Applied Materials, Dendreon, and Hansen Medical

Just a few notes today on three of the companies I own or follow.

Applied Materials (AMAT) had a bang-up quarter, reporting on May 15. Management has been predicting market share gain because of new tools for the semiconductor industry, some based on Applied's deeper abilities in materials processing science. Revenue was $2.35 billion, up 7% sequentially from $2.19 billion and 19% from $1.97 billion in the year-earlier quarter. GAAP EPS (diluted earnings per share) were $0.21, flat sequentially from $0.21 and up from negative $0.11 year-earlier. Non-GAAP EPS was $0.28.

Applied is on two separate cycles: the semiconductor process upgrade cycle (for instance, right now the transition from 28 nm processes to 20 nm processes) and the end-device demand cycle, which tends to follow global economic ups and downs. Long-term investors have to learn to ignore the cyclical nature, or use it to buy AMAT when it is cheap. As I write it is at $20.19, cheap if EPS keeps growing. Pays a divident of $0.10 per quarter too, working out to just under 2% per year at the current price. Applied is waiting for regulatory approval to combine with Tokyo Electron. If the merger goes well they could crush the competition. For more see my Applied Materials Q2 2014 notes.

Dendreon (DNDN) continues to make progress despite its woes. Early Phase II data in its study for its vaccine for urothelial cancer is encouraging. But unless the final Phase II data is extremely strong, we still have a large, expensive, slow Phase III trial to attempt to gain regulatory approval. In the meantime everything depends on how management reduces the cash burn. Some data due to be presented later this month may also encourage more patients and doctors to prescribe Provenge; any increase in revenue would be helpful. There is a lot of short interest in this stock as shorts bet that Provenge sales will plunge (something they've been predicting for 2 years) and the company will go bankrupt before European sales of Dendreon ramp up in Q1 2015. For more see my Dendreon Q1 2014 notes.

Hansen Medical's (HNSN) stock price has been on a downward tear since it hit  52-week high of $2.89 on February 11. It sank to $1.10 on May 12 and now has had a dead-cat bounce, probably short covering, back up to $1.31 as I speak. Hansen Medical has two catheter-cased robots, one for electrophysiology and one for vascular surgery, that are much praised but seldom sold. With a market cap of $146 million and Q1 sales of $3.7 million, you can see why it is a highly speculative, venture-capital type of bet to make. Still, there is always next quarter; they claim the sales pipeline is strong, it is just hard to get hospitals to actually commit to new capital equipment purchases. I think the questioning of Intuitive Surgical's robots has not helped. For more see my Hansen Medical Q2 2014 notes.

I own all three stocks (but not Intuitive Surgical). I reserver the right to buy more, or to sell my shares, at any time. I am an investor and financial journalist.

Provenge Approval and Biotechnology Recap

Dendreon's Provenge received earlier than expected approval by the European Medical Agency. It will now be possible to sell the prostate cancer therapy in Europe. It is likely to be a slow ramp, however, because each nation has to approve Provenge for reimbursement (they all have national health insurance in Europe) and a facility to process the Provenge (which involves tagging patient blood to make it attack the cancer) has to be built. Since two facilities are operating in the United States, at least they should know how to set up one more efficiently this time around. See Dendreon Provenge Approved in Europe press release.

I added to my Dendreon stock position, but note that with an exist market capitalization of half a billion, and little likelihood of reaching profitability even in 2014, this is still a very risky investment, not for the faint of heart. Don't bet money on Dendreon if you can't afford to lose it.

Followers know I have been reviewing the biotechnology stocks in the Nasdaq 100 at Seeking Alpha. The overview and comparison article on those stocks has been published:

Biotechs in the Nasdaq 100 Recap

Dendreon Q2 analysed

I have a new post at Seeking Alpha:

Dendreon Revenue and Cost Trends

You can also look at my note from the Dendreon (DNDN) Q2 2013 Analyst Conference Call

I have owned Dendreon stock since 2005 and its been a lesson in how badly the market prices stocks. Which is to say, The Market is just a bunch of humans, most of whom grew up well-off and like the English aristocracy of old, barely no how to dress themselves. They let the herd think for them, and constantly overprice and underprice stocks. Which means an individual investor can take money from them pretty easily if: you do a good job at research and analysis; you keep your emotions in check; you keep in mind that the world is a chaotic place; you are patient; you keep diversified.

In particular with Dendreon, when it finally got approval for Provenge for prostate cancer, a bunch of brokers who had never heard of Dendreon before hyped it to their clients, sending the price soaring to levels inconsistent with reality. I sold most of my stock then. As the price has fallen I have started accumulating DNDN again. I could lose my money, there is at least a 25% chance DNDN will go bankrupt by 2015, but I don't think so, as a say in my article.

Dendreon's Provenge Recommended by European committee

New article posted at Seeking Alpha:

Dendreon Gets European Recommendation

See also my: Q1 2013 Dendreon Analyst Conference Notes

Provenge is approved in the United States for the treatment of metastatic minimally symptomatic castrate-resistant prostate cancer. Dendreon is seeking approval for Provenge in Europe.

Dendreon's Provenge Revenue Trends

After finally getting FDA approval for prostate cancer therapy Provenge in May 2010, Dendreon's management thought their main problem would be setting up enough manufacturing capability to meet patient demand. Instead, and largely due to the FDA's unconscionable approval delay, by the time Provenge was available prostate cancer competing therapies were coming to market, from companies with larger and more experienced sales forces.

So revenue did not ramp as fast as Dendreon expected. Worse, they leveled off this year. Here are the numbers:

Provenge revenues, millions	2011	2012
Q1	$28.1	$82.0
Q2	$49.6	$80.0
Q3	$65.8	$78.0
Q4	$77.0	$81.6

The Q4 2012 Provenge revenue is preliminary, and excludes a $3.8 million favorable adjustment to chargeback reserves which had built up in prior quarters.

