Risks Dendreon Investors Need to Know

Transcript:

Brenton Flynn: Great. Moving on from Questcor to another company with significant overhangs, that's Dendreon and their prostate cancer drug, Provenge.

David Williamson: When we were talking about doing overhangs, I was really waffling between picking Spectrum, which obviously has issues with Fusilev and generic competition that was in the market, and then not, and it allowed them to really grow sales and it could come back...

At the end of the day, I decided to go with Dendreon. I know that's been a popular company for our readers, and a sore spot for a lot of them, when you look at where the stock was, a year, two years ago, versus where it is now.

It's been a real issue, and Dendreon's overhang is really twofold. It's competition, and then a debt-based issue, which I'll get into in a second.

The competition is Johnson & Johnson's Zytiga, and Medivation's Xtandi. Johnson & Johnson recently got first line pre-chemo indication for its drug, so now it will actually compete head-to-head officially with Provenge, although it could be prescribed by doctors, obviously, off-label for that.

Medivation's drug got approved as a second-line treatment. That's where Zytiga was, but again a lot more people are actually excited about Xtandi over Zytiga, so we could see that drug creep. They are trying to get first line approval, but that's a little ways off.

We haven't actually seen a whole, full quarter yet of what this means for Provenge, but we have unfortunately seen Provenge sales decline. They did $82 million in the first quarter of 2012, $80 million in the second, $78 million in the third.

What we really need to see is that turn around. I think they're going with the right approach. This is a complementary therapy -- that's how they're going to try to sell Provenge. There's a trial reading out; it's playing out in 2013. We should get initial results this coming year, so we'll see where that's headed, but if they can't reverse these declining quarterly sales...

The restructuring is great and all, but if you're not going to break even at $400 million, it's not any better than not breaking even really at $500 million when you have this debt issue, which is a $620 million payment in 2016, which as of now they are not even close to making it. They really would need to see sales turn around, and in a pretty significant way. At that point, you're looking at either serious delusion or, potentially, worse.

Brenton: Yeah. I think I have two issues that don't make me comfortable. I don't know the Dendreon story nearly as well as you do, but first is the margin profile; the fact that this drug is custom-made for each patient. The margins are much lower, therefore the break-even point much higher. You've got that dynamic...

David Williamson: For our viewers, historically gross margins on a lot of these drugs are around 90%. In part of the restructuring, they're talking about getting cost of goods sold down to 50%, as a win.

Brenton: Yeah, so there's that end. Then I hear these trials, in combination with Zytiga. Are they testing with Xtandi as well?

David: It's in the plans, but that has not started yet.

Brenton: Yeah. If that's becoming part of the bull case... I don't know if that was part of the bull argument only a year or two ago. I think it was Provenge maybe on a stand-alone basis, and now we're maybe just trying to find any green shoot that we can, in why this might be a viable product.

Of course, the valuation has also fallen considerably too, so you have to give credit where credit's due there. It could be cheap if these things turn out.

David: And there have been some buyout rumors, so we've seen a little bit of a bounce, but I don't think investors should jump in just because of some rumors. There are always rumors -- it's biotech, right?

I think they need to wait until they see some trial results, because that will give some clarity as to the future tactics of the company.

Also, just to see sales turn around. I know they were revamping the sales force and there have been some other issues, but you don't want to jump in while sales are still declining. Let's see that stabilize. Let's see that head back up where you need it to be if Dendreon is going to become profitable.

Brenton: OK. Max, do you have anything to add, or do you want to move on?

Max: Well, I agree with David on this one. I think we spoke before about the cost/benefit ratio. Do you know how much it extends the life of the patient by, Provenge?

David: It's not significantly more than Zytiga or Xtandi. That's the issue.

Max: Right, so when you're looking at a price that big, I really don't think sales are going to grow, but of course things could change.

David: And that's $93,000 versus roughly $5,000 a month.

Brenton: Yeah, I think when you build out the costs, I've done a little bit of the math there. It's not as big of a gap; obviously, the Provenge infusions are done on the front end, and then aren't done on a regular basis afterwards, whereas Zytiga is taken for an extended period of time, so when you look at the total cost, they're much more comparable.

David: Yes, absolutely.

Brenton: But for a variety of reasons, I certainly wouldn't be involved in this, other than for a purely speculative bet.

David: It's not just the cost. It's the limited treatment window, because Dendreon's used for basically asymptomatic or minimally symptomatic patients, so if they get on Zytiga first, by the time that stops working it's too late for Provenge, and that's really a big issue with the drug.

That's why this trial is important, because they want to show that you need to use Provenge first, before moving on to these other drugs, for the optimal results.