Dendreon Corporation's (DNDN) CEO John Johnson on Q1 2014 Results - Earnings Call Transcript

| About: Dendreon Corporation (DNDN)

Dendreon Corporation (NASDAQ:DNDN) Q1 2014 Results Earnings Conference Call May 8, 2014 9:00 AM ET

Executives

Lindsay Rocco – IR

John H. Johnson - Chairman, President and CEO

Gregory R. Cox - Interim CFO

Silvio Pacheco - Chief Customer Officer

Andrew S. Sandler - EVP and Chief Medical Officer

Analysts

Lee Kalowski - Crédit Suisse

Mara Goldstein - Cantor Fitzgerald

Matthew Lowe – JPMorgan

Eric Schmidt - Cowen and Company

Katherine Xu - William Blair

David Epstein - CRT Capital

Operator

Good morning ladies and gentlemen and Welcome to Dendreon’s First Quarter’s 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions on to how to participate will be given at that time. (Operator Instructions). As a reminder today’s conference call is being recorded. Now I would like to turn the conference over to your host, Lindsay Rocco.

Lindsay Rocco

Thank you and good morning everyone. We are pleased that you could join us today for Dendreon’s first quarter 2014 conference call. With me are John Johnson, Chairman, President and Chief Executive Officer; Greg Cox, Interim Chief Financial Officer; Silvio Pacheco, Chief Customer Officer and Andy Sandler, Chief Medical Officer.

Before we begin I would 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 including the risks and uncertainties identified in today's press release and in our filings with the U.S. Securities and Exchange Commission.

In addition, this presentation includes non-GAAP financial measures. This presentation is not intended to be a substitute for our financial results presented in conformity with generally accepted accounting principles in the U.S. Investors and potential investors are encouraged to review the reconciliation of the pro forma financial measures included in our earnings release.

The most directly comparable GAAP information and a reconciliation between the non-GAAP and GAAP figures are included in our first quarter 2013 earnings release, which has been furnished on Form 8-K. I would also like to refer you to earnings slides we posted on our Investor Relation’s website.

Now with that I will turn the call over to John.

John H. Johnson

Thank you, Lindsay, and thank you for joining us today. We will begin today's call with a review of our first quarter results which we will compare to our Q1, 2013 results in order to put in perspective the real progress that we have made at Dendreon.

Net product revenue for the quarter was $68.8 million compared to net product revenue of $67.6 million in the first quarter of 2013. Q1 of this year is the first quarter since the introduction of competition where we saw revenues rose compared to the prior year which confirms the progress that we are making on a year-over-year basis. Achieving our first quarter results with fewer headcount, reduced expenses and more streamlined marketing spend compared to the first quarter of last year speaks to our more efficient use of resources.

As you know it is not unusual for Q1 to be slightly behind Q4 due to seasonality.

Gregory R. Cox

So this is Greg Cox. He is must be experiencing technical difficult so, I'll take over. So as you know it's not unusual for Q1 to be slightly behind Q4 due to seasonality. During first quarter we saw enrollments increased on a sequential base. After stabilizing PROVENGE sales in the face of competition we expect Q2 to improve from Q1, as it did last year.

On the commercial front our newly appointed commercial leadership team has being working closely together to ensure the commercial organization operates seamlessly. We are pleased to see our sales force work efficiently and they are executing on all cylinders.

Turnover in the sales force was less than half of last year's number. Last quarter we announced our plans to make PROVENGE commercially available in Europe which marks a major milestone for Dendreon. As we previously stated we are taking a very cost effective approach to how we will make PROVENGE commercially available in Europe, and determine the best way to do that is through a two-step process. The first step is making PROVENGE available to physicians and patients through centers of excellence using our contract manufacturing organization, PharmaCell, beginning with Germany and the United Kingdom.

We are planning to begin with fewer than 10 centers and our goal is to have the first commercial patient treated in the fourth quarter of this year. We are continuing to work with the health technology assessment committees to provide necessary information to support reimbursement in Europe. We are pleased that we had a successful European association of Urology or EAU meeting which included positive interest from KOLs and the inclusion of PROVENGE in the new EAU prostate cancers guidelines.

The guidelines recommended PROVENGE as a therapeutic option for patients with asymptomatic, minimally symptomatic metastatic castrate resistant prostate cancer and also supports the fact that there was significant overall survival benefit in the PROVENGE arm in the pivotal study, with an overall safety profile that was acceptable.