Provenge seems to be in a run rate of $320 million per year, which would be a pretty successful drug if its cost of production were more normal and if it was one of many therapies of a corporation. But at $320 million per year it makes Dendreon a money loser.

The Q4 $81.6 million is suggestive of a trend. Provenge therapy is a bit complicated, so a quarter with major holidays like Q4 might be expected to show some seasonal decline. Q4 2012 is improved $4.6 million or 6% over Q4 2011. It is also up sequentially $3.6 million, or 5%.

On the other hand, the peak so far is back in Q1 of 2012. Also, a number of factors might make revenue slop in or out of a particular quarter.

Even as we await the analyst conference and official numbers for Q4, our minds move to Q1 2013. I would put the goal post at $85.0 million for calling a trend. That would give us 4% annual growth and a record quarter. Even 2 up-trending quarters is not enough to go out on a limb on, but it might start to restore confidence in the financial future of Dendreon.

Disclaimer: I am long DNDN and will not trade the stock for 3 days after the publication of this report.

William P. Meyers

See also: www. dendreon.com

My main Dendreon notes page.

Dendreon on the Ropes

Back on April 29, 2010, Dendreon announced that Provenge had been approved by the FDA. That day DNDN opened at $40.09 and closed at $54.58. On March 6, 2009, it had opened at $2.77 per share. Today DNDN closed at $4.45. Was FDA approval really that meaningless?

Recent Q3 sales results for Provenge were down sequentially from Q2, which is not reassuring, although not as bad as some of the anti-Dendreon crowd had predicted.

Dendreon still has a couple of shots at getting off the ropes and becoming a valuable company, but a further drop in Provenge sales, or even stasis, could lead to bankruptcy. Investors have mostly erred on the side of safety, and abandoned hope. This means there is more upside than downside at today's price, but the downside risk is still considerable.

Provenge is an immunotherapy that is approved by the FDA for asymptomatic or minimally symptomatic metastatic castrate resistant (hormone refractory) prostate cancer. Like most cancer therapies it is not a cure, but has demonstrated statistically significant benefits in survival times for patients. Unlike many cancer therapies, it has relatively minimal side effects.

Dendreon's past management made a number of strategic mistakes, but that is only knowable in retrospect. When Provenge should have first been approved by the FDA (in my opinion), competing new drugs were a couple of years from potential approval. By the time Provenge was finally approved, competitors were on the verge of approval. Management's primary concern was building out the facilities needed to produce Provenge (treating patients white blood cells to recognize cancer antigens) as rapidly as possible, which was a capital intensive prospect.

It isn't that management thought Provenge would sell itself; they also had a sales force prepared to sell Provenge. However (and Provenge is by no means the only therapy this has happened to in the last few years) there were doubts raised in the medical community about the value of Provenge. More importantly, doctors are used to handing out pills or hooking up patients to IV's, and Provenge instead required taking white blood cells out of patients, shipping them to processing facilities, and then shipping them back to the doctors for re-infusion into patients. Provenge built three facilities in different areas of America so that the logistics would work out.

Provenge revenue was first reported for Q2 2010, $2.8 million for a partial quarter. Revenue then jumped in Q3 2010 to $20.1 million. After that there was a ramp that was slower than original guidance by Dendreon management, which finally peaked at $82.0 million in Q1 of 2012.

Q2 2012 revenue declined to $80.0 million, and Q3 revenue was $78.0 million. Management claims there is still considerable unmet demand for Provenge and revenue can be ramped to at least $100 million per quarter. To reduce costs employees have been laid off and one of the three manufacturing facilities has been closed. Management believe $100 million per quarter is cash flow break even.

Since debt ($554 million) exceed cash ($445 million), a few more quarters of revenue under $100 million could cause Dendreon to seek bankruptcy protection, wiping out shareholder value. The debt is in the form of convertible notes due in 2014 and 2016.

However, there are several positives going for Dendreon, which could increase revenue in both the short and the long run. Because it is an immunotherapy, there is an argument that Dendreon should be the first therapy tried once a patient arrives within its FDA label. Right now that does not yet appear to be the consensus within the set of physicians who are potential prescribers. Thus the future value of Dendreon stock currently highly dependent on the educational capabilities of the Provenge sales force and leading physicians who are advocates for the therapy.

There is potential expansion of the label, with clinical studies underway that could provide the factual basis for this. Even that is another double-edged sword. If studies fail to find statistically significant benefits for patients outside the current label, that might weaken physician interest for patients inside the label. If the studies are positive the expansion of the addressable patient base should easily take Dendreon past the $100 million per quarter line.

Finally, there is Europe. If you already own Dendreon stock, this is certainly worth waiting for. There should be an EMA decision around mid-2013. But it is not a sure bet. The EMA is not obliged to follow the FDA, although it typically does. The European health care system has shown more price-sensitivity than America, which could stall adoption or reduce margins. Finally, another capital-intense facility would need to be built. Maybe they can move the machines from the closed U.S. facility to Europe if approval is granted.

Dendreon is one of the most interesting stock stories in the past five years. It peaked at $55.43 on May 3, 2010, as brokers who worked with analysts had dismissed it a year earlier hyped it as the hot new stock. On March 6, 2009, it had opened at $2.77 per share. That was some ride. It was a great illustration of how auction pricing systems can get wildly out of touch with reality.

