factors that affected our sales in the second quarter. The good news is that we understand these issues at hand and are taking definitive steps to correct them and position our commercial organization for long-term success. We expect some of the challenges we face in Q2 to continue through the second half of 2012. We expect to begin to see benefits of our commercial efforts by the first quarter of 2013.
The first factor that affected our results is a high vacancy rate year-to-date in our sales force. we believe that much of this turnover is a result of organizational changes that Dendreon has been through over the past year as well as other biotech companies preparing for launch recruiting experienced oncology sales people.
As John mentioned we see a direct correlation between focused coverage and sales growth, with approximately 30% greater sales in areas with focused sales coverage versus unstaffed territories. 18% of our physician had no direct on the ground sales staff at some point in June. Given the unique delivery of PROVENGE office support from our sales staff is extremely important. To effectively drive sales and meet the growing demand of our product, it is imperative to have a strong team in place as we refocus our commercial operations. We brought in new talent and we ramped our sales leadership with a number of senior level hires including at the regional level.
With the right team in place at the top, we are aggressively recruiting to fill existing vacancies within our sales force with top notch industry experience personnel. Our goal is to have field leadership, engaged in ongoing recruitment and fill all vacancies within 60 days. We have a number of new hires expected to join in July and August and we expect to begin to see an improvement in sales in the first quarter of 2013 as a result of a stronger sales team.
The second factor which affected our results this quarter was yield. As John mentioned we saw an unusually high rate of infusion cancellations late in June about double that of our normal run rate. One of the things we have seen is that we are experiencing a drop off between patient enrollment and first infusion, due primarily (inaudible) access and health related issues. To address this we have deployed a dedicated nursing field team to ensure that infusions actually occur once the patient is enrolled. The process from patient enrollment to first infusion can be lengthy. However, our data shows that if a patient makes it a first infusion, they typically make it to the third infusion. Through the use of the field nursing team and new technologies as well as improved scheduling, we can make the process more efficient from enrollment to first infusion, bringing benefits to physicians and patients alike. This also benefits our sales force by bringing them up to focus on new patient enrollment rather than service issues.
Third, as we mentioned last quarter, our focus has been on growing accounts in the community setting, specifically neurology clinics, where we see tremendous future upside potential. During the quarter while neurology accounts continue to grow, they did not grow as quickly as we expected. Furthermore, positive results in neurology were offset by a slight decline in oncology and academic accounts.
Our oncology and academic accounts have historically driven a large volume of patients and we have learned that we need to achieve better balance in terms of our marketing spend and focus across all three of our key market segments. To put it differently, we will not focus on one segment at the expense of another, because PROVENGE and immunotherapy are still considered a relatively new treatment we do not yet have the scale of penetration across the diversity of accounts to manage the swings in demand between accounts. As a result changes in demand amongst one set of accounts can result in volatility in our business.
To drive deeper penetration in our customer base, we reorganized our market access team including hiring business specialist to help focus on our largest customers. We have also hired key account managers for each of our three major customer sector, with dedicated on the ground support at each touch point, to accelerate patient enrollment and facilitate physician administration. And we brought in new marketing talent to focus on our efforts both in the U.S. and beyond.
We are also making important strides to improve the execution of our commercial organization as a whole not only must we recruit and hire the right people but we must ensure that we are giving our sales force the right tools to allow them to succeed, which will help them penetrate larger accounts. In order to drive volume, your marketing mix must be tailored to penetrate our most important accounts across all market sectors, urology, oncology and academic.
We continue to see community accounts getting more comfortable with the science, process for utilizing PROVENGE and reimbursement procedures. However, given that this is a fundamental change in the treatment paradigm for prostate cancer patient it will take time and continued education to familiarize those new immunotherapy. We must continuously leverage our positive reimbursement programs to minimize physician uncertainty around reimbursement of PROVENGE in the appropriate on label patients.
