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Executives

Nicole Soley

John H. Johnson - Executive Chairman, Chief Executive Officer and President

Gregory T. Schiffman - Chief Financial Officer, Executive Vice President and Treasurer

Mark Frohlich - Chief Medical Officer and Executive Vice President of Research & Development

Analysts

Mark J. Schoenebaum - ISI Group Inc., Research Division

Cory William Kasimov - JP Morgan Chase & Co, Research Division

Michael J. Yee - RBC Capital Markets, LLC, Research Division

Rachel L. McMinn - BofA Merrill Lynch, Research Division

Robyn Karnauskas - Deutsche Bank AG, Research Division

Howard Liang - Leerink Swann LLC, Research Division

Eric Schmidt - Cowen and Company, LLC, Research Division

Laura K. Chico - Robert W. Baird & Co. Incorporated, Research Division

Y. Katherine Xu - William Blair & Company L.L.C., Research Division

Gregory R. Wade - Wedbush Securities Inc., Research Division

Lee Kalowski - Crédit Suisse AG, Research Division

Ryan Martins - Lazard Capital Markets LLC, Research Division

Ying Huang - Barclays Capital, Research Division

Gloria Woo

Geoffrey C. Porges - Sanford C. Bernstein & Co., LLC., Research Division

David D. Miller - Biotech Stock Research, LLC

Dendreon (DNDN) Q3 2012 Earnings Call November 2, 2012 9:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Third 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.

Nicole Soley

Thank you, and good morning, everyone. We're pleased that you could join us today for our third quarter conference call. With me are John Johnson, Chairman and Chief Executive Officer; 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.

John H. Johnson

Thank you, Nicole, and thank you for joining us today. As you know, we delayed our earnings call from Tuesday to today due to Hurricane Sandy, as we are holding the call from our Bridgewater, New Jersey office. Our thoughts go out to everyone affected by the hurricane.

In advance of the storm, we took precautionary steps to ensure that our New Jersey operations would continue operating as usual. We have also been rerouting and rescheduling any procedures that may be impacted by the storm. I would like to take this opportunity to thank our employees across our entire organization, but especially, on our Morris Plains manufacturing facility for their dedication to help helping ensure smooth operations throughout the storm.

As you saw in our press release, we experienced positive trends in the third quarter across community accounts, and we have now seen those push into October. At this time, we believe the storm has had a minimal impact on October sales as we were able to reroute and reschedule most procedures. Even with the impact of the storm, October was a strong first month for our quarter. Given the severe disruption of the hurricane in the Northeast, we naturally expect there will be some impact on scheduling given patients and doctors' ability to get to the appropriate treatment settings. We are working to minimize this impact through November and December, but it's too early to tell how or if sales will be affected in the fourth quarter. We look forward to updating you on our next call.

Now onto our third quarter results. I'll begin by providing a high-level overview of our performance and our commercial progress, then I'll turn the call over to Greg who will discuss our financials in greater detail.

During the third quarter, we announced and began to execute a restructuring that we believe will lower our cost of goods sold to less than 50% of revenues, reduces our level of administrative expense and puts us on a path of being cash flow positive on our U.S. operations.

Today, we believe we are in a strong financial position with a strong balance sheet and are poised for future growth.

Commercially, we've had to make changes that while disruptive, have strengthened our commercial operations and position us for growth. We now see important markers that these changes have created new momentum for PROVENGE in our most important segments.

Let me briefly review the numbers. There in the quarter, we generated $78 million in net revenue, which is 27% higher than the third quarter of last year, but 2.5% lower than the second quarter of this year. We added 54 net new accounts for a total of 741 accounts since launch.

While our revenues are down slightly on a sequential basis, we saw an important positive trend in community accounts, which represents 66% of our total revenues. Committee urology accounts grew 14% quarter-over-quarter. We implemented a targeted urology key account management team earlier this year, and we have started to see the benefits of those investments. In account service by this new key account management team, revenues were up 16%, quarter-over-quarter.

As you know, the vast majority of prostate cancer patients pass through the urology offices. We continue to believe that urologists are critical for PROVENGE over the long term whether they infuse or refer. And as a result, we will continue to make urologists a key area of focus. We also know there's a significant opportunity in having this group screened earlier for metastatic disease.

Community Oncology account saw a positive reversal of trend being relatively flat on a sequential basis, which is a significant improvement compared to the 8% decrease we saw in Q2. We implemented a similar key account management team program in oncology in the Q3 and expect to see improved performance in oncology as a result, just as we did in urology.

Oncologists treat the majority of metastatic advanced prostate cancer patients and as a result will always be a core area of focus. Our strategy continues to focus on the large accounts regardless of specialty, especially in the community setting. We believe our commercial strategy is beginning to take hold in the important community segment. The positive performance of our community accounts was offset by a 25% decline in academic accounts, which we believe is largely being driven by an increase in clinical trial activity and site activation by other companies in these accounts. There are 6 Phase III or large Phase II clinical trials ongoing in the pre-chemo advanced prostate cancer space, which is in addition to the number of investigator-initiated trials also in this area. Given this clinical trial activity, we will continue to expect to see headwinds in this segment in the quarters ahead.

In terms of our customer composition, we ended the quarter with community clinics now accounting for 66% of our total business. Within the community setting, oncology now accounts for 43 points of this business and urology for 23 points.

Now I'd like to discuss the progress we've made in strengthening our commercial operations and improving commercial execution. Let's start with the sales force. Last quarter, we said we expected to stabilize the sales force in Q3, and we've done just that. I'm impressed with the top talent that our commercial team has recruited to fill our sales force vacancies. Having this new talent join our team of professionals who are loyal and passionate about bringing PROVENGE to patients, gives me confidence heading into 2013.