The way I look at it, there are three ways for Dendreon investors to win: if sales start ramping again in the U.S. within the current label; if the label is expanded in the U.S.; and if Provenge is approved in Europe. That is not bad odds, but the downside is potentially losing the entire investment. Market cap ended today at $687 million, which normally would assume profits can run something like $15 million per quarter in the foreseeable future. Since the future is not foreseeable, buying or selling DNDN at today's price comes down to how much risk investors are willing to take on.

Disclaimer: I am long Dendreon. I won't trade DNDN for 1 week following the publication of this article. I buy and sell Dendreon depending on my assessment of its statistically likely true value in comparison to its price.

Dendreon Provenge Sales Wobbling

Reporting on Q2, Dendreon managed to pull a skunk out of a hat. I said in my last Dendreon column, Dendreon's Boring Q1 Results, that "Failure to gain approval in Europe, or continue to ramp sales up past the $125 million per quarter level, would tank this stock further."

Q2 revenues from Provenge for metastatic non-symptomatic prostate cancer were $80.0 million, down 2% sequentially from $82.0 million, but up 66% from $48.2 million in the year-earlier quarter.

Investors were not appeased by management's plan to close down it New Jersey manufacturing facility and other cost cutting measures.

Shorts and backers of rival prostate cancer therapies have been trashing Provenge for close to a decade now. But from its introduction until Q1, 2012 revenues grew each quarter sequentially. Note that even the poor Q2 results were up 66% from the year-earlier period. Dendreon supporters (including me) understood that since Provenge is complicated to administer, and expensive, it was not likely to ramp as quickly as an oral or even an IV administered therapy.

$80.0 million, at about $0.1 million a pop, means about 800 patients in the quarter. Management offered the theory that sales were poor because individuals in their sales force had been lured away by rivals (not necessarily prostate cancer therapy rivals). They claimed a correlation between areas where there were holes in the sales force and areas where new patients failed to materialize. While that may be true, it also says something about Provenge not yet being a preferred option for many oncologists, urologists, and patients.

On the positive side, more data analysis of Provenge's effectiveness were released during the quarter. It is possible that, as the word gets out that it extend's the average patient's life more than a few weeks, it will become more attractive. Doctors and patients will be more likely to try it during the "window" that the label allows for (you can't prescribe on-label if the cancer is not metastatic and hormone-castration resistant, but once it progresses to being symptomatic, in this case meaning painful, the patient has again also gone off-label).

It is easy to verify that Provenge is now widely available as a therapy. As a test I was easily able to find several qualified providers within a 100 mile radius of my home [try: Provenge provider locator]. There may still be holes in the geographic coverage, but they are not very extensive. Anecdotal evidence that there are men who have lived much longer than expected following Provenge therapy is also easy to find, at least on the Internet. While Provenge is complex to administer, its side-effects are minimal for a cancer therapy.

How much hope is there for a Dendreon stock price recovery at this point? Today Dendreon closed at $$4.94, corresponding to a market capitalization of $761 million. The recent low, following the release of Q2 results, was $4.17, while the 52 week high was $17.04. In the euphoria after FDA approval the stock hit $54.06 in April, 2010.

When the New Jersey facility is closed and the deadweight in Seattle is ushered out, current management expects a break-even run rate of $100 million per quarter, or $400 million per year.

It is anyone's guess whether Dendreon can make it to break even and beyond. Break even means over 1000 patients per quarter, or up over 200 from Q2, or a 25% increase. You would think that would be doable, but if were doable it should have been done in Q2.

What we have, apparently, is an army of rival sales people in the field not only pushing their therapy, but in the process trying to push patients out of the Provenge therapeutic window. The Provenge data looks compelling to me, but apparently it is not so compelling to at least a portion of the oncologists and urologists out there. It may be too bad we have medical decisions effectively made by profit-driven sales pitches, but that is not going to change anytime soon.

On the upside is the possibility of European approval some time in 2013. Given the expense of Provenge therapy, and the state of European economics, even if approved there might be some negotiation over price and another slow ramp. Still, Europe is a big market, and then there is the rest of the globe.

If Q2 turns out to be an anomaly, if Q3 revenues are north of $85 million, then those who dumped Dendreon in the $4 range will look like fools. I like Dendreon at this price, but not enough to actually buy any more until I see a significant uptrend in revenue.

Manage your risk, keep diversified!

Disclaimer: I am long Dendreon. I won't trade DNDN for 1 week following the publication of this article.

See also my Dendreon Q2 2012 analyst call summary

Dendreon's Boring Q1 Results

Dendreon (DNDN) investors (and speculators) have become used to wild price swings. In the early years these depended on opinions about whether the FDA would give marketing approval for Provenge for prostate cancer. After FDA approval came, after years of delay, we had overly-optimistic forward-looking guidance on how fast Provenge sales would ramp from Dendreon management, and wildly optimistic forcasts by bullish analysts. Then Provenge, in 2011, ramped revenues, if not slowly, at least significantly slower than most investor's expectations.

All the while there were people and institutions with big shorts out there, certain that Provenge would not be approved by the FDA, then that it would not be reimbursed by insurance companies and Medicare, and finally, lately, that it would be rejected by physicians as a statistical con game. They were proved wrong on every count.

On the Q4 analyst call Dendreon management had guided to a Q1 with "modest" sequential revenue growth. (Excluding the $125.2 million one-time royalty revenue item in Q4.)

Almost strangely, that is the result that was turned in today. Revenue, almost exclusively from Provenge, was $82 million. Provenge revenue in Q4 was $77 million, giving sequential growth of 6.5%. Enough to sour the collapsing-Provenge-sales shorts, if not enough to warm up the bulls. Year over year results were much more impressive, about triple the $27.0 million of Q1 2011.