Building on this momentum a panel of 21 physicians from the European consensus panel of prostate cancer expert agreed and published in European Journal of Cancer that PROVENGE is an appropriate option for the treatment of asymptomatic, minimally symptomatic metastatic castrate resistant prostate cancer. 70% of these physicians support the use of PROVENGE prior to Abiraterone or Enzalutamide

These consensus findings clearly demonstrate the continued enthusiasm for European physicians to PROVENGE. In particular that PROVENGE should be positioned early in the treatment of asymptomatic, minimally symptomatic metastatic castrate resistant prostate cancer. In fact, we have been approached by a number of additional KOLs interested in opening centers of excellence.

The second step is to expand further in Europe once automation as approved. We are preparing for discussions with European regulatory authorities regarding automation. We expect automation to not only play a key role in our ability to expand in Europe but to also be an important strategic driver to help us lower our cost of goods sold in the United States.

We moving with very laser like focus on our efforts to lower cost of goods sold with our continuous improvement efforts across the board and the implementation of automation in our manufacturing process, which we believe will help unlock further value to PROVENGE in the years ahead.

We continue to work closely with the FDA in this effort and are in frequent communication with the agency. Beyond that we continue to explore additional strategies for incremental improvement and process without optimizing quality. We believe we can reach cost of goods sold in the 30's on a percentage basis given our internally forecasted revenues following the full implantation of these efforts. We want to emphasis on getting cost of goods sold into the 30s requires a number of steps both before and after FDA approvals and realizing the full financial benefits of automation and related improvements may take several years but at the end of this process we expect to reach cost of goods sold in the 30s.

Accelerating our path to profitability is a top priority of Dendreon and we are focused on becoming cash flow breakeven as soon as possible. We began to implement our restructuring and cost reduction plan in November to help Dendreon succeed as a leaner more nimble biotechnology company focused in immuno-oncology. We are continuing to make progress and saw net benefits realized in Q1 2014 and will to continue identify to operate Dendreon more cost efficiently.

Addressing the company’s convertible debt remain a top priority for us. We are exploring options with our advisors and continue to make progress in our thinking. Beyond that we are not going to provide details at this point. We have cash, cash equivalents and short and long term investments as of March 31, 2014 of approximately $170 million. Our restructuring plan is enabling us to slow our cash burn while continuing to make strategic investments and initiatives that we believe will maximize the value of PROVENGE.

With that I will turn the call over to Silvio to discuss our commercial efforts.

Silvio Pacheco

Thank you, Greg. I will now review our key commercial highlights. Like many companies we see seasonality in our business. Our first quarter results were driven by strong year-over-year growth in our urology accounts. Community urology grew 28% year-over-year and was down 4% on a sequential basis. Community oncology was down 12% year-over-year and was down 12% on a sequential basis. Our hospital segment which now combines academic and community based hospitals grew approximately 1% year-over-year and was down 7% on a sequential basis.

In terms of our customer composition for the quarter, community clinics accounted for 40% of our total business and community urology clinics accounted for 34%. Hospitals represented 26% of our total business. The competitive environment continued to evolve during the quarter with Zytiga and Xtandi increasing competitive share in the post chemo setting.

We are also seeing increased competition in pre chemo and oncology from Xtandi. As in prior quarters we continue to see the greatest impact of competition in small and low volume accounts across our market segments.

As we discussed last quarter our new commercial model is focused on targeted accounts which also includes large accounts as well as those who were aspiring to grow into the same class. As a reminder we define large accounts as having annual run rate of more than $1 million in sales.

We ended the first quarter with 93 large accounts up significantly from 54 in Q1 of 2013. As you may recall, we have adopted an account base model to drive depth and penetration in those accounts that have historically prescribed PROVENGE.

In Q1 targeted accounts represented approximately 80% of our business via the new model. This can help us improve top line sales through incremental growth while maximizing efficiency and helping improve the program’s experience with patients. We maintained revenue share while developing large account stability, thanks to the focus of our sales team.