Our efforts are not only focused on the physician customer but also on getting patients to ask their doctor about PROVENGE. We continue to be aggressive in our direct to patient awareness, educational activities and are encouraged to see the results we are seeing from this. For example, we are launching a campaign to advance conversations on treatment options in prostate cancer in conjunction with the largest patient advocacy organizations across the country. We are continuing to see physicians use PROVENGE in conjunction with other therapies and we continue to stress the importance of treating patients with immunotherapy early on while the condition is still asymptomatic. For competitive reasons we are not going to discuss all of our tactics but rest assured we are very focused on making PROVENGE successful. With a more robust and efficient commercial organizational and targeted strategy, we are confident in our ability to further establish PROVENGE as the foundation of treatment for men with advanced prostate cancer, and meet the growing interest we are seeing in the marketplace.
We remain committed to serving our physician customers with the high level of service that they have come to expect from us. While this turnaround will not happen overnight, I’m confident that we are taking the right steps to strengthen our commercial organization and position ourselves for long-term success.
Let me now turn the call over to Greg for an update on the financials.
Thanks Joe. Earlier today we reported our financial results for the second quarter of 2012. Net product revenue for the quarter ended June 30, 2012 was approximately $80 million compared to $82 million for the quarter ended March 31, 2012 and $48 million for the quarter ended June 30, 2011.
For the quarter ended June 30, 2012 we saw approximately $6 million of rebates and charge back up slightly from the March 31, 2012 quarter of approximately $5.7 million. In addition, we recorded approximately $1 million of charges associated with [GPO] administration fees.
For the second quarter we had a growth in net revenue adjustment of approximately 8.1% compared to the quarter ended March 31, 2012 of 7.5%. The slight increase was driven by greater percentage of sales coming from 340B eligible institutions.
Earlier today, we reported that we would be restructuring our technical operations. In addition, we announced our restructure administrative functions to align our support cost with the biotechnology industry norm for similar size and complexity. We also will look to become more efficient throughout our organization. These restructuring include a decision to close our New Jersey manufacturing site. Over the next 12 months we expect to reduce expenses by $150 million annually with the reduction of more than 600 physicians including contractors. This is never an easy thing to implement. We have some of the most committed employees I have ever worked with and I’d like to thank them personally for all of their hard work and support that they have provided and will continue to provide while we work through this challenging process.
As part of the restructuring process and extensive analysis we have performed focused on customer service levels through our supply chain. Based upon this analysis it became evident that the most robust supply chains would be to utilize our Atlanta and Seal Beach facility.
In addition, over the past 8 months we have found ways to substantially increase the throughput of our manufacturing facility. We currently project that we can produce approximately 1 billion in annual product revenue utilizing only our Atlanta and Seal Beach facilities. This does not include the projected benefits of automation which we plan to implement over the next couple of years.
With fully automated manufacturing facilities, we project it could at least double the annual product revenue produced at these two facilities. Based upon these finding, we determine that the most appropriate action would be to close our New Jersey manufacturing operation. We expect this closure to be fully implemented in the fourth quarter of this year. Following the close of New Jersey operations, we expect the cost of goods sold of less than 50% down from 77% this quarter.
As a result of the decision to close our New Jersey facility, we expect to record an initial restructuring charge of approximately $4 million related to severance and other related termination benefits. And we expect to record a non-cash restructuring charge of approximately 65 million related to the impairment of property and equipment of the New Jersey facility in the third quarter of 2012.
We expect the restructuring initiatives will take up to 12 months to implement as such we will continue to incur charges related to employee severance benefit and other related expenses until the plan is complete.
As John indicated in his comment, there are opportunities to become more efficient and cut cost from a G&A standpoint to become more in line with benchmark companies. We are expecting to reduce our administrative expenses by more than 35% over the next 12 month. Following this restructuring our selling, general and administrative expenses are projected to be approximately $240 million on a GAAP basis, of which approximately $60 million of cash expenses are associated with your traditional administrative functions.
We would expect to see leverage in our administration and administrative functions overtime as our revenue grow. We believe that these changes bring our administrative expenses in line with benchmark companies of our size and complexity. There will be restructuring expenses beyond those associated with the closure of our New Jersey manufacturing site, and we will provide better guidance with regard to timing of the expense savings and restructuring charges on our third quarter conference call.
We expect to see savings begin flow through our P&L next quarter, however, we do not expect to see net benefit in excess of restructuring charges to be realized until the first half of 2013. Following the completion of these restructuring activity, we expect to be cash flow positive from U.S. operations when sales are approximately $100 million in a quarter. This is a 20% improvement to our prior guidance of approximately $125 million in a quarter.