We just completed the national sales meeting 2 weeks ago in Atlanta, and I can assure you that the energy and the passion of this team was off the charts.

As you may have seen, as part of our restructuring initiative, we are also relocating our commercial operations to Bridgewater, New Jersey. Bridgewater will become the primary location for commercial positions that are not field-based. By having the entire commercial team together, rather than split between the 2 locations, we will become more efficient and aligned as we grow the business. We've already begun the transition process and expect to have this function fully consolidated in Bridgewater by the first quarter of 2013.

On the patient and caregiver front, we continue to get positive responses from our new PROPEL Program, which is a 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.

At a recent PROPEL meeting, physicians presented to a group of over 200 prostate cancer patients and caregivers. We were able to access an extremely wide audience of potential PROVENGE patients with this initiative, and we continue to execute this program to educate the prostate cancer population.

As Dendreon continues to educate the patient and provider community about the benefits of earlier screening and diagnosis, we expect to drive growth. We will continue our conversations with the patients, caregivers and their families to get information to them in as many new ways as possible. A great example of our ongoing consumer education initiatives is our work around Prostate Cancer Awareness Month in September. To bring great awareness to PROVENGE, we executed a national media campaign to raise awareness surrounding the disparity of prostate cancer in African American men, along with available treatment options, including PROVENGE.

We also hosted a number of community events to disseminate treatment information to patients, families and caregivers, and are excited about the opportunity we have to access potential PROVENGE candidates through a direct approach.

With regard to payers, we had an important policy milestone earlier this month as Aetna announced that it expanded its coverage policy for PROVENGE. We believe this decision is a testament to our commercial progress and the value of the benefits of PROVENGE therapy. And in September, we received a contract award from the Department of Veteran Affairs.

As we strengthen our commercial operations, we continue to make progress on restructuring our manufacturing footprint. We are on track to close our Morris Plains, New Jersey facility by the end of 2012 and have started ramping up production at our Union City, Georgia plant. Greg will update you on our restructuring progress later on during the call.

Over the last several weeks, I've been out on the road meeting with a number of our key constituents. I am hearing firsthand that they are seeing the benefits of our commercial efforts, including the more personalized experience they are getting with on-the-ground support. They share our belief in the benefits of PROVENGE and our confidence in Dendreon's ability to succeed. I'd like to share some anecdotes and some of the recent developments that underscore my confidence.

The provider community and KOLs continue to reiterate to us their belief in the benefits of the combination of immunotherapy in conjunction with other products. Based on this enthusiasm, we have made a decision to proceed with an Xtandi sequencing study and are obtaining feedback from physicians on the study design. The ZYTIGA is fully enrolled and we expect initial data to be released next year. Physicians continue to tell us they do not see these products as either-or decisions. They intend to use all the arrows in their quiver, and are looking forward to seeing this data.

As we look at the lifecycle of PROVENGE, I've heard a common theme from KOLs and providers over the last several months. Move PROVENGE early in the treatment paradigm. The retrospective analysis of those patients participating in the Phase III IMPACT trial, separated in the quartiles based upon their baseline PSA, demonstrated an approximate 13-month median overall survival benefit, versus control in those patients with the baseline PSA of less than 22.1. This underscores our belief that an earlier intervention with immunotherapy would be beneficial to patients. As a prominent physician summed it up to me last Wednesday evening, "T-cells take time. Earlier is better."

We will be working with KOLs and regulatory agencies to determine if there is a path forward that makes sense in earlier settings.

At the end of September, I attended the European Society for Medical Oncology's annual congress in Vienna, Austria. While there, I heard great feedback from the provider community in Europe, as the data presented continues to provide important insights into the treatment of advanced prostate cancer and further demonstrates the overall survival benefit of PROVENGE.

As you know, we've been working to expand into Europe where there is a large addressable market with similar characteristics to the U.S. Just last week, we completed our first patients treatment in a European Union open-label study, a study that is crucial to our EU expansion, and we are on track for mid-to-late 2013 regulatory decision.

With our restructuring on track, we are looking to the future. I see a stronger organization, focused on meeting the growing interest for PROVENGE, a leaner organization with a more efficient operating structure and a more flexible organization.

We have brought significant new talent and set plans in place to affect change in our commercial operations. We have tailored every strategy across Dendreon, and we are seeing many initiatives we implemented this year beginning to yield results.

We are encouraged by this progress and our positive momentum.

Let me now turn the call over to Greg for an update on the financials.

Gregory T. Schiffman

Thanks, John. Earlier today, we reported our financial results for the third quarter of 2012. Net product revenue for the quarter ended September 30, 2012, was approximately $78 million compared to approximately $80 million for the quarter ended June 30, 2012.

For the quarter ended September 30, 2012, we saw approximately $4.4 million of rebates and chargebacks. This is down from $6 million in Q2. In addition, we recorded approximately $1.1 million of charges associated with GPO administration fees.

Visit [ph] fees are included as reduction of gross sales. As such, for this quarter, we had a growth to net revenue adjustment of approximately 6.6%, which is back in line with our historical growth to net adjustment of approximately 6.5%.

Going forward, I'd expect to see our gross-to-net adjustment around 6.5% to 7.5%, depending on the amount of business being generated through 340B eligible institutions.

As John indicated, this was a mixed quarter for revenue. We were down sequentially. However, we saw a positive trend in our community accounts, which is where we believe the long-term revenue potential exists.

I'd like to provide some additional color on revenue for the quarter. As John indicated, we saw a very solid growth in our urology accounts which were up 14% sequentially.

As you recall, we implemented a new structure to support our larger urology accounts earlier this year. In the accounts supported by this new team, we saw a 16% sequential growth. We believe that we are starting to see some benefits from the changes implemented earlier this year by the new commercial team.

