Dendreon: Market Mania In Action

| About: Dendreon Corporation (DNDN)

In a matter of mere months Dendreon Corporation (NASDAQ:DNDN) has gone from being the Darling of the Biotech World, with every small biotech avidly hoping and striving to be "The Next Dendreon"--even as Dendreon's advocates had long hoped for it to be the fabled "Next Amgen"--to being a pariah whose shares have lost roughly 80% of their value.

The sizzling story was that the company is the first ever to gain FDA approval for a cancer immunotherapy, Provenge, which in late stage prostate cancer trains the patient's own immune system to recognize cancer cells as bad and to attack and kill them. The trial results were fabulous: greatest survival benefit EVER in late stage disease with almost no side effects (a few days of fever and chills). The patient population is huge: over 30,000 men every year enter the Provenge label, asymptomatic or minimally symptomatic castrate resistant metastatic prostate cancer. The only other option for late stage men, Taxotere, has horrible classic chemo side effects which can even include death. Early on the National Comprehensive Cancer Network gave Provenge its highest recommendation as a firstline treatment on label and the Journal Of Clinical Oncology has recommended that Provenge, given its immune boosting properties, be given as early as possible.

So what happened? Did Provenge stop working? Did it kill someone? Nope. But the story is complicated. First Medicare announced that it was going to conduct a coverage review for Provenge, since it had never seen a treatment like Provenge before and didn't know how to classify it. It also required doctors prescribing it to submit for payment under miscellaneous reimbursement codes that had to be processed by hand--thus causing reimbursement to docs to take as long as 4 months. These actions caused all sorts of media hype about the pricing of Provenge ($93,000 for a full course of treatment) and even its efficacy, in spite of the FDA approval and the publication of the trial results in the New England Journal of Medicine. In retrospect this must have initially created a climate of worry in doctors planning to prescribe Provenge about the certainty of getting paid. Most men on the Provenge label are elderly and qualify for Medicare, so Medicare non-coverage would have been a giant deal. Then the prescribers in fact experienced slow reimbursement because of the lack of a product specific code. The press also created an atmosphere of doubt around the treatment based upon its 4.1 month median survival benefit (see here for an article explaining the fallacy of such doubts), in spite of its also improving 3 year survival by almost 40% and seeing many men in the trials live many extra years.

To make a long story short, Medicare ultimately issued a National Coverage Determination granting broad full coverage for Provenge on label and even left open the prospect of coverage in the future for off label earlier stage disease. It also issued a Q Code to allow electronic filing and processing of claims usually within 30 days.

Victory for Dendreon, right? Not so fast.

For the media bad news sells, right? Good news, not so much. Although of course the financial press reported the really major decisions for Dendreon in favor of coverage and reimbursement, the general media that had raised all the doubts about Provenge now made the resolution of the issue in Dendreon's favor a back page, short shrift item. The company surveyed and found only 20% of potential prescribing physicians were aware that the coverage issue had been totally resolved in Provenge's favor and that a Q code had been issued to speed reimbursement. It also found, as it announced on August 3, of this year in giving second quarter numbers, that doctors were refraining from prescribing to all their eligible patients out of concerns about being reimbursed, given what the company called Provenge's "cost density" ($93,000 for a treatment that takes just a month and is done). The company, given the numbers for the quarter and the now known script trends, had no choice but to pull long and frequently reiterated guidance for massive growth in the fourth quarter and to substitute predictions of "modest growth" quarter over quarter for the rest of the year.

The shares crashed from the thirties to the teens.

The company announced the layoffs of a quarter of its workforce and additional budget cuts to allow cash flow break even at revenue of $500 million. It announced a program to educate docs about the NCD and the Q Code. It set up charity fund provisions to ensure indirectly that any doctor prescribing to a pre-screened eligible patient would be reimbursed. It made new provisions to assist patients with travel expenses.

And recent 3rd quarter results, announced on November 2, showed progress on all fronts: Revenue was $65.8 million compared with $51 million for the second quarter, almost 30% quarter over quarter growth (more than "modest" I think). Awareness of the coverage decision and Q Code issued by Medicare had grown to 70% among potentially prescribing docs. Average time for reimbursement had dropped to 30 days.

Still, the shares tanked even further into the 6s based apparently upon management reiteration that the fourth quarter would see seasonality (Thanksgiving and Christmas not prime for medical procedures) as was seen in the prior year, and while showing again "modest" growth, would not equal a 30% q over q gain. Bad timing also had Medivation, a potential Provenge competitor in a few years, announcing good trial results for its POST-CHEMO (not in the Provenge space) Medivation 3100.

(Again the media are not big on making such distinctions and Mr. Market sometimes jumps to catasrophic conclusions).

So, is the crash justified based upon the objective facts? I don't think so--I think it's classic, ill informed market mania. But you be the judge.