In addition we are pleased to see our immunotherapy education campaign gaining traction. The campaign focuses on educating healthcare practitioners about the important quality immune system plays in fighting cancer and the unique benefits associated with immunotherapy. As part of our education campaign, our direct to consumer advertising has been running since March 2013 and the campaign has been effective in helping to differentiate PROVENGE with patients and their care givers. We will continue to make data driven decisions about when and how we use direct to consumer moving forward. With that, Greg will discuss the financials. With that Greg will discuss the financials.

Gregory R. Cox

Thank you Silvio. I will now walk through the financial review of the quarter. Earlier today, we reported our financial results for the first quarter of 2014. Net product revenue for the quarter ended March 31, 2014 was $68.8 million compared to $67.6 million in Q1, 2013 and $74.8 million for Q4, 2013.

For the first quarter we had a cost of goods sold of approximately $37 million and 53% of revenue as compared to cost of goods sold of approximately $43 million or 64% of revenue in Q1, 2013 and $38 million or 51% of revenue for the fourth quarter 2013. And looking at our cost of goods sold during the first quarter 2014 versus the fourth quarter of 2013, if we normalize the first quarter volume with the fourth quarter volume, our cost of goods sold was comparable quarter-over-quarter.

In 2014, we’ve recorded a charge of approximately $46 million related to Antigen inventory which did not meet product specifications. We have insurance coverage for up to $30 million for Antigen losses at this site, and we expect to receive recovery up to this amount in two installments during 2014.

In addition we’re continuing to invest to get remaining loss and are exploring all our available options for additional recoverability.

We are looking to ways to become more efficient and manufacturing is a core asset for Dendreon. We have been contacted by several companies about leasing a portion of our Seal Beach facility which should lower our costs of goods sold. We’ll not provide an update and specific details such as timing potential impact. However we are actively exploring all avenues to leverage our expertise in immunotherapy manufacturing and reduced our cost for goods sold.

As John indicated we also expect to see our cost of goods sold to decrease in the future with continued streamlining and the benefit of automation at manufacturing process and we'll continue to move forward with our efforts. Following the full information of these efforts we believe we can reach the cost of goods sold in the 30 on the percentage basis given our internally forecasted revenues.

Sales, general, and administrative expenses were approximately $39 million this quarter, down from approximately $62 million in Q1, 2013 and $ 47million last quarter. The decrease in SG&A expenses was primarily driven by lower costs associated with reduced headcount and lower spending associated with external vendors.

Research and development expenses for the first quarter were approximately $14 million as compared with approximately $18 million in Q1 2013, and $17 million the last quarter. We had a non-cash stock compensation [product] for the quarter of approximately $2 million versus an expense of approximately $2 million last quarter. This is primarily driven by changes in assumptions.

For the quarter ended March 31, 2014 we had a GAAP loss of approximately $0.24 per share down from approximately $0.48 per share in Q1 of last year and down from Q4 2013 pro forma GAAP loss. This includes approximately $2 million associated with restructuring activity and various non-cash charges. Excluding these cash charges and non-cash charges for the quarter ended March 31, 2014 we had pro forma loss of approximately $23 million or $0.15 per share.

As we have previously discussed, accelerating the path of profitability has been a top priority for Dendreon. And we’re focused on becoming cash flow breakeven as soon as possible. We began to implement our restructuring and cost reduction plan in November 2013 that helps Dendreon to succeed as a leaner more nimble biotechnology company focused in immune-oncology.

We’re continuing to make progress and saw net benefits realized in this quarter. We have cash, cash equivalents, and short and long-term investments at March 31, 2013, of approximately $170 million. Our cash burn during the first quarter was $30 million which down significantly from the first quarter of 2013 and down slightly from the fourth quarter of 2013. Due to changes in our working capital our cash burn was less than as we expected for Q1 therefore we anticipate our cash burn for Q2 to be consistent with our Q1 cash burn.

With that I will turn the call over to Andy for clinical update.

Andrew S. Sandler

From the clinical point of view, the rationale for positioning PROVENGE as frontline therapy in metastatic castrate-resistant prostate cancer continues to gain momentum with the increasing amount of data signing programs along with the broader understanding of immunotherapy in cancer we continue to see KOL support and enthusiasm strengthen PROVENGE, particularly in Europe after coming off a successful EAU meeting.