Progress can be fairly described as steady. More doctors and patients are trying the therapy. More data supporting the therapy will be released this quarter. March was a particularly strong month, but management does not want to extrapolate from that, instead seeing low-single-digit sequential growth in Q2 from Q1.

There are negatives, the main one being cash burn in the quarter of $59 million. There was $559 million cash left at the end of the quarter. While management is working on reducing costs, mainly they are expecting to reach profitability by expanding sales. The break-even point is expected around $500 million per year, or $125 million per quarter. At a low-single digit per quarter growth rate, that won't come soon.

On the upside is the possibility of European approval. Given the expense of Provenge therapy, and the state of European economics, even if approved there might be some negotiation over price. Still, Europe is a big market, and then there is the rest of the globe.

There are also possibilities for further immunotherapies for other cancer types, but those are not likely to come into play this year. Cancer trials take a long time.

When new biotechnology companies have promising therapies but no FDA approvals they often reach speculative heights that lead to disappointment during the revenue ramp phase. That certainly happened with Dendreon, which hit a share price of $54.06 on April 26, 2010. Its 52-week low this year is $6.46.

With the stock closing at $11.69 before results were announced, giving a market capitalization of just $1.8 billion (and sinking lower in after-hours trading), in my view Dendreon is a buy but carries considerable risk. Failure to gain approval in Europe, or continue to ramp sales up past the $125 million per quarter level, would tank this stock further. I expect European approval and hitting the break even mark in 2013, but that makes for a long wait. It is not exciting stuff anymore, but it is still a solid long-term bet.

Manage your risk, keep diversied!

Disclaimer: I am long Dendreon. I won't trim or expand my position for 1 week following the publication of this article.

Dendreon's Provenge Challenged by Marie Huber

Recently some people have declared Provenge, a treatment for prostate cancer, "dead." This is because of an analysis made independently by Marie Huber [See Insight: New doubts about prostate-cancer vaccine Provenge (Reuters)]. Marie has a BA in Biochemistry from Cambridge and a Masters of Philosophy in Bioscience Enterprise from Cambridge and MIT. Her work history is not as a scientist but as a business analyst, and she claims to currently be an independent citizen-scientist.

Before getting to her analysis, I should say there is no point to the character assassination that apparently Ms. Huber has been subjected to. Her analysis either stands on its own weight or it does not. [Disclaimer: my own biostatistics credentials are challengeable too. I took one probability course in college, worked for 1 year at a low-level job at a biostatistics company, and otherwise I am mainly self-taught. I have done professional analysis of biotechnology companies for about 5 years now, invest in biotechs myself, and have a good, but not perfect, track record.]

If you want to see it for yourself, Marie Huber's analysis is available on the internet as her video Understanding the Provenge Trials as is the paper she co-authored, published in the the Journal of the National Cancer Institute (of Britain): Interdisciplinary Critique of Sipuleucel-T as Immunotherapy in Castration-Resistant Prostate Cancer.

In the video she specifically tries to convince oncologists and urologists to not prescribe Provenge for patients with metastatic prostate cancer. She says her analysis shows that Provenge "might" be harmful, rather than helpful to patients. Given the low rate of side effects for Provenge, far lower than typical cancer treatments including chemotherapy and physical interventions, that is an extraordinary claim.

Ms. Huber starts with a perfectly reasonable review of prostate cancer, the immune system, the Provenge mechanism, and the trial design and results. Her first factual critique (here I am assuming she is being factual about data Dendreon released) is that only 27% of treated patients showed an immune response to PAP, the target protein. For me, that in itself might account for the low response rate; but we already knew there was a low response rate, one acceptable to the FDA given the low risk of side effects. More troubling, those 27% who did respond (with longer time till death) to PAP, as with the 73% who responded to the PAP-catalyst combination meant to induce response, could not be shown to have a survival difference. So, if that holds up, the process is prolonging survival in some patients, but not for the reasons usually given.

She points out that Provenge showed no effect on time to progression. But that was known long before the final Phase III trial. This should not, in itself, be a problem, and it was not for the FDA, because there are drugs that do delay time to progression, but don't increase overall survival. Overall survival is the gold standard, not time to progression.

It is data released the after the FDA approval that really gets Ms. Huber going (available for you to see at http://www.fda.gov/BiologicsBloodVaccines/CellularGeneTherapyProducts/ApprovedProducts/ucm213554.htm).

What the data proves most obviously is that the FDA raked Provenge data over the coals before approving the therapy. But we already knew that.

Huber focuses on a particular table of age-related survival data. This shows that the benefits in the trial were far greater for patients over 65 years of age than for those under 65 years old. Within the patients receiving the placebo, older patients died about a year earlier than younger patients, which should not be the case if all prostate cancers are equal and are the cause of death. The table also shows, but does not seem to interest her, that African Americans do really, really well on Provenge. So much so that I am surprised no one else has pointed this out.

In most vaccines, per Huber, older patients show lesser responses to vaccines than younger patients. In the Provenge data, again using 65 as the age division point, while the therapy seems to work in older patients, the younger patients who get Provenge survive longer.

Huber believes the most likely explanation of this data is that older patients were hurt by the placebo, but for some reason younger patients were not. If so, what we had may have been double blind, but in fact we were testing against a poison, not a placebo. The claim then would be that the Provenge process, aside from the immune-protein creation part, has negative health consequences for patients.

Interesting, but it involves leaping to statistical conclusions on an arbitrary dividing point, the age 65. A Dendreon spokesperson has indicated that, dividing at age 71, the anomaly goes away.