In addition, where we saw a sequential declines of 8% last quarter in our community based oncology accounts, we're essentially flat this quarter.

Based upon the success we've been seeing in our urology business, this quarter, we have implemented a similar structure to support our larger oncology accounts.

We would hope to begin to see benefits from those investments in the first half of next year. However, we saw declines in our academic business this quarter, related to what we believe are increasing clinical activities in our product label.

The academic business segment now accounts for only 16% of our total sales.

For the quarter, we had a cost of goods sold of $51.7 million, and as a percent of product revenue, cost of goods sold was approximately 66%. This is an improvement over last quarter cost of goods sold of 77% at a slightly lower sales volume. There are some favorable accounting adjustments for the quarter, associated with the restructuring, which will not repeat next quarter. However, assuming the closure of the Morris Plains, New Jersey facility next quarter, consistent with our plans. Even assuming similar revenues, we would expect our COGS to be around 65% for Q4.

We continue to see improvements in our cost of goods sold. Remember, we are still incurring expenses, associated with the New Jersey manufacturing facility, as we are still actively producing products at that site. Following the closing of the New Jersey facility, we expect to see cost of goods sold less than 50%. We are on track to complete the closure of the New Jersey facility by the end of the year.

As we move forward with our system and automation initiatives, as well as our ongoing cost-reduction activities, we would expect to continue to see our cost of goods sold decreasing over time.

In addition, as revenues grow, we will see leverage in our manufacturing infrastructure.

Sales, general and administrative expenses were approximately $68 million this quarter, down from approximately $85 million in Q2 of last year, and down from approximately $80 million last quarter. Again, there are some favorable accounting adjustments for the quarter associated with the restructuring, which will not repeat next quarter.

I would expect to see expenses increase to approximately $75 million next quarter, and then drop down further as we begin to see the benefits of the restructuring. We expect to begin to see net benefits associated with the restructuring initiatives to begin to appear in the financial results as early as the first half of 2013, with full benefits realized in the third quarter of 2013. The restructuring activities are removing a substantial portion of our administrative costs. And following the completion of our restructuring activities, we will have an administrative cost structure that is consistent with other benchmark companies of similar size and complexity. We will continue to invest in our commercial launch activities. And as we indicated earlier, we believe that we are beginning to see the benefits of some of those investments this quarter.

Research and development expenses for the quarter were approximately $19 million, compared with approximately $20 million for the same quarter a year ago, and approximately $20 million the last quarter. We expect to see R&D expenses continue to be around $20 million next quarter.

The company had a GAAP loss of $1.04 per share. This includes an $81 million charge or approximately $0.54 per share, associated with the restructuring.

Approximately $67 million of the restructuring charge are noncash, most of which are associated with the impairment of assets at our New Jersey manufacturing facility. This is consistent with the guidance we provided last quarter.

Excluding noncash charges and the cast charge associated with the restructuring, we had a non-GAAP loss of approximately $50 million or $0.33 per share. As we indicated previously, this includes some favorable accounting adjustments related to the restructuring. And earlier in my comments, I provided expense guidance by category to help the analysts prepare their financial models. We have consistently provided a pro forma representation of our financials, excluding our noncash-related charges to provide better insight as we move toward cash flow breakeven. We have a strong balance sheet with cash, cash equivalents and short- and long-term investments in September 30, 2012 of approximately $445.1 million, compared to December 31, 2011 of approximately $617.7 million.

For the quarter, the company had a net cash usage of approximately $65 million. This is up as compared to last quarter, driven primarily by the semiannual interest payments on our convertible debt. Upon final completion of the restructuring, we expect to begin generating positive cash flow from our U.S. operations at a sales level of approximately $100 million in the quarter. Following the completion of the restructuring, we believe that we are in a strong financial position and believe that the cash balance we are holding is more than sufficient to get us to cash flow positive in our U.S. operations.

I will now turn the call back over to John.

John H. Johnson

Thanks, Greg. As we accelerate our path to profitability and work to become a leader within our field, we are redefining our culture and finding better ways to operate. We continue to focus on growing the top line, streamlining our operations, strengthening our commercial organization and reducing our COGS. I'm confident that with the successful execution of our strategies, we believe we can be well positioned for profitable growth and are poised to meet the demand for PROVENGE that we continue to see in the marketplace. I'd now like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mark Schoenebaum from the ISI Group.

Mark J. Schoenebaum - ISI Group Inc., Research Division

I had a question about the decline in the academic setting. I was just wondering, given the fact this is such an acute drop, did you see signals in previous quarters or last quarter around this? And also, moving forward, given the fact that enrollment often takes many, many months or longer, do you expect further declines in this setting over the next several quarters?

John H. Johnson

A couple of things. We did see a decline last quarter as well, and I went out personally into a number of these centers and talked to the key physicians there. And clearly, in those discussions and feedback from our team, what was driving it was we were losing a lot of patients to these clinical trials. Now a lot is relative. If you look at that decline, that's about 43 patients if you do the math, quarter-over-quarter. Do I expect the headwinds in this area? Yes. As far as projecting whether they'll grow or decline, I'm not going to do that. And I want to be very clear here as well, though, Mark, that I'm not satisfied with this performance, and we're not going to look at these clinical trials as an excuse. We do want to tell you what happened. That said, we need to drive broader penetration and deeper clinical conviction across all the physicians inside these centers. There's still plenty of opportunity there. But as we look at what caused the actual drop, when I went out and when Joe and Tom and the team went out, that's what we found.

Operator

And our next question comes from the line of Cory Kasimov from JPMorgan.