For the quarter we had a cost of goods sold of approximately $62 million and as a percent of product revenue cost of goods sold was approximately 77%. This is an increase of our last quarter’s cost of goods sold by four points. Consistent with expectations provided on our last quarterly call where we indicated we expect to see COGS grow slightly as we had essentially depleted our zero cost antigen that would not be antigen expenses flowing through our cost of goods sold. This quarter we saw approximately $4.2 million of more antigen expense flowed through our P&L in the last quarter.
Excluding the non-cash accounting shift from zero cost antigen to antigen at cost, we saw about 100 basis point improvement in cost of goods sold relative to last quarter. We continue to show efficiencies in our manufacturing cost structure. Reducing the cost of goods sold is one of our top priority. As we said following the completion of the restructuring we expect to see cost of goods sold less than 50% down from approximately 77% this quarter and as we continue to move forward with our systems and automation initiative, we expect to continue to see our cost of goods sold decrease. In addition, as revenue grow we will see leverage in our manufacturing infrastructure.
Sales, general and administrative expenses were approximately $80 million this quarter down from approximately $105 million from Q2 of last year and down from approximately $95 million last quarter. Excluding the contractual obligations associated with management severance and other termination benefits, SG&A was down from the quarter ended Q1 2012 by approximately $3.5 million.
Second quarter 2011 SG&A expenses included approximately $34 million of manufacturing startup cost. We have provided a pro forma financial representation in 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 are moving to a cash flow breakeven position.
Research and development expenses for the quarter were approximately $20 million compared with approximately $19 million for the same quarter a year ago. We expect to see research and development expenses to continue to be approximately $20 million per quarter for the remainder of this year.
The company had a GAAP net loss of $0.65 per share. This included approximately $5.2 million or $0.04 per share associated with contractual obligations on management severances, generating a pro forma loss of $0.61 per share. we have 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 and for this quarter we generated an EBITDA loss of $0.48 per share.
We have a strong balance sheet with cash, cash equivalent and short and long-term investment at June 30, 2012 of approximately $510 million compared to December 31, 2011 of approximately $618 million. For the quarter the company had a net cash usage of approximately $49 million. You can see we are continuing to become more efficient with our cash.
I’ll now turn the call back over to John.
Thanks Greg. In conclusion we are excited about our long-term prospects. We are at the forefront of new era in cancer care and we believe the market potential for PROVENGE is substantial. We have set Dendreon on a new course to accelerate profitability and future growth. We expect the factors we discussed effecting our operations to persist through the third and fourth quarter as we focus on regaining our momentum and achieving profitability.
We recognized this process will take time, focus and effort, but we are committed to the task ahead and our confident that successful execution of our strategic priorities will enable Dendreon to deliver value to our shareholders and our physician customers as well as their patients around the world.
To sum it up, we have the right people, resources and strategy in place to deliver on the opportunity that is Dendreon. I’d now like to open it up for questions.
(Operator Instructions) Our first question comes from Mark Schoenebaum from ISI Group, your line is open.
Mark Schoenebaum - ISI Group
The $150 million in savings that is savings versus what? The current run rate or some future plan and then is the $150 million of savings you are talking about inclusive or exclusive of the cost of goods improvement, or you talking of the gross margin improvement? And the third part of the question is, what exactly do you expect your cash, SG&A and cash R&D expenses to be once the restructuring is complete.
The 150 million in savings is relative to where we are at today, it certainly includes the gross margin improvements as well as the other reductions that we are making in SG&A. I think we gave on a GAAP basis what we expect the SG&A expenses to be. At this stage I think and we have indicated administrative functions on a cash basis, they are about $60 million. I don’t think we are at a state right now where we would be able to break down cash specifically between the other function if you can imagine this is a process that we have been going through fairly extensively and have top level plans to putting the numbers. But in terms of the data that you are looking at net level of detail that wouldn’t exist today but we are able to give you guidance that we would be comfortable in sharing.
Mark Schoenebaum - ISI Group
And why did the breakeven sales number go down by 100 million but the costs are going down 150 million.