For sure Dendreon management could have done a better job of managing expectations. Perhaps, as the CEO Dr. Mitchell Gold has admitted in an interview, the company in introducing a first of its kind, paradigm shifting cancer treatment, should have just waited to see what the market acceptance of the treatment would be before guiding the financial markets as to sales expectations. For certain it was a bad luck blindside for Medicare to contribute to doctor uneasiness about reimbursement by questioning coverage for an FDA approved late stage cancer treatment (something it had never done before) and for the press to then jump on that to question the treatment itself.

Still, let's examine the facts including the numbers from the launch. Because if you focus there and not on the panic of the crowds, the story looks pretty good.

Provenge, in fact, hasn't killed anyone, and there have even been published reviews of its trial data since launch that suggest that because of its trial design (allowing men to cross over to a frozen version of Provenge upon progression, which seemed to give its own survival benefit) it might in fact work even better than originally thought (pure placebo men lived 14.2 months less at median than Provenge men). As above, the JCO has published an article suggesting that Provenge be sequenced first among the available options and as early as possible in light of its immune boosting characteristics.

And let's look at the actual launch numbers:

2nd Quarter 2010 (first quarter of Provenge approval): $2.8 million

3rd Q 2010: $20.2 million

4th Q 2010: $25 million

1st Q 2011: $28.1 million

2nd Q 2011: $51 million

3rd Q 2011: $65.8 million

I don't know about you, but those numbers look pretty good if you're not aware that before they came out management was guiding much higher. Based on the last month's rate they already show an annual rate north of $300 million (with guidance of continued further growth). In fact they represent, according to Biotech Stock Research, one of the most respected and knowledgeable publications in the world of Biotech, the 8th best one-year oncology launch ever. If only you weren't aware that management had guided for the 2nd or 3rd best oncology launch ever, you might think "Hey, given all the trouble that has surrounded this launch--capacity constraints while the company waited for FDA approval of factories, an unprecedented Medicare review, bad press--those numbers are pretty impressive". That's in fact what I think.

We can also look at the trend revealed by the data the company has released as to approved infusion centers to get an idea of what the future holds for Provenge prescriptions. The launch, which was then limited by having only 12 factory hoods approved by the FDA, began with only 50 infusion centers, which were those that had participated in the Provenge trials. By March 2011, there were 135 medical locations approved to provide Provenge. A short 8 months later the latest Conference Call revealed that 680 sites are now approved, 425 have actually infused the treatment, and 470 have either infused Provenge or are currently on the company's schedule to do so. It may be, as the company has advised, that because of reimbursement concerns doctors have been warily prescribing Provenge, and waiting until a few or even several prescriptions have been reimbursed before becoming full-on regular Provenge prescribers, but the rapid growth in medical locations applying to become Provenge providers, and then actually infusing the treatment, would surely suggest that there is great potential for the floodgates to open as docs become comfortable with the current reimbursement atmosphere, and perhaps for revenue numbers to even return toward original projections for massive sales. One can only assume that a medical provider applies for approval to administer Provenge because the doctor has patients for whom Provenge is medically indicated, and that the doctor intends to prescribe it to them.

Provenge still works. It's still a major, century sought breakthrough in cancer treatment. It is still, according to every thought leader in the field of prostate cancer treatment, the recommended foundation of care to be given as early on label as possible to every man who medically qualifies for it. There are still more than 30,000 such men diagnosed every year and there is an estimated 100,000-man backlog of cases waiting to be treated.

The Medicare review and its media coverage were a bad thing for the company and their effects are still being seen in the Provenge sales numbers. But the decision was totally in favor of Provenge and the story is finally getting out there. Doctors are learning that Medicare and all major insurance plans fully cover, that prescribing Provenge is mandated by good medicine, and that reimbursement is speedy and guaranteed. It may take some time to see the true, untainted market strength of Provenge--after all, the Medicare decision for coverage only was issued on June 29 of this year and the activation of the Q Code only happened mid-August--but one has to think that long term the prospects look better than good. Jeez, it is on track for $300 million in sales despite all this now-cleared-up mess.

The company not only owns full worldwide rights to Provenge, but also full rights to the underlying antigen delivery cassette technology that was proven effective by Provenge and can be applied in numerous other cancers. It has started enrollment in the Phase 2 trial for Neuvenge in bladder cancer. It plans to apply for European approval for Provenge in early 2012. It has more than $500 million in cash--something like 4 dollars per share--and the shares are in the 6s. So Provenge--with its FDA approval and actual >$300 million sales rate--and the underlying technology, and the European and worldwide rights to Provenge and its prospective follow ons, are worth $2 per share and change?!

I can only opine that the current share price is insane--but that's what happens when there is a market mania.

Wise investors with cash to place will take advantage. It may take a while for the mania to die down, but in the end you've got to believe that science and reason will win.

Disclosure: I am long DNDN.

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