Cory William Kasimov - JP Morgan Chase & Co, Research Division

I'm wondering if you've been able to assess the impact of ZYTIGA's new pre-chemo indication programs. I know you -- the physicians are saying it's not either-or decision, but is there -- is that something that's blunting the growth of PROVENGE? And then on the Xtandi sequencing study, is that being done in collaboration with Medivation and Astellas or is this being strictly sponsored by Dendreon?

John H. Johnson

Sure. As it relates to the Xtandi study, we're going -- we've made a decision to go forward with that, whether or not we choose to partner that. I'm not going to comment further on that. And what was -- I'm sorry, Cory, what was the first part of that question?

Cory William Kasimov - JP Morgan Chase & Co, Research Division

In terms of the new label for ZYTIGA and the pre-chemo setting.

John H. Johnson

Yes, I'm sorry. As far as the new label, we haven't seen that impact us directly in a substantial manner at this point. I don't think we can point a finger and say it was ZYTIGA that blunted any growth. We did have a lot of turnover in our sales force a quarter before last. We are putting people in place and training them. And as a result, as we look at it, it's more of that. If we look at some of the market research audits we do, we don't see that yet. But obviously, we're going to keep our eyes open and continue to monitor it.

Operator

And our next question comes from the line of Michael Yee from RBC Capital Markets.

Michael J. Yee - RBC Capital Markets, LLC, Research Division

This is actually a question for Greg. You said community was 66% and academic was 16%. Am I missing something to add up to 100%? Can you break those buckets out a little bit better? And within those buckets, can you break each of those out within oncology and urology? I just want to understand each of these moving parts. So community, academic, and what am I missing, and then oncology versus urology and each of those.

Gregory T. Schiffman

I think that, that community is where we can specifically break out oncology and urology and I think we indicated the 66% breaks down at 43 points of that were oncology and 23 points, urology. So it's not about a 1/3, 2/3, but it's getting close. We have 2 other segments outside of that. You got sort of hospital business that's not academic, and then you've got a mixed market where it's sort of combinations of them. They're not specifically urology or oncology. Both of them smaller. They're about equal in size. We did -- haven't broken down. There's not really anything fundamental or unique going on with trends or patterns there. The community, as I think, with the large accounts, we've had a lot of focus especially in urology. That's sort of the breakdown, though. It's just the remaining is combination of hospitals and sort of mixed categories that are community, but not dedicated to either oncology or urology.

John H. Johnson

Michael, we have some multi-specialty clinics that are in there in that last segment that Greg talks about, so it's hard to break those out. But the biggest bucket outside of what we were talking about was the community hospitals.

Michael J. Yee - RBC Capital Markets, LLC, Research Division

Okay. And so as you think about these buckets going forward, really, it's the community efforts that you're driving to drive growth. But we should think about the academic settings, these clinical trial site enrollment, sort of alluded to earlier. Enrollment just doesn't end in a quarter so this is going to be a headwind, and that's offsetting the community growth. That's how we should be thinking about it?

John H. Johnson

Yes, I think that's the way you should think about it. Obviously, as I've said before, I think we can still do better than we did in academics -- in the academic segment. That said, there's going to be some headwinds there. But we think, as you look across the community, there is a very, very large opportunity. And in my experience, you will see the hospital segment be less than 20%. But for us, we see a very large opportunity in the community. And clearly, we're going to try to get deeper penetration into those accounts.

Operator

And our next question comes from the line of Rachel MacMinn from Bank of America Merrill Lynch.

Rachel L. McMinn - BofA Merrill Lynch, Research Division

I wanted to dig in to that 14% growth you noted for the urology segment. Can you talk about how much of that was new accounts versus same accounts? And then just briefly, can you just describe what percentage of your volume goes to the Northeast? I understood your comments at the beginning about Sandy. I just want to make sure I understand the magnitude of the potential impact.

John H. Johnson

Greg, you want to take that?

Gregory T. Schiffman

Sure. So with regards to the Northeast, we really got 3 regions of the country and volumes within the regions not largely disproportionate. Northeast is probably a little bit larger, but it splits up fairly uniform across the country. And that Northeast region would include areas impacted and areas not impacted, certainly, by the weather, the storm that was back there. With regard to -- and as you are right to remind me, you were looking -- you started to ask the question on community new accounts versus historical accounts. And a lot of the growth is being driven by accounts that have been in place. It wasn't new ones this quarter in the urology setting. I think we talked about the key account management teams that have been implemented. They really are focused on meeting the needs -- the unique needs of very large accounts. And I think we're seeing some good penetration there within those accounts, which had been smaller and are growing.

Rachel L. McMinn - BofA Merrill Lynch, Research Division

So the 14% growth, you think the large majority of that within the community or urology is really same accounts?

Gregory T. Schiffman

It is far more same account growth than it was new accounts coming on board this quarter, yes.

Operator

And our next question comes from the line of Robyn Karnauskas from Deutsche Bank.

Robyn Karnauskas - Deutsche Bank AG, Research Division

So just can you give us an update on the sales force? It sounds like your new team, the people, the new hires you've made are doing a great job. But maybe in other areas, not as good a job. But -- so just wondering, maybe update us on the accounts that you've needed to fill. Have you filled all the slots in sales force? And then how comfortable are you going forward that the entire sales force will be able to do just as good job on all accounts?

Gregory T. Schiffman

So we have not filled all those positions. From Q2, most of the field we had some turnover, more in line with what we've seen historically this last quarter. I'll say in this last quarter, the sales force stabilized. We did not lose anyone who were in the top third of the rankings. So we feel good about what the sales force leadership team is doing right now. As we look ahead, we would expect that as a new team gets up and running, the new members of the team that they'll perform like our others. And we would expect to have a full boat and be able to put the pedal to the metal as we hit the first quarter of next year.

Robyn Karnauskas - Deutsche Bank AG, Research Division

And just a follow up, so do you now understand a little more about what happened when the sales force left? Was it really them leaving or was it the decline in the academic centers?