Statistics work best on like things, like a perfectly balanced, perfectly spaced roulette wheel. Each human is different, genetically and in state of health, when they enter a trial. We don't force cancer patients to eat identical diets or live otherwise identical lives while in trials. We hope our statistics catch meaningful aggregations of data. Dendreon has never claimed that Provenge cures prostate cancer. On the whole, no matter how you divide up the patients, Provenge prolonged survival in a double blind study (actually, 3 studies). If, like other cancer drugs, it hurt some patients while helping others, that is just par for the course. Chemotherapy frequently kills elderly patients before their cancer can. From Huber's statistics, at worst Provenge causes slight harms to some subsets while showing greater benefit to other subsets.

At the extreme, you can take the ten percent of patients who live longest and the ten percent who die quickest, and claim Provenge (or any therapy) does not work because the second set does worse than average. The right question to ask is: did the average improve, with minimal down side for the worst-affected? By that criteria, Provenge passes, and that is basically the criteria used by the FDA for approval.

Huber speculates that the blood processing reduced the number of lymphocytes in the blood returned to placebo patients. This would be easy to test. Perhaps her team can get a grant for that. I would like to see the results. Of course, if you want to kill lymphocytes, that is easy to do. Dendreon's process was intended to preserve lymphocytes. Huber admits that her speculation is unproven.

If lower lymphocytes in placebo patients were a problem, then the question arises: what caused the early deaths? In the beginning Huber stated that one reason patients have prostate cancer in the first place is that their immune system is not attacking cancer cells. Removing lymphocytes should not alter that. So the deaths should be attributable to other causes, like infections. As far as I can tell, the data does not support more placebo patient deaths from infections. The deaths are from the cancer. There may be other explanations, but the obvious one is that the placebo patients were just that: placebo patients. Which means the treated patients who lived longer did so because they received Provenge. The placebo patients lost the lottery. Sad, but that is what happens in clinical cancer trials of effective therapies.

Marie Huber did some interesting work, and I have no problem with her publishing it in a science journal. Whether or not her conclusions are correct, continuing to collect and analyze data is appropriate. It should soon be possible to generate statistics on patients treated with Provenge since its approval. In addition, Provenge should certainly be studied, in clinical trials, at earlier stages in the cancer progression process.

My problem is: suppose Ms. Huber is wrong. Suppose doctors don't recommend Provenge because they are busy and Huber's work reinforces a prejudice, or a salesman for a rival therapy overstates Huber's case, or whatever. Then lives will be shortened because someone rushed to put out data without checking it by actually conducting a study.

The FDA can get it wrong, but it is the agency responsible to see that drugs are safe and effective. If the FDA thinks Huber & crew are right, they should take Provenge off the market, even if it means they look bad for not being careful enough the first time around. Even if it means I lose some money. But to me the story that comes through Ms. Huber is that the FDA did a very thorough job, while Ms. Huber admits she has not proved her point. Right or wrong, it is speculation.

Disclaimer: I am long Dendreon. I won't trade the stock for at least 3 days after this article is posted.

Before making a decision be sure to read my Q4 2011 Dendreon call summary and check out my main Dendreon page, which has loads of background information.

Dendreon Capitulation

Following the announcement of Q3 results on November 2, 2011, Dendreon (DNDN) stock capitulated. One can only surmise that those who came to the Dendreon game late and hoped to make easy profits, thereby showing their lack of understanding of cancer drug introductions or poor choice in momentum stocks, are now out of the stock. It would be interesting to know who now owns all that stock. Dendreon's 52-week high was $43.96, but it actually hit a post-FDA approval of Provenge for prostate cancer high of $55.43 on May 10, 2010. Its 52-week low was on November 3, at $6.46, with a dead cat bounce today bringing it up to $6.69 at the close. That represents a market capitalization of just under $1 billion.

Q3 results were about what any reasonable person would expect. On August 9, 2011, I guesstimated Q3 revenue at $66 million. It came in at $64.3 million. That included $3 million in non-Provenge royalty payments. Which puts Provenge at $61 million, up 23% from $49.6 million in Q2. Where else would that be a slow ramp?

For those who baled there were two major factors. Revenues were not ramping as quickly as they hoped, and there is a not-unreasonable questioning of where Provenge revenues might peak. In a mere 12 months we have gone from wildly optimistic to deeply pessimistic projections.

What are reasonable projections for Provenge revenues? You have the number of patients covered by the label annually, less those who don't try the therapy. There is no financial reason to not try the therapy since it is covered by Medicaid and Medicare, as well as all major private health insurance plans. The current label constitutes a window through which most prostate cancer patients whose disease progresses will pass, but currently you have to wait for the window. If you a different therapy during the window and wait long enough you can find yourself off label. There is no good reason for a rational patient (or physician) to let that happen. Provenge is very safe and takes only 1 month to administer. It should be the first therapy tried when a patient enters the window. Other therapies can then be tried before waiting to see if Provenge is working, a good strategy given the low percentage of men it provides complete remission for.

33,000 men are expected to die of prostate cancer in 2011, but not all of those go through the Provenge label window because the cancer can become symptomatic before becoming castrate-resistant. I estimate that 15,000 men in the United States will reach the stage of hormone-refractory, non-symptomatic or minimally symptomatic, metastatic prostate cancer each year. This estimate is less that the over 30,000 deaths from prostate cancer each year, since not all men go through the window before dying. Men who knowingly hit this stage usually have already had surgery or radiation therapy plus hormone therapy, but many are not diagnosed until after they have passed the window. Provenge therapy costs about $90,000. If 10,000 men per year try Provenge revenues would be $900 million per year. (There will be 240,890 new prostate cancer cases in the U.S. in 2011 according to the National Cancer Institute, but most men are cured by surgery or radiation or die of something else before their cancers become metastatic.)