And the piece there is a difference between GAAP expenses and cash expenses and it's pulling 100 million cash out but 150 million in expenses as you report amount of P&L.
Our next question comes from Cory Kasimov from J.P. Morgan, your line is open.
Karen Jay - J.P. Morgan
This is actually Karen Jay in for Cory. I wanted to ask again the performance, the areas whether the high turnover, were they more impacting higher volume accounts or new accounts they just gain off (inaudible). And are you seeing about the return in July?
We have seen vacancies distributed throughout the country, some have impacted some of the higher volume territories, some have impact some of the lower volume accounts and we are dedicated to making sure that we get top notch talent into those territories to make sure we continue the momentum and the relationships that were there and existed. Regarding the moving forward as we see our accounts, we do believe that we have a good in place to make sure that we are focusing executionally well on our top tier accounts to make sure that our activity is focused on driving that same opportunity at each account further enroll patients and bring them to get more PROVENGE.
And to your question Karen, as it relates to July sales, this is John, a couple of things. Number one, Joe is rebuilding the commercial team really from the ground up. We have made necessary changes in sales leadership at both VP level and all the regional levels. We have really begun to rebuild that, we have added marketing talent, we think those changes are going to take some time and so we are not going to be providing quarter specific guidance nor an update on monthly sales at this point. We will revisit that in the future, we believe that this team will regain the momentum and yet programs on the trajectory that it should, and certainly for the opportunity that we think is there. We already did a guidance as we get little bit further downstream and get to this restructuring.
Karen Jay - J.P. Morgan
Just a clarification quickly on something in the press release about updating coverage policies, (inaudible) color on that and what we might expect in terms of scenarios or how we should interpret that language.
So, our reimbursement has been strong especially with the national coverage decision, we continue to work with our payers to assure that patients have access to PROVENGE, and w have had good success with some of the public and private payers, and making sure that access to the product is reimbursed and the national coverage decision of last year has gone a long way and helping us through that process.
Our next question comes from Michael Yee from RBC Capital Markets, your line is open.
This is (inaudible) in for Michael. With regard to the higher vacancies and cancellations in May and in June, how much of that do you think it was because of disruptions in sales turnover versus impact from conferences versus competition in merging?
Certainly, whenever you have turnover it really hurts especially since the relationships that have been developed the momentum on projects, certainly helped. The yield issue is a bit of a different issue, as we look at that and with the yield issue we typically see. So, we monitor it, we are looking to be more efficient and reduce that rate of cancellations and last part of the quarter we did see an increase in that cancellation rate, but we have addressed it, with field nurses deployed at the division level to make sure they are focusing on our top customers, so that way when an enrollment does come through it does get to that first infusion, because that’s the critical point. Once the patient gets to the first infusion they typically get to the third infusion and not is an issue. So, I think that when you look at the situation, yield vacancies all play a role in this last quarter.
We didn’t see through any of the discussions and the work that we did to understand this, any relation to the competition at this point in time. I think certainly while we normally would search engines infusion still as we go through the quarter and we get to see that in the second half of June as we thought we were, some of that certainly was driven by not having field sales personnel in account, to setup the infusions and to help work the patients through.
Our next question comes from Rachel McMinn from Bank of America/Merrill Lynch, your line is open.
Rachel McMinn - Bank of America/Merrill Lynch
Question a little bit more on sales, I know we had closely trying to find an apples-to-apples comparison that to the best of your ability can you give us a sense of why you think same account sales look like quarter-to-quarter. And then just to clarify, John are you basically saying that I’m just trying to get a sense for how you are thinking about sales over the back half of the year. It sounds like you are not going to give guidance specifically but should we think about sales being down continue to be negatively impacted by vacancy that are existing, I’m just looking for same level of guidance there.
As it relates to guidance, we are not going to provide and simply because we have really rebuilt all of the commercial organization and a big part of that was the changes in sales leadership over to VP and regional manager level. That combined with an unusually high rate of vacancies in May and June, means that as we hit into this next quarter we are going to have to fill those vacancies, get those people trained and get them out with customers.