Gregory T. Schiffman

You mean in terms of the sales or the sales force?

Robyn Karnauskas - Deutsche Bank AG, Research Division

In terms of sales, the weakness last quarter. It was highlighted it was the sales force. Is it now more of a blend of sales force and decline in academic centers, even clinical trials? I'm just trying to understand more and more about the weakness of PROVENGE last quarter and what's really caused the stall in growth?

Gregory T. Schiffman

Yes, maybe on that one -- maybe on that one, Rachel, even though we did see decline in Q1 in academic, it was not nearly as pronounced as this quarter. And I think that we really haven't changed our view in terms of the largest impact we had in Q1 was dealing with -- I'm sorry Q2 was dealing with sales force turnover.

John H. Johnson

Yes. There's no question about that. And you still saw -- if you look at our data, you still see a decline in those territories where we had turnover. But as you look at the segments, the piece that stuck out to us that we want to highlight and be transparent about was the academic setting. That said, as a new group comes on and as we try to penetrate deeper in these accounts, we hope to turn that around. But there are headwinds in that particular setting. But when you look at where most of the potential is in the community, we think we have the opportunity to penetrate those accounts at a deeper level. And as I said in my remarks, we've added a team in that segment similar to what we did in urology around key account management that we would expect to see some of those benefits from that group in this quarter and heading into the first quarter of next year.

Operator

And our next question comes from the line of Howard Liang from Leerink Swann.

Howard Liang - Leerink Swann LLC, Research Division

You talked about the growth in the community setting and declined academic setting. How do we know it's not the result of PROVENGE becoming more widely available in the community? Therefore, patients no longer have to go to the big centers to get treated.

Gregory T. Schiffman

That's a fair question and we have seen cannibalization of some of our business and we've talked about that in the past. And so we examined that as one of the factors here. Was there some of that? Yes. But the majority of it is, as we went out and dug in account by account, was really coming out of clinical trial recruitment. But that was one of the first places we looked.

Operator

And our next question comes from the line of Salveen Richter from Canaccord Genuity.

Unknown Analyst

This is Andrew Ron [ph] for Salveen. I was wondering the 54 net new accounts, can you break that down by how many added and how many drop to get to that number? And if I could just squeeze one other quick one, I mean in relation to the Aetna policy change, were you getting a lot of reports of denials for a longer pre-metastasis?

Gregory T. Schiffman

So on the -- let me answer the first portion. Yes, we had 68 sort of new accounts coming on board. Net, in terms of the total growth, it was the 54. And so the delta there where the accounts that had been acquired or consolidated into other practices or hospitals.

John H. Johnson

So it wasn't accounts that fell off. It was -- in fact, in one case, we had a couple of accounts that came on and got acquired in the same quarter, last quarter. So you do see some consolidation in that. And that's what was driving in that number, not at any accounts fell off. As to Aetna, I can't say that we had a lot of denials. I don't think that, that would be accurate. I think what this does do is expands the patient population in that pair mix for patients to be much more consistent with the NCD. And so we're pleased that Aetna made that decision, and we think it's good for patients.

Operator

And our next question comes from the line of Eric Schmidt from Cowen & Company.

Eric Schmidt - Cowen and Company, LLC, Research Division

Another question on the active accounts. Do you ever drop an account off the active list? In other words, did all 741 accounts actually order during the quarter? And then maybe just a quick follow-up for John. It sounds like we should continue to expect these kind of quarter-over-quarter modest declines turning around in the early 2013 time frame. Is that sort of still the plan?

Gregory T. Schiffman

I can take the first portion of that. And when we referenced the account, there are accounts that are able to prescribe the product, have prescribed the product and treated the patient. That is in the cumulative number. There are certainly some accounts that do not order within a quarter. We've had some accounts that have not ordered over a period of time, and actually we've had that happen where they may not have ordered for 6 to 9 months, and then we see them come back and start ordering again. The vast majority of accounts are active, but it isn't one that every single account every quarter does order.

John H. Johnson

And as it relates to going forward, Eric, we're not going to give a specific guidance. But I will say that we believe and that we expect that PROVENGE will grow. We're not going to point to a specific time. I'm very pleased with the positive momentum shift. I was at the Atlanta National sales meeting. The enthusiasm, the new team combined with those people that have been very loyal to this company, that combination was really something to see. And if I contrast that with the first sales meeting that I went to after I joined the company, it was night and day. And so I feel good about the group that's there. I'm really pleased with the job the sales leadership team has done in recruiting some really top talent, experienced talent, which is what you need, as you know, in this business. And we're getting them on board. We're training them and I would expect that we'll have a full boat as we head into next year.

Operator

And our next question comes from the line of Chris Raymond from Robert W. Baird.

Laura K. Chico - Robert W. Baird & Co. Incorporated, Research Division

This is Laura Chico in for Chris Raymond. Just wanted to kind of follow up on the earlier questions here related to new account adds. Trying to understand, do you expect these new key account managers in the community oncology setting to help you kind of facilitate or drive that growth there?

Gregory T. Schiffman

Well as we look at the key account managers, first and foremost, we're going to make sure that we're penetrating the larger accounts. Will they help with some account acquisition? Yes. Our primary focus, though, is deeper penetration. And really what the strategy does by bringing the area business managers and the urology key account managers in, it frees up our salespeople. And what also frees up our salespeople is our nurses in the way that we're utilizing them at this point. It frees up our salespeople to go and educate a broader group of physicians inside the practice around the clinical profile of PROVENGE. And we know that we could have done a better job of penetrating a broader set of physicians inside the practice and in many cases, it was 1 or 2 physicians in the practice who are our primary champions, and we want to branch out. What the key account management team does is take some of the load off the sales force managing the account. It allows the sales force to then really go and educate physicians -- a broader group of physicians around PROVENGE. And we would expect to see similar benefit in our community oncology accounts as the area business managers get up and running. That we've seen with the urology team. The combination of the sales force in working with their key account management partner has been something that we feel very good about, and was one of Joe's decisions, and I think that it's paying dividends already.