I can only conclude that the $61 million for Provenge in Q3, annualized to $244 million, is just the beginning of the ramp. Add to that European patients. Add to that the rest of the world. Add to that the possible expansion of the label. Provenge works by getting immune cells to attack cells presenting PAP (Prostatic Acid Phosphatase). It is present in symptomatic disease and during the hormone dependent phase. It would not be surprising if Dendreon were able to extend the label following clinical trials targeting off label phases.

Guaranteed? Of course not. It may make sense to prescribe Provenge, but that does not mean doctors will universally make that a practice. Competitive therapies may prevail, and we can expect new therapies to come down the pipeline until something really can cure the great majority of metastatic prostate cancers.

Dendreon won't stand still either. In addition to global expansion and Provenge label expansion, we can expect other immunotherapies to be developed. Each cancer type that has an appropriate immune system target should be addressable by this paradigm.

Will this happen over night? Of course not. Management was way overconfident in their projections in early 2011. Now they seem to have received the message and are digging into the task of educating patients and physicians. Q4 will not see much of a revenue ramp, but that is because patients and doctors are not likely to start a complicated, month long procedure during the holidays.

Just guessing, but I would expect Q1 2012 to show a better revenue ramp, probably to between $75 and $80 million. Management won't give guidance, and it is really up to the doctors who deal with prostate cancer. I think as word gets out about successes from Provenge, the process will become demand driven. How long that might take, I am not willing to guess.

In any case Dendreon is a stock for patient investors, as has been keenly demonstrated several times in the last 5 years.

Disclaimer: I am long Dendreon. I won't trade the stock for at least 3 days after this article is posted. I am likely to be a buyer at today's price.

Dendreon Restructuring Call

Mitchell H. Gold, MD, Dendreon's CEO, led a analyst conference call to discuss restructuring plans. This follows the month-earlier announcement that Provenge sales were ramping slower than expected.

About 500 employees are being laid off, out of about 2000. Restructuring costs are estimated at $21 million, including $5 million in non-cash stock-based compensation.. Savings from restructuring are estimated at $120 million per year. Most of these employees were in training to be ready to meet the (previously expected) demand ramp. Presumably if demand accelerated again they would have to be rehired, and the savings would not accrue.

For most mid to long term investors the key question is long term demand. Revenues for August were reported at $22 million, up 16% from July, which would put July around $19 million. Given a similar $3 million ramp in September, Q3 income would be $66 million, but management stood by its refusal to guide on revenue other than to say that it expects it to ramp slowly quarter by quarter in the immediate future. $66 million is up 32% sequentially from $50 million in Q2, which would be tremendous had expectations not been raised so high earlier in the year.

Approval of Provenge in Europe was painted as a 2013 event, so no revenue help there is likely until 2014.

Analysts' questions went every which way at management's statement that $500 million in annual revenues, or $125 million per quarter, would get Dendreon to cash-flow break even (but not to GAAP profits). They also believe they have enough cash to reach that point. They had $674 million in cash at the end of next quarter, and $600 million on August 31. Cash use should decline now that the 3 Provenge facilities have been certified by the FDA.

Aside from restructuring, the major effort is in sales. The good news is that the reported time for reimbursement for Provenge has dropped to around 30 days, from prior reports of 60 days or more. That means medical organizations with cash flow issues could treat twice as many patients with the same amount of capital. Also, a concerted effort to make sure prescribers understand the Provenge label and reimbursement availability has been made and is ongoing. We will see if this all has an affect if management keeps reporting revenues on a monthly basis.

Management still believes that the $90,000 per patient price is not an obstacle, and that other prostate cancer drugs will not prevent Provenge from being prescribed within its label, since it is very safe, with almost no side effects, and the course of therapy is much quicker than for most cancer drugs.

There seems to be little fodder for short term momentum plays up or down right now. A lot of risk has been incorporated into the current stock price. A slow revenue ramp with flattening in 2012 would probably keep the price in a range. A faster ramp and better evidence that end demand really can ramp well above $500 million per year would justify a higher stock price, maybe substantially higher, but that could take several quarters to see.

Disclaimer: I have been long Dendreon since 2005, but buy and sell according to my analysis of prospects versus the market capitalization. I added Dendreon shares in August 2011 and last sold shares in April of 2010. I have no plans to buy or sell Dendreon in the near term.

See also: Dendreon Press Releases

Onyx Pharmaceuticals Readies Carfilzomib

I learned about the Biotech Disappointment Curve from watching Onyx Pharmaceuticals. I started following Onyx (Nasdaq: ONXX) in 2005 and first bought stock in 2008. Often new biotechs run up large market capitalizations when they have their first positive Phase II or Phase III data in. After FDA approval, however, investors sometimes start looking at a company differently. They want to see market caps based on earnings, not on future expectations. We recently saw the down side of this curve again when Dendreon announced that its ramp of Provenge had slowed in Q2 [See Dendreon Provenge Demand Questioned].

In the case of Onyx, if you look at the stock price going back a decade, the stock in 2002 was under $7 per share. The 2003 ramp was impressive, with a peak of over $48 in April of 2004. Nexavar (sorafenib) data for advanced kidney cancer was positive, and in December of 2005 the FDA approved the therapy. Then came the show-me-the-money slump, as it takes a while for a sales force to actual get traction for a cancer therapy. At the bottom of the slump, in late 2006, you could buy the stock for under $11 per share. Then in 2007 there was another ramp when Nexavar was getting approved for liver cancer. From 2008 until present Onyx stock has mainly stayed in a broad range around $30 per share.

Another factor is that Nexavar is sold by Bayer. Onyx gets a share of the profits after Bayer's expenses. But in most quarters Onyx's own operating expenses have been sufficient to wipe out the receipts from Bayer.