As far a same-store sales and our approach there in the quarter, (inaudible) top accounts continue to grow with us and we have seen some stabilize or some stay flat. And we realize in the commercial side that is really important that we have deeper penetration into these accounts, and that we continue to make sure our focus is there. And looking at the back half of this year, four primary approaches that need to happen; one, we need to get the physicians more comfortable with the clinical data and the benefits of PROVENGE and immunotherapy, as well as the process for the product. Number two, physicians need to become (inaudible) and make sure that with the multiple options for prostate cancer patients in the market that PROVENGE is an appropriately slotted upfront. Number three, focused execution of our programs and tactics. At the top account of course all three of our sectors academic, neurology clinics and oncology clinics. And fourth, we need to accelerate and increase our direct to patient activities and programs so that we get patients to ask for PROVENGE at this top accounts.
Our next question comes from Robyn Karnauskas from Deutsche Bank, your line is open.
This is (inaudible) for Robyn. The first one just, I think many people kind of expected (inaudible).
Well as it relates to the New Jersey decision, therefore, two primary criteria that we utilized in order to make this decision. The first was customer service. Where would we be able to service all the customer s given the expertise issue that we have around PROVENGE and having to deliver it within a specified timeframe. And as we look at our base of customers and where we expect the future business to come from. It was clear that from a customer service and being able to service those customers within the parameters that we set that is Atlanta and Seal Beach were an excellent combination. And so from both the customer service and from an overall COGS standpoint, that’s how we made the decision, it's a substantial amount of money annually at the run rates we are expecting.
We don’t see (inaudible) we see these products as complimentary. On market research today in the second quarter don’t show that Zytiga has moved significantly in this quarter. Zytiga did have some positive data at the end of the quarter presented at a conference, we will continue to monitor and react to that activity to see how it's progressing. We see physicians using PROVENGE in conjunction with other therapies, they tell us about it. We believe that an increase of products in this stage it will reach increasing in screening and treatment of these patients and that’s good for prostate cancer patients and good for PROVENGE. We believe that immunotherapy and PROVENGE is a necessary component of patients with advanced prostate cancer, a therapeutic option that they must have.
Our next question comes from Howard Liang from Leerink Swann, your line is open.
This is actually (inaudible) in for Howard. Can just help me understand what were your what is the sales assumption for the cost of goods when you say it's going to be less than 50% a year from now. and can you just break out for us exactly what the GAAP and non-GAAP of cost of goods, R&D, SG&A will be at 400 million in sales.
When we look at the cost of goods sold, where we said it would be below 50% that’s not really assuming volume increase from where we are at. And so what we are stating is that with the closure of that facility, it brings the cost down to that level. And we would expect to see additional savings overtime as volumes ramp, we get leverage as well as improvements inefficiencies. With regards to the cash base for all of the component, at this stage in total our cash expenses dropped down to approximately $100 million in a quarter, breaking it down to three components as we indicated earlier, this is a process that we got some top level plans. And we are certainly very supportive of the information we have provided today by functional area on a GAAP basis we are not prepared to able to share what the cash spends would be for each of those components.
So, in terms of the fixed cost for the cost of goods, if we were assuming the current sales run rate, what would that be one the New Jersey plant is closed.
I think as we indicated it's approximately $65 million associated with the write downs in the facilities. If we look we have been running approximately $11 million a quarter in terms of depreciation and amortization at New Jersey.
Our next question comes from Salveen Richter from Canaccord Genuity Securities, your line is open.
Salveen Richter - Canaccord Genuity Securities
Just a question on the sales turnover and vacancies you saw in the second quarter. I mean I assume you see typically come of that happen quarter-over-quarter. So, how different what you saw versus what herd in previous quarters. And then just a question on within the community account, it looks like you went from 28% penetration in neurology accounts to 30% this quarter. What are the challenges or the hurdles here are to increasing uptick in the neurology setting.
So, 18% of vacancies in June is the high number, that’s way higher than what we typically would see in the normal year in a normal quarter. So, we have seen that, I think we have seen it for a variety of reasons that I outlined earlier; one is past organizational changes that have occurred at Dendreon plus the other biotech companies preparing to launch going after your people that are experienced oncology sales force folks. The next component that you asked about is neurology, and in neurology clinics there is some key components to move into business for their, getting to neurologist comfortable with using PROVENGE and immunotherapy in our process. The turnover certainly has affected neurology practices and well as oncology practices.