As Greg discussed earlier we’re pleased with the inclusion of PROVENGE in the new EAU prostate cancer guidelines which recommend PROVENGE as a therapeutic option for patients with asymptomatic minimally symptomatic metastatic castrate-resistant prostate cancer. The guidelines also supported the fact that there was a significant overall survival benefit in the PROVENGE arm in the pivotal study with an overall profile that was acceptable.

In February we presented data from ongoing immune-oncology trials at ASCO GU which further elucidate the product potency and mechanism of PROVENGE, in addition to our investigational compound DN24-02 for the treatment of urothelial carcinoma.

Recently at 29th Annual European Association of Neurology in April we presented preliminary data from our Phase 2 [SAN] study, a randomized trial of sequential PROVENGE and androgen depravation therapy and these data demonstrated that tumor specific T-cell responses appear to be enhanced and sustained when PROVENGE is given after ADT in patients with biochemically recurrent prostate cancer at high risk from metastases in an earlier stage of disease. The presentation of this data at EAU highlight Dendreon's commitment to expanding awareness and understanding that immunotherapy and PROVENGE in Europe as we prepare to meet PROVENGE available to advanced prostate cancer patient beyond the United States.

We are also continuing to see physicians frequently use PROVENGE as initial therapy or in combination with other therapies as our sequencing studies continues to progress. The Phase II sequencing study of PROVENGE and Zytiga is fully enrolled and we are seeing that agents can be given concurrently without affecting PROVENGE potency and immunological responses. The safety profile of the drug in combination appears to be consistent with the individual drug's existing label.

The Phase II sequencing study at PROVENGE and XTANDI is close to being fully enrolled. Our prime study assessing immune responses at different time points up to one year is actively enrolling patients. In addition the study may predict patient outcome prior to during and following treatment of PROVENGE. We continue to see a very enthusiastic response to the antigen spread data we have generated and genuine interest in seeing some biomarker development. Additionally a manuscript on this topic is currently under preparation.

We are also actively enrolling patients in our PREDICT screening study to identify metastatic disease in castrate prostate cancer patient without known metastatic disease. Finally, we are continuing to advance our promising immuno-oncology pipeline and have completed enrollment in our randomized Phase 2 study in high-risk urothelial cancer. Patients in this study are treated with DN24-02, our autologous cell immunotherapy based on the same platform as PROVENGE targeting the tumor antigen HER-2/NEU.

We look forward to the presentation of PROVENGE and DN24-02 data at the upcoming EUA and ASCO annual conferences. And with that I will turn the call back to John.

John H. Johnson

Thank you Andy and I apologize for the technical difficulties earlier. Our Q1 results year-over-year confirm the progress we are making on our strategic plans. We have taken substantial steps to reduce our cash spend while maintaining our revenue share and making strategic investments in our key initiatives. We will continue to work to accelerate our path to profitability and identify ways to optimize efficiency.

Our core vision and mission have not wavered, to revolutionize the fight against cancer through products that harness the power of the immune system. We thank and recognize the hard work of our dedicated employees who focus each and every day to ensure patients receive the treatment. We are confident that with the successful execution of our plan we can achieve our mission and maximize the value of our programs. I would now like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Lee Kalowski of Crédit Suisse. Your line is open.

Lee Kalowski - Crédit Suisse

Great, thank you. I’m wondering for the quarter if you could break out a year-on-year growth by pricing volume. It looks like revenues grew 2% but I believe you have a 9% tailwind on price, I’m just wondering is that the right way to think about pricing volume growth this quarter? And then you had mentioned in the press release and in the comments about some pre-chemo competition you are seeing from XTANDI, I’m just wondering when you started to see that increased competition and what your expectations might be over the next couple of quarters ahead of the September PDUFA date for the pre-chemo label?

And then just lastly on the debt with the 2014 note due next month, should we expect that will simply by paid in cash next month? Thank you.

John H. Johnson

Thanks Lee, I will have Greg go ahead and take the price volume mix question is as well as debt question Silvio can address the XTANDI question. Greg?

Gregory R. Cox

Thanks Lee, good question. As far as price we are just filing the 10-Q and it’s disclosing that we did have a $1 million less price as far as debt I don’t know if Silvio wants to comment further on that.

Silvio Pacheco

No.

Gregory R. Cox

Okay, do you want to go ahead and address the second question?