Operator

And our next question comes from the line of Katherine Xu from William Blair.

Y. Katherine Xu - William Blair & Company L.L.C., Research Division

I have a question focused on the European section, I mean, territory. I mean, are you looking for a partner? And also, why the European review now is sort of slated to mid-2013. Previously, it was -- I thought it was accepted earlier this year, probably in January.

Gregory T. Schiffman

Maybe I can take the second portion of the question. We've always said middle of the year, the January is the earliest possible date if everything with absolutely to the clock and our expectation, given this is the first time that they're seeing a product like this, was that there would be clock stops. I think it's pretty typical, actually, even for products that are probably more mainstream than ours, and we wouldn't see a 12-month time frame. And so we've always guided to middle of the year since even to the start of this year. So that hasn't changed. I'll turn it back over to John.

John H. Johnson

Yes. And that we've always guided there, Katherine. The other thing is that we have responded to the 120-day questions. So we're moving forward in the process. We are examining partnering in Europe, and we're not going to comment, as you could imagine, on any specifics around those discussions. There could be some situations where having a partner makes sense. Obviously, the deal has to be good for Dendreon and good for the partner. But it is something that we're actively examining.

Operator

And our next question comes from the line of Greg Wade from Wedbush.

Gregory R. Wade - Wedbush Securities Inc., Research Division

Just wondering with respect to the estimate of the impairment of the manufacturing facility, how did you come to that number? Can it go up or down in the future? And then with respect to some granularity around the improvement to cost of goods we saw in the quarter, the pessimist could view that less sales equals a better margin. The optimist would say that there's improvement that's been made to the processes. Maybe you could help us to understand why it went in that direction this quarter?

Gregory T. Schiffman

You bet. So on the impairment, the impairment is really tied to book value of an asset. And from that standpoint, you impaired the facility, the majority of it. We are still using the facility this quarter. You do not completely impair a facility that's in use, but you have to do sort of a net present value based upon expected future sale. And so I will see a little bit more flowing through in the fourth quarter but the vast majority of all of it has gone through. It isn't something that's going to change in any sensitive way. There will be some additional restructuring charges flowing through in the fourth quarter and first and second until we've completed all activities of restructuring. And so the majority of the charges have hit, but there will be some moving through each quarter. With regard to COGS, I mean, I guess on that front, I -- in any place I've ever been, if you have a lower volumes, you have higher COGS because by definition, you spread your overhead. And if you have a lower volume, there's less volume that you're spreading that overhead to. And so from that standpoint, yes, we have the same labor. I have the same depreciation, amortization. I have less volume that it goes over. We have continually had improvements in our cost for sales over the last year. I think that the teams at our manufacturing site have exceeded the internal estimates in terms of areas of savings. We always expected to see benefits. This is a product that we're really learning how to make in volume. We've been doing that about, I would say, about 9 months, now a year where we focus on how do we reduce the cost. And I think we've reduced them dramatically, as well as finding the ability to get more products through a facility, increasing that by about 35%. Going forward, I think we expect to continue to see improvements in cost of sales at our manufacturing entities, where you have products you made for a decade, and you'd still see 5%, 10% improvement in COGS and you just--it improved every year, the process and efficiencies. We clearly expected that. We also have a lot of effort underway in automation and systems that I expect to see more of a step function improvements when those implement. That's what we continue to expect to see what drives COGS down. And we still maintain the guidance that we've expected, which is something below 30%. So between 20% and 30% from a cost of goods sold when we get all of the automation in place and volumes have ramped a bit.

Operator

And our next question comes from the line of Lee Kalowski from Crédit Suisse.

Lee Kalowski - Crédit Suisse AG, Research Division

The first maybe for Mark since we haven't heard from him. The Xtandi sequencing study, is that -- should we expect the data from that at Orlando or in Chicago? Is there any way to give us a little granularity on that?

Mark Frohlich

Yes. So the trial is pretty much fully enrolled. So we're in the process of getting the additional data on those patients as we follow them over time. And we anticipate submitting them through a conference next year, potentially at both those conferences, but obviously, we can't predict when things will be accepted. So I think at some point, in the first half of next year, we would expect to be able to provide some results.

Lee Kalowski - Crédit Suisse AG, Research Division

Okay, I appreciate that. And then maybe a question for John. I really appreciate the breakout of the various settings and the growth within each of them. And I understand you don't want to give too much of guidance on revenues, but can you give us some sense for maybe where you think each of these parts might be moving over the next few quarters? So if we look at the 23% to 43% and the 34%, sort of where you see those components moving?

John H. Johnson

Yes. I'm not going to -- as you inferred, Lee, break down in the specific guidance, I will say, historically, what I've seen is academics fall below 20%. Hospitals used to that combined business in many -- with many products used to be less than 20%. But you have seen, in many cases, some of these hospitals buy up some of the clinics, and so that dynamic has changed a bit. I think you'll continue to see growth in the community setting, and I would expect that we will see some growth in the hospital nonacademic setting. And it's too soon for me to tell where academics will ultimately net out. What we know is that there is very strong enthusiasm on the community side. We have a team and factories, and Joe's not on the call with us today. He's at the large group -- Urology Group Practice Association meeting out in Chicago. We're getting very good feedback. There was a lot of good things yesterday that came out of that meeting from both the podium and some of the one-on-one meetings. I talked to the team at 6 this morning. And we think that probably the community setting is where we're going to see the majority of our growth going forward.