Our next question comes from Eric Schmidt from Cowen and Company, your line is open.
Eric Schmidt - Cowen and Company
First just pertains to the guidance for breakeven at $100 million per quarter revenue was there a timeline for achieving that or Greg can you comment on whether you have the cash to get to breakeven. And wondering how Europe fits into this, I assume all of the numbers you gave today focused on just the U.S. business?
With regards to timeline and I think we are giving a specific timeline of getting there although given we were $80 million this quarter. You are looking at a growth there, $20 million in total to hit. I think from that basis we absolutely believe we have the cash that we need to be able to get to a cash flow breakeven. We do not have the access to the equity markets. You are right it does not include Europe, but Europe right now for us is about $3 million a quarter that we are spending in. So, I mean it's I say in the rounding here right now that 100 million breakeven. And I think as we go forward with Europe, we have had discussions and focus is strongly looking at partnering it. And to the extent that there is some infrastructure items we are building out our goal would be being able to execute that from cash flow that we generate.
Eric Schmidt - Cowen and Company
But I think when you lat restructured the business last year you talked about an SG&A, target savings of $60 million press release year on (inaudible) $300 million GAAP expense or quarterly run rate of 75 million. What’s changed because I guess now with the new restructuring you are still only talking about SG&A getting to that target?
If you look at the SG&A number in total, a portion of that was additional savings that we are projecting and I think that incorporated in the numbers because we were going to see SG&A continuing to drop when we referenced all of these are relative numbers where we are at today.
Our next question comes from Chris Raymond from Robert W. Baird, your line is open.
This is actually (inaudible) in for Chris. I wanted to clarify, do you expect the COGS less than 50% of product revenues after the full implementation of the restructuring in about 12 months or after the New Jersey facility closes some more like six months. Can you give little more detail on where the 600% headcount reductions are coming from?
It is after the closure of the New Jersey facility. It is in the G&A functions that we expected will happen over 12 months window. Certainly, more of it will happen this year than next year but it won’t be complete until that, but you know the COGS is associated with the closing of the facility in New Jersey that you will achieve those results. And with regards to the break over the headcount, again I don’t know we will give specifics other than New Jersey manufacturing is clearly a factor that you are closing it down. There is over 50% of this is associated with technical operations, but there will be a sizable number of individual effected in the Seattle facility as well.
Our next question comes from Yaron Werber from Citi, your line is open.
This is actually (inaudible) in for Yaron. On the call you mentioned you had around 870 infusion sites, and I believe in the past you said that when you got to 1000, there will be about 80% of the clinics we are targeting. So, given the high penetration, have do you feel about the ongoing demand and what drives high up take in each of those accounts in your perspective.
We do believe this drug has big potential, has significant upside. As far as sites and accounts, last quarter we talked about linking sites to parent accounts and really looking at what do our parent account look like, because at times what happens is parent’s accounts in both the neurology clinic and the oncology clinic segment will add on site that geographically maybe a bit spread out. So, we have seen growth actually in both of those components, both accounts and sites in the quarter greater than we saw in the first quarter. So, that is interest in both brining PROVENGE into infuse and expanding those that have already infused to some of the smaller sites. So, that is the positive.
Our next question comes from Lee Kalowski from Credit Suisse, your line is open.
Lee Kalowski - Credit Suisse
Just wanted to follow-up something Joe you had mentioned with Zytiga, your audit showing that Zytiga not moved incrementally this quarter. So, if we think about not potentially without getting potentially a labeled indication for pre-chemo indication, potentially around the time you are talking about an uptick. I guess what sort of gives you the confidence that you guys will b seeing the uptick right around the time that Zytiga might be getting pre-chemo label. And then a separate question, is there anything else in terms of seasonality that we should be thinking about in Q2 and potentially into Q3 that might impact little bit of volatility in sales?