Silvio Pacheco

Yeah, sure so the second question so we have already seen the impact of hormonal therapy in the pre-chemo setting with the approval of Zytiga in next phase. And our position is that the decision between PROVENGE and XTANDI, this is not an either/or decision but what we’ve heard from customers that PROVENGE is complementary to both Zytiga and Xtandi and that’s the real decision will be between Zytiga or Xtandi.

So we feel that there continues to be significant room for growth in this market place for PROVENGE given its unique mechanism of action and the fact that is complementary with both of these new agents.

Gregory R. Cox

And then Lee as far as your question for 2014 guide. And as we guided to and we are taking a look at all our debts, it's front and foremost in our mind. And all we’ll address that as soon as we can and outside of that we are not going to specifically comment on the 2014 or ’16 debt.

Lee Kalowski - Crédit Suisse

Okay. Thank you.

John H. Johnson

And Lee just one additional comment on the price volume mix. While we did just take some prices these last year remember that with the ASP system that always doesn’t flow through right away so the 9% price increase you suggested in terms of a tailwind was not realized not even a year back.

Lee Kalowski - Crédit Suisse

Okay. Thank you.

Operator

Our next question comes from Mara Goldstein of Cantor Fitzgerald. Your line is open.

Mara Goldstein - Cantor Fitzgerald

Oh thank you, I just wanted to go back to something that you had discussed in the prepared remarks, the DTC campaign and sort of the level of exposure you have with that now and what I guess is their base level expenditure associated with it? Is it completely out of the P&L? And any metrics we should think about with regard to that?

John H. Johnson

I will -- thanks for the question I’ll go ahead and make couple of comments and then Silvio if you want to add anything feel free. So we are currently running the ads on TV and certainly see it through the end of May. What else we said in prepared remarks, when and how we use that will really be based on data driven decisions. We may choose to for example two pieces of the campaign locally, we may choose to pause it but really it's going to be based upon the data and so far it's not our expectations but it is in the P&L to your question correctly.

Mara Goldstein - Cantor Fitzgerald

Okay. But you know in the past you’ve certainly spoken to the idea around or rather some metrics around calls to the call center and follow-ups to the care givers and I was just if there is any more disclosure around that in your point?

John H. Johnson

We are not very specific results other than to say it didn't met our expectations. I would say that we did see in fact pick up a little bit in terms of our call center was kind of interesting. We’ve learned a lot through this. As we’ve said before we have a different 800 number for every ad that we’ve run so we know exactly who response and in terms of where we get our responses from and then we are able to track those responses straight through to infusion. But I would say that the campaign does remain strong certainly up through the latest data point that we have.

Mara Goldstein - Cantor Fitzgerald

All right thank you.

Operator

Our next question comes from Geoffrey Porges of Sanford Bernstein. Your line is open.

Unidentified Analyst

Hi this is [Welshey] for Geoff. I have a question about Europe. So could you directionally guide us in terms of how many major markets are you looking at in terms of the center of excellence or how many centers you are potentially looking at just directionally right so we can get a better sense as to what’s the size of your initial effort the Phase I effort versus the full on route to automation. Thank you.

John H. Johnson

Yes thanks for the question. So in Europe our initial plan is to go to less than 10 centers. As we said in the prepared remarks we did in fact have physicians at the recent European Neurology meeting come up and request the additive centers. So in our plan at least today is less than 10. We are seeing very good response to the approval and especially to the label there. We’ll make decisions in terms of how quickly do we expand that as we go ahead, but I think you can expect as we head into the fourth quarter we’ll be less than ten.

Geoffrey Porges - Sanford C. Bernstein

Okay.

Operator

Our next question comes from Cory Kasimov with JPMorgan. Your line is open.

Matthew Lowe – JPMorgan

Hi there is Mathew Lowe in for Cory today. Just wondering if you could comment specifically on the trends in April and how they may compared to the trend of PROVENGE over the course of three months. And then maybe if you also talk about your educational programs how they are going I mean in terms of regarding how to teach physicians how and where best to PROVENGE. Thank you.

John H. Johnson

Sure, I'll talk a little about the trends and Silvio if you want to talk about the education as it relates to the Champion program that we are undertaking right now. So with regards to the trends as we said in prepared remarks we saw the enrollments sequentially up, those trends have continued into April and as we look at it we do really believe that our business is stabilized and the fact that we did have year-over-year growth for the first time it's very close knitted with the price volume mix but beyond that just in terms of pure demand from enrollment sequentially we saw that increase.