Lee Kalowski - Crédit Suisse AG, Research Division

Okay. And so if we look at IMS data, it looks like less than 1% or 2% of the products that you got are being prescribed by urologists. So would it make sense, given the lack of competition here, to really make a big push in that area?

John H. Johnson

As I said in my remarks, good question -- as I said in my remarks, urology will always be a key area of focus for us for a number of reasons, primarily because most all these patients flow through there. There's an opportunity to screen for metastatic disease earlier. Many physicians say to us that they believe that immunotherapy is better the earlier you can give it. And so as a result, we're always going to have a strong commitment there. Dynamics of the market, though, are that the vast majority of these advanced prostate cancer patients with metastasis are treated today by the oncologists. And so we know that that's an important group. We're going to continue focusing on them. And our strategy is not so much specific to a given specialty. It's much more about where are the large group practices that treat these patients. In some places, urologists just refer and in some places, they treat. But wherever there's a large practice and they're treating the patients in that given ZIP code, that's where we'll have our focus.

Operator

And our next question comes from the line of Ryan Martins from Lazard Capital.

Ryan Martins - Lazard Capital Markets LLC, Research Division

Just on -- it seems like there's some discussions ongoing about the regulatory part forward for all the lines of therapy. So I hope you can give some color on that. And then has there been any decision made on the endpoints for the Xtandi sequencing studies? Is that going to be similar to the ZYTIGA study? Or could that going be different endpoints there? And finally, just on the European open-label study, is that something that was requested as part of the review? Or is that something that's just a part of the planned process as part of the approval?

John H. Johnson

Mark, you want to take those?

Mark Frohlich

Yes, sure. In terms of earlier treatment, we're exploring the various possibilities to the key opinion leaders, and we'll keep you updated if and when we make a decision to move forward there. In terms of the Xtandi study, we're also again seeking input from key opinion leaders. I would anticipate the trial design would be similar to what we're doing with the abiraterone sequencing trial. And again, a study that wouldn't really be powered for a clinical endpoints, but more for immunologic endpoints. I think there's a variety of biologic reasons why you might expect from synergy from agents like this. And so there's a lot of enthusiasm for pursuing those types of combinations. In terms of EU open-label study, that was something that we proactively thought it would be important for us to get some experience with European physicians and should there be questions from the regulators. We have a little bit of European experience there to provide some experience.

John H. Johnson

It was not a requirement for our submission.

Mark Frohlich

That's correct. It was not a requirement.

Operator

And our next question comes from the line of Ying Huang from Barclays.

Ying Huang - Barclays Capital, Research Division

So firstly, can you give us a little bit color in terms of your staffing level for the sales force? I know you're probably not where you want to be, but if any color, that would be helpful. And then secondly, what specific measures are you taking in terms of trying to reinvigorate the academic centers? And then lastly, given the small size of the sequencing studies here, what's the next step in order to make this into a clinical practice for the physicians here?

John H. Johnson

Sure. So I will talk a little bit about the staffing levels and the measures for the -- for taking in the academic setting, and then I'll turn it to Mark to talk on the last part of the question. In terms of staffing, we have less than 10 vacancies in our sales force. We did have a couple of promotions this quarter as well into this new area of business manager jobs. And those kind of a situations, we don't see the same type of problem with the accounts because we're able to manage them as we go through the transition better. So the number is less than 10. As it relates to measures for academics, it really is a center-by-center approach. We need to understand what trials are there and what patients -- what may be available. We've asked our sales force to continue to educate a broader group in those large accounts. And we know, in some places, it's going to be tougher because patients are not going to be allowed to have PROVENGE before they get to these other therapies. But it's really a case-by-case basis, and the biggest part of that is just really trying to educate a broader group of physicians.

Mark Frohlich

In terms of next steps for sequencing studies, I think it's really important for us to see what the results for these studies show. Again, I wouldn't characterize them as small. I mean, they're kind of 60- to 100-patient range so I think enough to get a good clinical experience on the potential for combinations like this. And if they're positive, I think they will have ongoing discussions about how we potentially capitalize on that with the larger studies with clinical endpoints.

John H. Johnson

There's a lot of enthusiasm clearly around this, even on the podium yesterday at the urology meeting. It was a topic of discussion that these trials should be done because the physicians know that none of these products alone are a cure. And they want to see what kind of benefits they can get by using them together.

Operator

And our next question comes from the line of Gloria Woo from Citi.

Gloria Woo

I just want to know if you could talk about your ability to refinance your debt. And then also, if you could talk a little bit about how you plan on fending off any competitive threat?

John H. Johnson

Okay. So with regard to restructuring on the convertible note, it comes due 2016, January. So we certainly have a fairly long time period still to address. I think it probably will be addressed within a few different tranches with regards to anything that we'd be restructuring equity-linked. I can't see us doing anything in the near term. I think that we are on a progress in a path here. We saw a positive momentum in the community accounts. I think that the commercial team, it does take a little while for their activities and initiatives to start showing benefit. We're beginning to see that. We execute. We need to -- you will get to a point where you will be in a state where you can say, "What would you do? How would you restructure and probably with something with equity-linked?" There's some state where you get comfortable with your cash balance, potentially use some of your cash just to repurchase. And I think it'll probably be 3 tranches over the next couple of years that you'll work through a process there and slowly restructuring and removing that overhang.

John H. Johnson

And as it relates to the competition, we continue to believe that physicians don't do this as either/or. Our approach is really that these products are going to be complementary and that physicians should use their clinical judgment and use all the arrows in their quiver when appropriate. Our biggest task is as these new agents enter the markets is to make sure that we properly educate physicians around the survival benefit of PROVENGE, as well as the benefits of immunotherapy. And so for us, our job is much more about educating the physicians on PROVENGE and not trying to fight a competitive battle because we do see these products more as complementary.

