Analyst Conference Summary

DENDREON
DNDN

Conference date: August 3, 2011 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2011 (second quarter, Q2)

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Forward-looking statements

Overview: Ramping Provenge sales will be slower than expected in second half of year. Patience required.

Basic data (GAAP):

Revenue was $49.6 million, 76% sequentially from $28.1 million, and way up from $2.8 million in the year-earlier quarter.

Net income was negative $114.6 million, up 2% sequentially from negative $111.8 million, but improved from negative $142.6 million year-earlier.

EPS (earnings per share) were negative $0.79, down sequentially from negative $0.77, but up from negative $1.04 year-earlier.

Guidance:

Withdrew prior guidance of $350 to $400 million 2011 revenue. "Expects modest quarter over quarter revenue growth for the remainder of the year."

Highlights:

"For the remainder of 2011, the [Provenge] launch trajectory will reflect a more gradual adoption of Provenge as physicians gain confidence in this positive reimbursement landscape." Trying to make sure all eligible prostate cancer patients have access to Provenge. Adoption has been slowed by physician lack of certainty about the availability of reimbursement. Revenue was below Dendreon projections. Indicators are that market potential form Provenge is substantial.

Will reduce expenses and make workforce reductions. Will align capacity build out with near term requirements.

CMS (Centers for Medicare and Medicaid Services) began requiring Medicare contractors to cover on-label use of Provenge with a ruling on June 30, 2011. The number of accounts infusing Provenge has exceeded projections, reaching 265 by the end of the quarter and over 300 by the end of July, with an additional 200 applicants. However, less patients per account than expected due to reimbursement concerns, identification of eligible patients, and the novelty and difficulty of the process.

While cost of Provenge is similar to other cancer drugs, the $90K is for 3 infusions in about 4 weeks, so the expense comes much faster than most therapies, creating cash flow anxiety. Reimbusement was not aligned with label, which caused confusion, but now is aligned with label.

Did not see these problems clearly because until June the supply was constrained. Once more became available, the other problems became more obvious.

The Seal Beach [Los Angeles], CA facility had 36 workstations approved.

Non-GAAP numbers: net loss $83.5 million or $0.57 per share.

Cash, equivalents, and investment balance ended at $673.9 million.

Cost of revenue was $28.8 million, leaving $20.8 million in gross profit. Operating expenses of $123.6 million included $18.6 million for R&D and $105.1 million for selling, general and administrative expense. GAAP loss from operations was $102.8 million. Interest and other expense was $11.7 million.

$90 million in start up expenses were projected for 2011. In Q2 $30 million was spent. These are one-time costs.

We will overcome the challenges, just as we have already overcome challenges other comapnies have never had to face. We have a clear plan to get back on trajectory.

Q&A:

What changed reimbursements, capacity constraint should not have hid them? We also moved from academic centers to community medical centers. Urologists and oncologists are much more concerned about reimbursement than the academic centers.

How do we know it is not a demand issue from the patient side? Market research with the urology and oncology doctors shows they have not identified the patients that are within our label. Only about 25% of patients have been identified. But physician interest is high. Some are putting tester patients through to get a feel for reimbursement. New accounts may treat one patient, then wait two months to get paid, before doing a second patient.

Do you think you mispriced the product? We think, given the risk profile and survival benefit, we are priced right. We did not anticipate the cost-density issue.

How long is the process going to take to get to the prior estimated revenue per quarter? There are a large number of patients in current accounts within the label. When patients get comfortable with reimbursement, we will get back to the ramp. We can't predict how long the process will take. Urologists in particular are not familiar with the issues involved. Their past process was to wait for the cancer to go to the next stage, then refer to an oncologist.

No guidance on the exact number of workstations to be ready this year. Will try to match workstations to actual demand. We don't believe there will be any capacity constraint in the near future.

June sales? August orders were higher than prior two months. Would not give more detail.

Did academic centers run out of patients? No, but new adds had limited patients, so the run rate did not ramp as expected.

Why was the doctor education done so poorly? One reason is the National Coverage Determination (NCD) has not even been posted on the website. The old NCD differed from the label, so the doctors have to unlearn that. [How long can it take a national sales force to call 500 doctors? How much money has been tossed into this ramp? -- WPM]

Are you going to slow down on Europe? We are on track to file in Europe, that is going fine.

If a center has 5 or so patients, they end up with a $500,000 receivable, which is outside of their usual financial comfort zone.

Competitive drugs? We see Provenge as a foundation of care. We are not seeing any effect from new prostate drugs so far.

Cash burn going forward, would you do better with a partner in U.S. or EU? Cash usage was over $100 million. If nothing changed, that is six quarters worth of cash. But capital expense will drop when all three centers are ready. Cash usage will decrease. At the end of next year, in a conservative scenario, we will have a significant cash balance.

We have had very few outright denials of reimbursements, but more delays for more information.

We had staffed and trained employees in anticipation of the ramp, we now know we won't need all those employees short term.

Market division between academic and community centers? Vast majority are academic today, but in long run about 70% will be in the community.

Are you marketing to patients, or just to doctors? In New York and LA we have started to do direct to patient marketing.

Are the higher prescribing centers now at risk to losing patients to community centers? There are changes in referral dynamics when centers are in the same area.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2011 William P. Meyers