So we do expect Q2 will improve in a similar fashion to last year and this is really due in fact to the efforts of Silvio and the commercial team and their focus we have seen over the year our large accounts almost double which means that the strategy is working and by focusing on those accounts the push rate will be much more efficient with the use of our resources. So Silvio why don't you talk a little bit about the immunotherapy campaign what we are doing across all three campaigns that we are targeting.

Silvio Pacheco

Yeah so, we are very pleased with the results that we have seen with our immunotherapy education campaign and I think two testaments of that is that fact that we are seeing patients with metastatic castrate resistant prostate cancer being treated earlier and their treatment disease. And you know further validation that our strategy is working if you take a look at the growth that we have seen in urology as well as in our hospital segments I think just confirms that our efforts are beginning to pay off.

Matthew Lowe – JPMorgan

Okay, thank you.

John H. Johnson

Thanks Matt.

Operator

Our next question comes from Eric Schmidt of Cowen. Your line is open.

Eric Schmidt - Cowen and Company

Thanks, looking for a little bit of clarification on price and volume mix was the $1 billion tailwind a year-on-year impact or quarter-over-quarter?

John H. Johnson

Greg you want to take that?

Gregory R. Cox

It was Q1, 2013, thanks for your question, it was Q1 2013 compared to Q1 of 2014 on the revenue.

Eric Schmidt - Cowen and Company

Okay, and in terms of the Q2 comments that you just made similar year-on-year trends that mean we should be expecting you know stable just likely growing year-on-year sales in Q2.

Gregory R. Cox

So, if you look at the sales last year they did rebound back in the first quarter. For whatever reason we do tend to seasonality there whether that's benefit verification or just some factors around the holiday so, I do think that you'll see it come back to levels like that now, and that’s what the enrollment data would suggest and then beyond that just sequentially, enrollments were in fact up in the first quarter versus the fourth quarter. So well you never know exactly how many those enrollments you are going to realize for a variety of factors you know I think if you look certainly at last year's improvement you can expect something similar to that.

Eric Schmidt - Cowen and Company

Thanks John. And are you now getting away from providing new accounts in any given quarter?

John H. Johnson

No, we are not. We will continue to give that, what we wanted to do Eric on the first quarter here we'd be happy to have Silvio talk about the new accounts for the quarter is really just focused on the year-over-year growth and most importantly now what we are much more concerned about is what happens in our large accounts. We have taken our sales organization and really focused them on A, B and C accounts and then we have some opportunistic deals on that.

And so while in the past especially early on you want to make sure that you have all the accounts Dendreon systems ready but we thought it was a best approach for us based on what the company had learned over the years lets too in fact dive in and focus on the biggest opportunity and in the face of two large competitors that we knew as we would best be able to grow our business and defend that business, if we had that kind of focus. We just don’t have further resources or the reach that they do across all of the broader oncology, urology and hospital accounts. So Silvio if you want to just give some more specifics as it relates specifically to new accounts that would be great?

Silvio Pacheco

Sure. So in the first quarter we added 49 new sites and as John had mentioned, our focus right now is to continue to have definite penetration and that accounts had historically pushed by PROVENGE. We feel that by doing that we can help drive our top line sales through incremental growth while continue to maximize our efficiencies in helping improve the programs experience with patient.

But that said, we will continue to be opportunistic and certainly we will not turn away any new business.

Eric Schmidt - Cowen and Company

Okay makes sense. One last question, why would it take some [inaudible] like said maybe a few years to get to that 30s percent cost of goods target following the approval on process?

John H. Johnson

So when we talk about the 30s, keep in mind that’s not just automation, that’s all of our efforts and so inside that, we have a streamlining of all of our processes. We have our efforts in reducing our goal material cost, especially how do we reduce antigen cost overtime, how do we leverage our infrastructure, I think that as Greg mentioned, that we’ve been contacted by several companies about leasing a portion of our Seal Beach facility and if you think about it, that would be able to lower our cost of goods sold by being more efficient there and but we have with the team of people there who have done some really great work in this space.

As you see these other companies come in, they recognize that they could benefit from the expertise of that group, they really are experts and we have had a lot more interest in how do we help them and could in fact to take over a portion of that facility which would reduce cost and potentially you could see some service revenue there.

