Dendreon 2011: Supply Constrained to Missed Guidance

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This year will go down as the year that investors figured out that drug launches matter. They were important before this year, but the amount of skepticism has reached gargantuan proportions.

We can thank Dendreon (Nasdaq: DNDN  ) for that.

Supply constrained
The year started out with Dendreon not able to meet demand. The company got its prostate cancer treatment, Provenge, approved in early 2010 but wasn't able to keep up with demand. The company sold just $48 million worth of Provenge in the fourth quarter of last year.

Provenge is produced specifically for individual patients. Immune cells are taken from the patient, primed to attack the tumor, and then infused back into the patient. Until additional workstations came on line, Dendreon was limited to the workstations it had built before the approval to support the clinical trials.

Expansion of the original manufacturing plant in New Jersey was approved in March. Considering the special way Provenge is made, an approval wasn't guaranteed; getting the FDA to sign off seemed to decrease the risk.

A new plant came on line in June with another scheduled for approval at the end of August. The company seemed well on its way to meeting its 2010 sales guidance of between $350 million and $400 million, with approximately half expected in the fourth quarter.

But this isn't the feel-good story of Vertex Pharmaceuticals' (Nasdaq: VRTX  ) awesome launch of Incivek. There's no near instant blockbuster here.

Cost density
In August, Dendreon pulled its sales guidance after a disappointing second quarter made the company realize that demand wasn't keeping pace with the new manufacturing availability.

The company blames the slower ramp on its underestimation of the ability of doctors to front the cash to buy Provenge and then bill insurance companies or Medicare. The "buy and bill" model isn't specific to Provenge; any drug administered by a doctor -- such as Regeneron Pharmaceuticals' (Nasdaq: REGN  ) Eylea that's injected into the eye and Human Genome Sciences' (Nasdaq: HGSI  ) Benylsta that's infused -- have to be purchased first before the doctor can be reimbursed.

What's different about Provenge is that the three doses of the drug are delivered just two weeks apart. The patient gets the entire $93,000 treatment in a month. Many drugs have price tags that high or higher -- Bristol-Myers Squibb's (NYSE: BMY  ) Yervoy costs $120,000 -- but the doses are spread out over a longer time frame.

Initially, doctors at academic institutions were the ones prescribing Provenge. Fronting the money wasn't causing major issues because those institutions have large cash flows. But as Dendreon expanded into community doctors, it ran into problems. Smaller offices may be willing to try Provenge on one or two patients, but they're not going to front the cash on a boatload of them until they're sure they'll be reimbursed in a timely fashion.

At least that's how the company tells it
The price density issue seems like a reasonable explanation for the missed guidance, but it's also possible that doctors just don't think Provenge is worth prescribing. Provenge's only real competition is Sanofi's Taxotere, if you can call it that. Provenge has fewer side effects and seems to be helping prostate cancer patients live longer than those taking Taxotere.

The big issue is whether new treatments -- Sanofi's Jevtana and Johnson & Johnson's (NYSE: JNJ  ) Zytiga -- that are approved for use later in the disease progression are actually being prescribed to patients that would otherwise receive Provenge. While they're not approved for those patients, doctors have the leeway to prescribe drugs as they see fit. With the botched launch this year, it's going to be much more difficult to compete with those companies and others such as Medivation (Nasdaq: MDVN  ) that are coming up from behind.

Check back later in the month when we'll look at what's in store for Dendreon next year. You can get a little reminder by adding Dendreon to the Fool's My Watchlist service. And don't miss out on our special free report "The Motley Fool's Top Stock for 2012." Our analysts strongly believe one company is poised for such monster returns; they boldly named it our top pick for next year. Hint: It's not Dendreon.

Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Johnson & Johnson and Dendreon. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson and Vertex Pharmaceuticals; and creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 17, 2011, at 10:09 AM, GraydenValdez wrote:

    Great recap of a roller coaster and mis-steps. At the heart of all this is a CEO without biotech commercialiaztion experience, nor launch experience, and a COO that had experience with pills - not the complexities of a biologic.

    The cost density facade reported deflects blame away from the inadequacies of leadership. Prescribers never had to "front" the money for the treatment. Many customers had payment terms on their invoices of 120 days. Prior to the Qcode, prescribers were still receiving timely reimbursement. Other products launched with a miscellaneous Jcode were being processed within 45-70 days. I would think PROVENGE wasn't any different. Even on the long end, that means doc's had a 50 day cushion to pay their bill. Cost density wasn't the issue. The issue was an ill-prepared market of Urologists. DNDN completely missed clinically educating Uro's on screening/scanning patients early to identify appropriate men for treatment.

    I'm long DNDN, believe PROVENGE is a great product and hopeful the current leadership can right the ship. We'll see.

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