Bayer and Onyx have been running Nexavar through a set of clinical trials that have shown it may be effective for other forms of cancer, and to strengthen its role in liver caner. If you subtract out the research and development (R&D) costs, in most quarters Onyx would have shown a profit. Onyx has started recruiting patients for Nexavar Phase III clinical trials for breast cancer and thyroid cancer, and has Phase II trials underway in colorectal and ovarian cancer.

Fortunately Onyx Pharmaceuticals has been able to maintain a high cash balance despite the losses, end Q2 2011 at $550 million.

Given the background of success with Nexavar, tempered with losses due to R&D spend, Carfilzomib is the key to Onyx's future value. Carfilzomib is a proteasome inhibitor that had positive data for relapsed and refractory multiple myeloma in a Phase IIb trial. In fact the data was good enough that it is being submitted to the FDA for approval. At the same time two Phase III trials have been initiated.

If carfilzomib is approved by the FDA, either based on current data or after Phase III results, the nature of Onyx's model will change. Again, there is likely to be a phase of investor euphoria followed by disappointment at the time needed to ramp a new cancer therapy. It should be possible, starting in 2013, to have a vigorous R&D program to continue expanding the use of Nexavar and carfilzomib without actually throwing the bottom line into the red. If profitability comes earlier, so much the better.

Even should carfilzomib and new indications for nexavar fail, Onyx could show profits by cutting back on R&D and because it has a long ramp ahead for Nexavar for liver cancer in Asia, where the majority of global liver cancer cases occur.

Today Onyx ended with a market capitalization of $2.1 billion, at $33.52 per share. I believe that there is always risk in biotechnology stocks from competition, the need for FDA and other national medical agency approvals, and from failure to execute. However, I am a long term investor in Onyx Pharmaceutical based on the potential of Nexavar and carfilzomib. I have no plans to sell or buy ONXX in the immediate future.

Keep Diversified!

See also my notes on the Q2 2011 Onyx Pharmaceuticals analyst call.

Dendreon Provenge Demand Questioned

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

Dendreon Ramping Up Provenge Production

For years Dendreon was the Cheshire Cat of biotechnology companies. Its stock price zoomed up and down depending on results of trials and rulings of the FDA on the efficacy of its first therapy, Provenge for prostate cancer. For about a year now the cat has seen flesh added to its bones and paying patients receive Provenge treatments and facilities for those treatments have been built, certified by the FDA, and come online.

In the last 52 weeks Dendreon's price has been relatively stable (compared to pre-2010), the a low of $30.15 and high of $43.96, with the price as I write at $38.92. It its peak, after FDA approval for Provenge, it hit an auction-market frenzy driven level of $55.43 on May 3, 2010.

Dendreon is probably still a couple of quarters away from showing its first profits. On August 3, 2011, it will report on the second quarter, but keep in mind Q2 was one of limited production facilities and high costs as new facilities are built and certified. I would expect revenues between $30 and $40 million (they give annual guidance, not by quarter) and about $100 million for operating expenses, so another red ink quarter. The ball to watch, however, is Q4 2011. That should finally give us a realistic picture of gross margins and operating margins.

Capacity rollout is encouraging; management is executing well. The Los Angeles facility, with 36 workstations, was approved by the FDA on June 29, 2011. Workstations take patient's blood and tweek its immune components to attack prostate cancer cells. The original New Jersey facility with 12 workstations generated $25 million per quarter in revenues. 36 additional workstations in New Jersey were approved on March 10. It should be noted that approval of workstations does not mean they immediately begin operating at full capacity.

However, at $25 million for 12 stations, 48 means $100 million in revenue and approved equipment in New Jersey and LA together could generate roughly $175 million per quarter. I suspect that if extra shifts are worked and the machines have little down time, the figures could be higher. At the same time their is the other constraint: patient demand. Doctors can't just write a Provenge subscription. They need to work with certified infusion centers, which Dendreon has been hustling to set up.

There is another facility under construction in Atlanta. Dendreon is estimating Q4 revenues in the $200 million ballpark. All three facilities should be operating, but by no means will all the workstations be operating at the $200 million mark.

Beyond that, Dendreon is seeking approval for Provenge in Europe. After that, the rest of the world.

It will be interesting to see if Provenge is as effective in the field as it was in clinical trials. That could have a big impact on how it will compete with other therapies.

Finally, and why that $55 per share spike was not all that unreasonable, if a bit premature, Dendreon is a platform company. In other words, Provenge is hopefully just the first of a series of active immunotherapies against various forms of cancer. The down side of that is that a lot of money will continue to go into R&D. The upside is that any further success of the platform really would make Dendreon into a gold mine for its stockholders.

I have been covering Dendreon since 2006. As usual I will write up a summary of Dendreon for Q2 2011 after the conference on August 3, 2011. You can see all of my notes on Dendreon as well as links to other important data at my Dendreon main page.

Looking for the next Dendreon? You might want to check out my Hansen Medical page.

But in addition to known risks, their are potential unknown risks, so keep diversified!

See also: Provenge Press Releases

Dendreon On Plan for Q1, full 2011

Yesterday Dendreon held its analyst conference call and released its Q1 2011 results. The key take away is that everything is going according to plan. For a company that spent years in the wilderness wondering if they would ever get FDA approval of Provenge active immunotherapy for prostate cancer, making and staying on plan seems to be an obsession.

Dendreon is a long way from profitability as it ramps up its Provenge system. The GAAP net loss for the quarter was $111.8 million, or $0.77 per share on revenue of $28 million.

Provenge is a process in which a prostate cancer patient's blood is activated to get the immune system to attack the cancer. Some blood is withdrawn at a clinic, flown to the New Jersey manufacturing facility, treated at a workstation, and then flown back to be infused in the patient. The initial launch was done with just 12 workstations. In Q1 the FDA approved an additional 36 workstations for New Jersey, but the ramp up did not come until near the end of the quarter. In April, however, more of the machines were working, so the revenue run rate grew to $15 million for the month. On average in Q2 Dendreon expects to run 24 machines.