We are in those discussions now where we will have to make projections on when they might happen but that is just another example and obviously you are going to see some benefit on your COGS as well and so you look across all these things and you look overtime, we just want to make sure the expectation is appropriate. So it is not going to be one item that when it goes down into the 30s it could be several of these different initiatives we have underway.

I don’t know Greg if you want to add anything to that?

Gregory R. Cox

No I think that’s pretty good analysis.

Eric Schmidt - Cowen and Company

Thanks a lot.

John H. Johnson

That makes sense for you?

Eric Schmidt - Cowen and Company

It does. Thanks, John.

John H. Johnson

Okay.

Operator

Our next question comes from Howard Liang of Leerink Partners. Your line is open.

Unidentified Analyst

Hi this is [Rich Gus] calling in for Howard. Thanks for taking my question. Of the patients who have recently started PROVENGE, do you know about what percentage received Zytiga previously?

John H. Johnson

Silvio, do you want to comment on that?

Silvio Pacheco

Yes John. Yeah so what we know based on some of the market research that we have is about less than 5% of those patients have received Zytiga first.

Unidentified Analyst

And in general when patients fail Zytiga the other sense is to about what percentage of patients are asymptomatic or minimally symptomatic and eligible for PROVENGE?

Silvio Pacheco

So about 30% would be in that asym and sym.

Unidentified Analyst

Okay, great. Thank you.

Operator

Our next question comes from Yaron Werber of Citi. Your line is open.

Unidentified Analyst

Great, thanks for taking the question. This is Chris in for Urin. I have another question on the U.S. automation. Can you comment and give us a little bit maybe better picture on how much of your forecasted drop in COGS into the 30s, it is volume versus just your automation changes? Thanks.

John H. Johnson

Greg you want to take that.

Gregory R. Cox

Sure John and [inaudible] trying to where you, Chris thanks for the question, outside of what we have stated about automation here and the fact that we are going through some FDA conversations report back and forth which we feel has been good, we haven’t specifically commented on the breakdown of automation versus the volume . We just specifically guided to with all those things that John has indicated as well as internal forecast we expect our cost to be in 30s.

John H. Johnson

Yeah that I would just add that we do expect a substantial benefit from automation and it goes across all pieces, because certainly once you are automated you could in fact see yourself having some satellite facilities through these transportation costs, you could see yourself having a much different footprint as it relates to your ability to be efficient and so one of the reasons back to the question I think Eric had earlier around several years and we are going to see a nice benefit initially. But as you deploy automation more broadly you can in fact see a benefit that will be continuing to improve over time.

Operator

Our next question comes from Katherine Xu of William Blair. Your line is open.

Katherine Xu - William Blair

Thanks good morning. I am just curious as you’ve said the first commercial patients could be on drug by fourth quarter. Just wondering about your pricing strategy there and also any negotiations with various countries and how those are going so far?

John H. Johnson

Thanks for the question. So we have been working with the health technology assessment committees across Europe. We are not going to give specifics for certainly competitive reasons on those discussions but I will say that they have gone very well. Let’s keep in mind that our label in Europe does break out the response by courts file in the patients with the PSA of less than 22 for example you saw a 13 months overall survival. In that [retrospective] thought analysis but I would let you know that obviously as I look at pricing and utilization they are clearly looking that where does that make the more sense from a societal point of view, get the most impact.

And I think the EAU rather putting those data in through label has really helped the health technology assessment committees look at where can they see the best value how should the product be positioned? And those have aided our discussions for sure. And we think it makes sense that it was the proper move by the EAU to include those literature to help advice physicians and patients as well as the payers.

And so other than that kind of color right here we are not going to go in specific details, but we do as you pointed out expect first patient be treated in the fourth quarter.

Katherine Xu- William Blair

Okay and another question is on complication from Zytiga and Xtandi, you said there was increasing competition. I am just wondering do you see that in the oncology setting, or the urology setting? The majority of your business in neurology do you competition coming in neurology setting?

John H. Johnson

Silvio you want to take that question.

Silvio Pacheco

Sure. So what, yes so currently where we see the competition is in the oncology setting and specifically in those small or low volume PROVENGE accounts. What we’ve heard from our customers that given PROVENGE’s unique mechanism of action and that this product is complementary with both Xtandi and Zytiga. So they don’t necessarily view this as an either/or but adding PROVENGE to these hormonal therapies.