Let me address the Zytiga again, we see this product as complementary, we see them to be used as more and more therapies come out in this space. Patients will be able to have the benefit of multiple therapeutic options and we see the importance of the sequencing and what’s occurring in sequencing out in the market both at the podium, at major meetings, as well as what we are hearing when we talk to physicians as being an important component. We also believe that in that sequencing story PROVENGE as an immunotherapy should be sequenced up front prior to Zytiga. We are also seeing in the marketplace is that as competitors or additional products enter this space, the noise increases, more patients get screened and this is better for patients and also better for us, because those are the patients that are identified earlier at asymptomatic patients that would be ideal to start on PROVENGE therapy.
To be even more transparent, we don’t believe it was Zytiga in the second quarter and the reason we believe that is not only our physician feedback but also if we look at the audit including the June share audit we did not see Zytiga take market share in the pre-chemo setting from PROVENGE and so that’s why we don’t believe it today. And now going forward, some patients maybe (inaudible), may some patients get Zytiga before PROVENGE, sure; do we think that having an immunotherapy on board makes a lot of sense, based upon all of our discussions with our thought leaders absolutely. Do, many of the thought leaders believe that you should put an immunotherapy on board before to (inaudible), absolutely. But obviously there is a lot of education that’s going to happen and that’s going to have to be worked out, but from the audit that we have seen, it wasn’t Zytiga in June.
So, as I look forward do I see some seasonality here, we need to fill the vacancies, the vacancies are really important for us to make sure we get top notch folks in those territories. We have people ready to start in July and August as well as when those vacancies are fulfilled really focused execution. Focused execution on our top customers and making sure that immunotherapy and PROVENGE is seen as a necessary component for advanced prostate cancer patients.
Our next question comes from David Miller from Biotech Stock Research, your line is open.
David Miller - Biotech Stock Research
First thing I have is an update on the Zytiga comb trial that you are doing, are we still looking at December for data from that, early data?
I don’t think we have always indicated we expected to see enrollment this year, I don’t think we necessarily indicated the data would be out in December.
We should have all the patients enrolled by then and then it's question of analyzing the data and what (inaudible) we can submit it to. I think early next year is probably most likely.
David Miller - Biotech Stock Research
The next question I have is, Joe, you talked about a couple of times, talking about wanting to focus on all three segments, neurology, oncology and academic. Neurologist, however, control about 90% of your target patients, but you said you need better balance. Does this mean you are kind of changing away from a urology specific strategy or what happened in Q2 because of vacancies for urology specific strategic kind of slid and you actually had more people calling on oncology academic accounts.
We realize that where the patient say, a lot of these patients are in the neurology practices and neurology is very important to us. We have put key account managers in those positions and actually when I heard got here, we even expanded that because we wanted to make sure we were appropriately deployed against our largest urology customers. And we still see that as a big opportunity and significant upside, but we cannot afford to led the other sectors slide, we need to continue to have everything addressed and everybody called on including the academic institutions and the oncology groups, because there is high volumes there. And for us to be able to be successful we need to be able to balance all of that activity and our marketing mix, but we do realize and we have been committed and we will continue to be committed to the urology market segment. We just can’t go to one segment and not go to the others.
Certainly, adding the urology account group the key account group’s call on the big practices is helping, keep the focus on the big accounts there. So, we are not backing away from it. Just as we look at the balance, we are making sure we are servicing the key opportunities to drive same-store sales. We just need a better balance.
David Miller - Biotech Stock Research
And then finally, Greg, you said that you are focused on partnering Europe, I know that we have always talked about partnering Europe for the manufacturing. Is the focus now on partnering it for the sales as well, sales and marketing?
It's John, we are going to look at, seriously look at options to partner the sales and marketing as well. Obviously, we have a lot of (inaudible) in the U.S. if we found the right deal for investors that will make sense. We would do it. If not there is commercialization plan being put in place and worked on today at Dendreon. And we believe based upon what we have done we would be able to fund that through the cash flow that Greg talked about earlier.
At this time I’d like to turn the conference back to our presenters for any closing remarks.
I’d like to thank everybody for joining us today. Obviously, this was important for our company to make these decisions. We do believe we have set a new course for Dendreon, both for profitability and future growth and we believe that the moves that we are making will be good for our shareholders overtime. As you might imagine we have a lot of communicating to do this even with various folks here both internally and externally, so we are going to get after that. We thank you all for joining us.
Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Have a good day.
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