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When biotech Dendreon
I've followed this company for several years, both because of my biochemistry background and because prostate cancer runs in my family, so I'm familiar with Dendreon. Its therapy takes a particular type of cell from a patient, treats the cells at its own facility, and then returns them to be infused back into the patient. The treated cells then stimulate the patient's own immune response to attack prostate cancer cells.
Sounds very expensive. And it is. That's the problem.
Dendreon's been focused for so long on getting the science right, getting FDA approval, and then getting enough manufacturing capacity to handle expected demand, that it apparently forgot one very important fact. Well, two, actually.
Fact No. 1
First, cancer treatments don't sell themselves. Especially when they cost $93,000. It wasn't until the end of June, over a year after FDA approval, that Medicare fully signed off on reimbursing doctors for the treatment and assigning it a reimbursement code. This approval has a large effect on sales for any treatment, because private insurance takes a lot of its cues on deciding to cover the costs or not from Medicare.
Unfortunately for Dendreon, barely 25% of the physicians who would use the treatment knew that the issue had been resolved. That tells me that its sales efforts were not very robust, as Dendreon should have been trumpeting the news from the mountaintops. The delay (and the previous, more cumbersome reimbursement process) helped lead a lot of doctor reluctance to use the treatment, which ties into the second fact.
Fact No. 2
Doctors are in business, too. A treatment that costs $93,000 and lasts only one month requires a much bigger upfront cash expenditure from doctors than does one costing the same but lasting several months. For instance, Johnson & Johnson's
Dendreon's management indicated that it hadn't really grasped this when CEO Mitchell Gold commented, "we now understand ... their increased sensitivity to the impact of cost density on their practice economics." Here again, the sales efforts hadn't been very robust. The sales force and, thus, management should have been well aware of this problem quite a while ago and been proactively working with doctors to ease that sensitivity. Make it easy for customers to buy from you, and they'll be more likely to do so. Pfizer
Given such problems, why am I purchasing shares? As a result of these revelations, expectations for peak sales of Provenge have dropped like a stone. Before, analysts were thinking $1.5 billion to $2 billion per year with Dendreon worth over $5 billion. That works out to be a price-to-sales multiple from peak sales of about 3 and about 13 times this year's expected sales of about $400 million.
With a current market capitalization of $1.6 billion, Dendreon is priced to have peak sales of about $530 million per year and current-year sales of only $120 million or so, using the same multiples as above. Two points from this. First, that derived peak-sales number is at the low end of what analysts are currently expecting, which is more in the range of $500 million to $1.2 billion. Using that range and the same 3-times multiple puts Dendreon between $1.5 billion, where it trades today, and $3.6 billion.
Second, for the first six months, it's already achieved $77.6 million in sales. I wouldn't expect sales to be only $42.4 million for the remainder of the year, some 45% below what it has done so far. Those doctors using Provenge already will probably not stop using it just because reimbursement is now easier.
The problems Dendreon faces -- namely, educating potential customers that reimbursement for the cash outlay is now easier and quicker than before, and working with doctors to ease their sensitivity about the outlay in the first place -- are fixable. Dendreon will go through a rough patch right now, but it should come out the other side successfully.
Of course, if it demonstrates otherwise over the next few quarters, I'll sell.
Tomorrow, the Messed-Up Expectations portfolio will buy about a 2% position worth of Dendreon shares.
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