Katherine Xu- William Blair

Those were the opinions of the urologist or the oncologist?

Silvio Pacheco

Yeah, so those were the opinions of both we seen from neurology as well as oncology.

Katherine Xu- William Blair

And the last question if I may, I think previously you had been pushing for scanning more frequently the patients in neurology setting to detect early metastases so they could be on label for PROVENGE I wonder how that process has been going.

John H. Johnson

Good question, Andy why don't you want to go ahead and talk a little bit about what you’re seeing and then Silvio if you want to give some more color on that would be great.

Andrew S. Sandler

Yeah, we have a clinical study that’s looking at patients for early detection. So we look at patients who currently do not have metastatic disease and we follow them through scanning procedures and so they have metastatic disease. Ultimately we know the patients out there from pervious data about a 3rd of those patients have metastatic disease or [pulse] metastatic disease that they physicians originally thought were non-metastatic. So through this clinical study which we have started about a year ago we are hoping that we'll have data to confirm the amount of patients that have a malignancy or I should metastatic disease early on and to find out what's the right time, or the right amount of time -- and when the right time of screening is.

Silvio Pacheco

And through our efforts on lasing awareness what we’ve seen is that there has been an earlier use of PROVENGE in these patients so we feel that the message is resonating and we’re having an impact.

Katherine Xu - William Blair

Thank you.

Operator

We have time for one last question. And that question comes from David Epstein of CRT Capital. Your line is open. If your cell phone is muted please unmute. I’m showing no further questions at this time I’d like to turn the call over to John Johnson for any remarks.

David Epstein - CRT Capital

Sorry I got on hold for a second. you guys talked a little bit earlier about Zytiga and Xtandi share in the post chemo settings but you also of course highlighted sequencing or combination therapies are gaining traction somewhat offsetting that how do you define share overall?

John H. Johnson

Silvio you want to take that?

Silvio Pacheco

Sure, so we necessarily don’t look at a patient share we just look at revenue share from our perspective. So we feel that as these agents are used in combination it's more of a sense of the revenues that we are driving from a PROVENGE perspective.

John H. Johnson

And then I’ll just add to that not all of the data for these products are available to all. So it’s tough to get true share which is why we tend to have little bit more revenue we do get some qualitative share numbers where physicians will report to us what they are using and we reference that a lot of time it’s just qualitative data, unlike some other markets have been in past where we have hard and fast restriction data we can give you NRX on a weekly basis, we don’t have that in this market.

David Epstein - CRT Capital

And then I guess more importantly to your thinking pre-sequencing in combination can offset I guess probably somewhat reinvigorated Xtandi after -- if and when it gets the expanded indication pre-chemo.

John H. Johnson

I clearly hear from the KOLs and I would expect and what they tell us to expect is that we use of these products sequentially should increase overtime. There was a lot early on we launch that wasn’t known about immunotherapy or PROVENGE I think physicians are better understanding today [inaudible] immunotherapy frankly speaking I think the fact that you have some much noise in the market about immunotherapy in general with the PD-1 and other therapies has helped us and we hear a much clear messages coming back around the roll of immune-therapy. So I would expect that sequential use to increase risk Xtandi coming into the pre-chemo market I do believe that’s been primarily an either/or choice for most physicians with Zytiga and that’s what’s been played back to us as we’ve done market research.

Will we lose some patients here and there, sure but by in large what we hear of that choice that other/or choice will be between Xtandi and Zytiga and so with continued education and with the podium support and messaging that, that's being coming out we would certainly expect to see increased use sequentially. I think beyond that you know Andy and his group that were on generating combination data I think his results come up that should be very, very interesting. We hear a lot of feedback and interest on that not only from urology but especially oncology about combination use now I think that’s surprising given how much they have used combinations in the past.

So you know obviously we will monitoring the Xtandi launch closely. That said we expect the sequential use to increase overtime.

David Epstein - CRT Capital

Thanks very much.

John H. Johnson

You're welcome. And with that I'll just thanks everyone and joining us and we look forward to speaking to you soon. Have a great day.

Operator

Ladies and gentlemen for participating in today's conference call. That does conclude the program and you may all disconnect. Everyone have a great day.

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