Dendreon Provenge Demand Questioned

August 8, 2011

The price of Dendreon stock plunged after hours on August 3, 2011 after the company announced that revenues from its new prostate cancer treatment Provenge would be considerably less than expected during the remainder of 2011.

Prior to the release of Q2 results and the Dendreon Q2 2011 analyst conference call the main concern about Dendreon had been its ability to bring Provenge capacity online [See Dendreon Ramps up Provenge Production, July 15, 2011]. Provenge is not a drug. It is a tweaking of the patient's own blood cells to generate an immune reaction to prostate cancer cells.

Dendreon management went over the situation with analysts both in their presentation and in the question and answer session. Clearly analysts were suspicious of Dendreon's explanation for the situation.

The issue (per management) was reimbursement. There had been earlier questions about whether private insurers and Medicare would pay the $90,000 or so Dendreon charges for Provenge. That question was settled by a July 30 government ruling that as long as the prescription was "on label," reimbursement would be made. Note that was after the the second quarter ended. Rather than resolve the issue, that positive development bifurcated to two new ones. One was doctor ignorance of the new situation, the other was cash flow issues.

The claim that doctors who treat prostate cancer remain ignorant of the availability of reimbursement for Provenge strained credulity. Even before the FDA approved the therapy investors money was spent at a mad rate, typically over $100 million a quarter, to prepare to manufacture, sell, and administer Provenge. It is hard to believe that Dendreon's pretty good sized sales force could not dial up a bunch of doctors and say, "Did you hear the good news? Medicare will reimburse for Provenge as long as it is used according to the label." I assume this massive muckup should not take too long to straighten out.

The cash flow problem arises because most doctors (urologists and oncologists, in this case) were not set up to handle a situation that turned out to have novel economics. Dendreon is no more expensive than most high-end cancer therapies. However, the entire process is done in about four weeks. Most chemotherapies and newer drug-based therapies take place over a longer period of time, so the payments are broken up over a period of months.

With Dendreon, the doctor's office has to pay $90,000 to Dendreon in one month, then wait maybe two months for Medicare reimbursement. An oncologist with ten patients meeting the criteria for Provenge (asymptomatic or minimally symptomatic metastatic hormone refractory prostate cancer) would have to front $900,000 to treat all ten patients immediately. So, no surprise with hind site, many decided to treat one or two patients, then wait for reimbursement for them before treating another patient or two.

Of course Dendreon has huge cash resources, so anticipating this problem might have been able to work something out, like giving 60 days credit. Sixty days, however, is enough time to through revenues into the next quarter, causing missed predictions of mounting revenue.

So the real question analysts and investors are asking is whether this is just a delay in the revenue ramp, or whether the cash flow issue is just a cover for less demand than has been assumed in the past.

Some of the demand-is-less than expected scenarios are credible; management says they are not seeing them so far. The main threat is competition. Because of the narrowness of the label, men are only in the Provenge treatment zone for a period of time. After that they progress to symptomatic cancer, and they are off label and ineligible for reimbursement. So if a doctor and patient choose another therapy, even if just for cash flow reasons, even if that therapy fails, then the patient will have progressed beyond the Provenge label.

How will it really work? Assuming the cash flow and reimbursement ignorance issues are resolved, it is a question of who has the better sales force. Provenge has some great selling points, mainly its low toxicity. But it is more complicated to administer. Management talked about making the logistics of it easier for clinics, so they are aware of that issue, too.

My guess is that Provenge will ramp and eventually meet earlier expectations. In the meantime, however, visibility will be poor for investors. Management lost a lot of trust in the recent fiasco. The stock price will stay low until we have a quarter where revenues prove demand.

Key to further growth of Dendreon is extension of the label. There is no scientific reason I know of that Dendreon should not be helpful both earlier and later in the progression of prostate cancer. In theory all men whose disease progresses pass through the current label, but catching them earlier should lead to more good outcomes, and hence give the therapy a lift against any competition. Also, of course, getting approved in Europe and the rest of the globe should lead to a major ramp in revenue.

You can see all of my notes on Dendreon as well as links to other important data at my Dendreon main page.

This is yet another real-world proof that in addition to known risks, their are potential unknown risks, so keep diversified!

See also: Provenge Press Releases

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Copyright 2011 William P. Meyers