The tepid sales data that is arising from quarterly sales reports is taking its toll on speculative investors in Dendreon (DNDN). With the news of 600 layoffs (many of the layoffs in administrative positions- both full time and contractors, not specifically mentioned as sales positions) and a prudent decision to close a NJ manufacturing facility, attempts to bring COGS down to less than 50% may impact their books as soon as 12 months, per John H. Johnson, current chairman, president and CEO.
The original forecast made by Dr. Gold greatly overshot the runway, as he assumed $350-$400 million in sales per year, and seemingly ignored the entire concept of market penetration.
In my prior article as contributor, I attempted to show why Gold's dream would never come true, from the office workflow standpoint- there is a learning curve that would make prescribing slow at the outset. That article and debate can be found on SeekingAlpha.
Such market penetration factors as physician reimbursement concerns, the amount of accounts (infusion sites) are hotly contested in investment blogs. The purpose of the latter half of this article is realistic, in that I will make an attempt to identify hurdles to continued growth of Provenge clinically, and simultaneously, show how Dendreon may benefit from conscientious planning.
"Full implementation of the restructuring is expected to take 12 months. Once implemented the Company will be positioned to be cash flow positive when net product revenue reaches approximately $100 million in a quarter, a 20% improvement from prior guidance."
The Street reacted after 2Q 2012 earnings announcement as below.
The dilemma certainly seems to be a combination of not only how much they sell, but how they sell. Where the street consistently comments on COGS (which develops itself into a gross profit margin) it is interesting to see how much Provenge is being sold.
COGS- Cost of Goods and Services, as a profit margin
Gross profit margins for Dendreon have been just over 35% on average. So for every widget sold for $1, $0.35 is profit. $0.65 is spent on the cumulative spending on efforts to manufacture, market, and deliver the product to sale.
Johnson's pledge is to reduce this to below 50% following the closure of the Morris Plains NJ Manufacturing plant.
Motley Fool has published an article citing "A large number of vacancies in the sales rep position", "infusion cancellations", and "focus and execution" as the typical business-related reasons why Dendreon experienced its 2Q 2012 shortcomings. They state that Dendreon is waving the white flag.
Yet, from this same article, Motley Fool argues that capacity is ample:
"With just two facilities, Dendreon will be able to produce $1 billion worth of Provenge with the potential to double that if automation is implemented in a few years. That leaves some room to run, especially since sales actually fell slightly quarter over quarter."
Are sales actually weak, or is there room to grow?
Let's take a look at how weak the quarterly sales are, on a site by site basis. If $80,000,000 was their net on a 77% COGS/23% profit margin, that means they sold a $93,000 product with a gross of $347,826,087.
Dendreon has 687 infusion sites per the press release above. Using a model where every site was equally active, that is $506,297 per site in sales.
That's only 5.44 infusions per site, per Q2 2012. If just 2 to 3 more patients are added per quarter per site, the numbers can change quickly. That is called upside.
What is their market penetration?
Using that average caseload and multiplying by 687, that's 3,737 cases treated in Q2 2012 alone. Projecting to a year multiplying by 4, that is nearly 15,000 cases per year.
It's not hard to find metastatic prostate cancer cases. Or is it? The National Cancer Institute predicts that 28,170 men will die of metastatic prostate cancer in 2012.
Using the above numbers to project through 2012, that's a very good market penetration (around 15,000 out of 28,000), given that men can die of metastatic prostate cancer within two years of the diagnosis.
What clinical factors may be affecting prescription of Provenge?
What investors, speculators, and industry analysts have failed to do is, again, realize that there are real world and front-line clinical factors affecting the sales. How acceptable of a treatment is Provenge? What is really going on with Provenge not in terms of Dendreon and its business, but rather, in the treatment of prostate cancer?
Ignored: a wildly emerging trend in prostate cancer treatment, and in fact, non-treatment. More and more men will be treated under a paradigm called "Active Surveillance" which is an attempt to watch the PSA over time, weighing the progression of prostate cancer against the progression of other diseases, typically more lethal, like coronary artery disease, strokes, and the complications of diabetes. Doctors are helping patients to decide not to treat, and rightly so for certain Gleason scores, widely accepted to be Gleason 6 and less, with low volume disease.
There are temporal trends in the actual causes of death in men with prostate cancer. Many die with the disease rather than from the disease. Is this shifting over time?