Operator

And our next question comes from the line of Geoffrey Porges from Bernstein.

Geoffrey C. Porges - Sanford C. Bernstein & Co., LLC., Research Division

First, could you just clarify exactly what the contract was with VA, and give us a sense of is there any volume attached to that and what's sort of discount's involved, if you can? And then the statement, Greg, you begin generating positive cash flow from U.S. operations at $100 million. First of all, positive cash flow, what's included in the expenses that you're allocating in U.S. operations? And secondly, should we then assume that you still are significantly away from positive cash flow overall at that sort of revenue run rate and you'd need to be substantially above that?

Gregory T. Schiffman

Sure. So, no. When you look at cash flow positive from U.S. operations, the amount that we are spending currently associated with European operations would be $5 million or less a quarter. So you're not a long way away from it on a global basis. I think the piece where we want to emphasize that is, depending on the strategy and how you move forward with Europe, clearly, at this point, that's not in our spend. If you partner it, you're not going to have any substantial increase, or actually, probably any increase in cost. If you go direct, you're going to do it in something that you can fund out of cash flow that you're generating, I'd expect, in general. So -- but we've focused on the U.S., given the uncertainty around exactly the strategy and how we move forward with Europe.

Geoffrey C. Porges - Sanford C. Bernstein & Co., LLC., Research Division

Can I just follow up on that? But do you -- when you say operating cash flow, did you do incorporate R&D in that? So that's net of all your R&D spend?

Gregory T. Schiffman

This includes 100% of our expenses. We are -- you're within -- like I say, we are spending less than $5 million a quarter on anything that's not related to the U.S. and everything else would be incorporated there. And so we are not -- it is getting us to a cash flow breakeven. Our burn would be de minimis at that point for Europe. And I'm sorry, I forgot the earlier...

Geoffrey C. Porges - Sanford C. Bernstein & Co., LLC., Research Division

The VA contract.

Gregory T. Schiffman

We're not going to disclose the details of any of our contracts, including the VA. But we were pleased that the VA decided to execute that with us.

Geoffrey C. Porges - Sanford C. Bernstein & Co., LLC., Research Division

But what does that mean then? I mean, it’s just hard to know why you told us about it.

Gregory T. Schiffman

Well, because we now have the opportunity to go into a whole new segment that previously we didn't have a contract in. So for us, that's pretty significant.

Operator

And we have time for one final question. Our final question comes from the line of David Miller from Biotech Stock Research.

David D. Miller - Biotech Stock Research, LLC

First of all, do you have any idea where -- whether the seasonality we saw last year will be repeated? Secondly, can you describe when you think we might get some return to sales guidance? And finally, can you talk a little bit about why trials in the academic center are being written to exclude a proven drug by PROVENGE and how you might work to reverse that trend?

Gregory T. Schiffman

Sure. I'll take the first 2 and then I'll have Mark take the last one. As it relates to seasonality, David, I think the question is, we don't know. What -- there is always a tendency for those patients that are concerned about their insurance to try to get -- and physicians who may be concerned about those patients, to try to get them in the fourth quarter. The reason why I'm hedging a little bit here is because with the hurricane, while we internally here at Dendreon can service all the patients, what we have found is we've been in contact with the offices and the apheresis centers is that many physician offices still out this way, aren't operating fully yet. Some of the aphe centers aren't open. And our issue and beyond that, even -- and it's tough for those of you that are not here to just understand how long the gas lines are. Just getting patients to be able to get to an aphe center or to get to their doctor's office has been severely hampered. And it's unclear when we're going to get power back. And just on a personal level, we've heard up to 3 weeks from where I live. And so it's just a big unknown. We are not going to use it as an excuse. We are doing everything and are ready to serve every patient that we can from a manufacturing standpoint. It's much more about the external logistics, and I just don't know what that's going to be. So that balance with seasonality, I don't know how that's going to play out. And I certainly want to be as transparent as I can. We don't have any immediate plans to return to guidance. Certainly, when we get to that point, we'll let everybody know, and then I'll turn it over to Mark to talk about the trial exclusion.

Mark Frohlich

Yes, sure. In terms of trial exclusion, sometimes, particularly, even the therapy trials or the prospect trials, for example, excludes prior PROVENGE. And it's pretty standard for clinical trials to prohibit subsequent therapies, at least from the time the disease progression. Often, there is an opportunity after patients progress to go on and get other therapies. And that's one of the things we've trained our staff to inquire with physicians if it is an issue to check to see whether or not it's possible to use PROVENGE either before or following those therapies.

David D. Miller - Biotech Stock Research, LLC

So with the new therapy coming in, why wouldn't they be using it on top of PROVENGE if it's been out on the market for 3 years. I mean, it sounds to me like, the trial protocols are being written to exclude PROVENGE ahead of these things. I'm just misunderstanding what's going on in the academic centers.

Mark Frohlich

Yes. Some of those trials are excluding prior PROVENGE, particularly the prospect trial, for example.

John H. Johnson

In some cases, David, it's because of the regulatory requirement to prove which agent actually caused the benefit. So if you use them together, for example, for your approval, sometimes the FDA will require you not to use them in combination to try to discern that benefit. I'm not sure if that's -- if that answers your question.

John H. Johnson

I'd just like to thank everyone for joining us. And once again, I'd like to thank the team at Dendreon that has stepped up during the hurricane to continue to reach out and serve patients. And we're going to do everything in our power that make sure that every patient that wants and needs to get PROVENGE that we take every available step that we possibly can to make sure that they get in a timely fashion. So thank you for joining us, and we look forward to talking to you in the near future.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may now disconnect. Have a nice day.

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