"During follow-up through 2008, prostate cancer accounted for 52% of all reported deaths in Sweden and 30% of reported deaths in the United States among men with prostate cancer; however, only 35% of Swedish men and 16% of US men diagnosed with prostate cancer died from this disease. In both populations, the cumulative incidence of prostate cancer-specific death declined during follow-up, while the cumulative incidences of death from ischemic heart disease and non-prostate cancer remained constant. The 5-year cumulative incidence of death from prostate cancer among all men was 29% in Sweden and 11% in the United States."
Remember the FDA indication for Provenge is (ad nauseum): the treatment of castrate resistant prostate cancer, that is metastatic to the bone, in minimally symptomatic or asymptomatic men (men with ECOG performance scale of 0 or 1 out of 5)
1) The longer a practice makes a patient wait, the higher the chance they will progress quickly to ECOG level 3. It has happened twice in my practice in 2012. The trend is emerging that temporally, the longer you wait to treat patients, the more likely they are going to die of something else. This makes Provenge therapy appropriate at earlier stages of the disease, something the company has promised is more effective at lower PSAs due to study presented at the American Urological Association and American Society of Clinical Oncology annual meetings:
"Retrospective analysis of IMPACT trial by baseline PSA quartile suggested PROVENGE extended median overall survival in all subgroups with a trend toward an increased magnitude of treatment benefit in patients with a lower baseline PSA."
2) The fact that patients die of other disease will be affecting patient choice to start antiandrogens. This will delay, by definition, the onset of androgen-independent disease. You can't have one without the other. If men are choosing to NOT treat, then by definition the onset of castrate-resistant prostate cancer will be delayed, but not gone.
3) The company needs sequencing data, ASAP. The competition with Johnson and Johnson's (JNJ) Zytiga, as its promising data has also been labeled a reason for drops in DNDN stock price (the days after positive earnings news, in fact, mysteriously well timed with announcements about SEC investigations starting)
4) While JNJ is less likely to buy DNDN than is Medivation (MDVN), it's more likely a partnership in sequencing will emerge between the two, perhaps to show better data than MDV3100 (Enzalutamide) as it is expected to get FDA approval sometime in 2012.
5) While most investors have tried to argue each of the new treatments emerging are going to be "the cure" and have invested likewise, I have a news flash for you: There is no cure for prostate cancer. If you want a cure, you need a combination of therapies (adjuvant therapies) that lead to a cure. This is why, even with localized disease (non-metastatic) after a radical prostatectomy, Provenge may hold a "protective" role if used either before or after radical prostatectomy- neoadjuvant or adjuvant. The company is looking into this, from the 2Q earnings press release:
"Patients with localized prostate cancer in an open-label Phase 2 trial called NeoACT, received three infusions of PROVENGE prior to radical prostatectomy. Investigators found significant increases ( > 3-fold) in CD3+ and CD4+ T-cells 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. PROVENGE is not currently indicated for neoadjuvant treatment of localized prostate cancer."
What about the "competition"?
First off, Dendreon should always consider its treatment unique, in fact, peerless. There is no true counterpart in this "competition" rather, there are players in the arena that will likely be used on conjunction, as state above. Combination and sequencing with Zytiga and MDV3100 is certainly more likely than the choice of one over another. This is not a mutually exclusive space as many investors foresee. While investors choose to make the best investment, and argue that their product is the best, patients choose treatments in combination to find a cure.
It's nothing short of absurd to see that before FDA approval, in the midst of all the above history behind DNDN, this is the Medivation chart:
This company continues to make gains based on promise of another antiandrogen, without $1 in sales.
What DNDN needs to do, in addition to promising the layoffs and changes in the business model, is focus on the above clinical issues- get it usable earlier. Project real sales forecasts which take active surveillance into account.
Lastly, hopefully before the end of 2012, DNDN will develop a cost-effective panel of biomarkers (perhaps from a company like Myriad-RBM) to prove to the patients and physicians alike, that the treatment is actually working. This needs to be correlated with improved survival outcomes. One of the biggest barriers to physicians wanting to give Provenge may become the lack of any objective data to show the patient, besides the typical marker the patient is looking at over years- the PSA. This number continues to rise, patients get very nervous and are willing to seek treatment in chemotherapy and radiation oncology if they are candidates.
I am long DNDN, in the stock equity itself, and in call options for January 2014. I have no plans to initiate buying or selling of either stocks or options in Dendreon within 7 days following publication of this article.
Disclosure: I am long DNDN.
Additional disclosure: Please see the article