The new machines can take on a higher flow of patients, which in turn means allowing more doctors and clinics to provide the therapy. Two additional manufacturing facilities, near Los Angeles and Atlanta, hope to be approved by the FDA this summer and fall.

Guidance remains that for full 2011 revenue will run $350 to $400 million. Half that will come in Q4, if workstations in all 3 facilities are available. My read on that is not that $200 million per quarter is the top run rate. All machines will not be online at the beginning of Q4 and their will be room for higher run rates as the machines are made more efficient and run multiple shifts per day.

Apparently men with (the appropriate stage of) prostate cancer want to try Provenge, which has few side effects.

Global expansion will take years, but Dendreon is already spending money to get ready for a European launch. A global trial of Provenge will also get underway this year.

See my Dendreon Analyst Call for Q1 2011 notes more detail.

See also: Dendreon

And keep diversified!

Dendreon Provenge Medicare Prostate Cancer Payment Decision

Good news for prostate cancer patients: Medicare will pay for Provenge therapy. For now they will only guarantee payment for prostate cancer that has reached the metastatic stage that does not respond to anti-androgen therapy (hormone refractory) and is still minimally symptomatic (not yet causing significant pain). Since prostate cancer is common in elderly men, many of those needing Provenge are on Medicare. Most private insurance companies also cover Provenge. The therapy, which sensitizes the patient's immune system to the cancer, has few side effects and has been shown to be effective for some men. Dendreon is expanding its capacity for providing the therapy; currently there is a waiting list. Some doctors and patients have worried that Medicare might decide against reimbursing the cost of the therapy. For more information see: Dendreon Press Release on Medicare Coverage for Provenge New York Time article: Medicare Says it will Pay for Expensive Prostate Drug Centers for Medicare Services (CMS) Proposed Provenge Decision For investors, check out my Dendreon for Investors page, which has links to analysis and dozens of articles on Dendreon and Provenge.

Dendreon (DNDN) Q4 results and call

Dendreon Q4 2010 analyst call summary, my notes from today's conference.

In short, the Provenge rollout is going as planned. This month the FDA should approve the addition of new Provenge work stations to the Dendreon New Jersey facility. When those stations come online capacity will be up fourfold. That ramp should occur in Q2. The current run rate is under $30 million per quarter, so the new run rate potential would be $120 million per quarter.

The buildout at Atlanta and Los Angeles is on schedule for going online later in the year. The quarter run rate when all systems are go should be about $360 million per quarter, or $1.3 billion per year.

There is no shortage of patients. There is a waiting list. New doctors and medical centers are being signed up, so as the machines become available their should be patients getting prescriptions for them.

Prostate cancer patients have some of their blood removed, then processed to tell their immune system to attack the cancer. The therapy is called Provenge; it is not a drug per se.

The biotechnology company is also setting up clinical trials to see if the general process will work for other types of cancer.

See also http://www.dendreon.com/

Provenge Prostate Cancer European Availability Planned

All fifteen Medicare regions and 80% of private payers have now approved Provenge (sipuleucel-T) for (asymptomatic or minimally symptomatic metastatic hormone refractory) prostate cancer for reimbursement. Expects to increase capacity by a factor of ten in 2011; should have 450 infuser sights by the end of the year; already hired 100 sales people.

$48 million total Provenge revenue in 2010, with about $25 million in Q4. $350 to $400 million revenue expected in full 2011, with about half of that coming in Q4. $280 million cash balance at the end of the year. GAAP loss of $310 million to $350 million for 2011; non-gAAP loss of $230 to $270 million.

Europe will be the first target for further Provenge approval. Believes addressable market would be about the same size as in the United States. There is a major unmet medical need there. After meeting with the European regulatory agency (EMA), IMPACT and other data already available should be sufficient to get European regulatory approval. Will engage a contact manufacturing organization for initial Provenge supply in Europe. Will also use this for trials for earlier-stage prostate cancer. But will concurrently build a Dendreon facility in Germany in 2011.

EMA decision would be possible in 2013. Reimbursement must be achieved nation by nation, and there are challenges. But as overall survival is the gold standard for European payers, and overall costs are actually reasonable for Provenge. Cancer therapy prices are largely similar in Europe to the U.S.

$125 million will be spent in 2011 to support American and European expansion, with about half attributed to capital expense and half to operating expense. Will require more capital for the European expansion.

ACI (autologous cellular immunotherapy) platform now includes an investigational product Nuvenge (DN24-02) for invasive bladder cancer. This is a highly immuno-responsive. Will be a randomized Phase II study for patients with HER2+ invasive transitional cell carcinoma of the bladder following cystectomy. Patients with advanced cancer have few good treatment options at present. Endpoint would be overall survival.

Q&A

Plans are for one plant in Europe? It is not necessarily our expectation that we would only ever have one. If reimbursements are approved, we could build more plants.

The European, or global, study would not be to support the regulatory filing. It would be to provide evidence of the efficacy of Provenge for earlier stages of prostate cancer.

Trajectory for expanding infusion centers? Started with 50, finished with slightly more. 450 should be available in Q4. The launch centers had been in previous clinical trials, many in very small clinics. Some of the new centers are much larger in terms of numbers of patients. First additional capacity should come on line in New Jersey, corresponding to about a third of the new centers also starting up.

Europe, maximum capacity for German facility? Seen as very similar to the Los Angeles and Atlanta facilities in design and capacity. Because population density is higher, the center could serve all of the EU countries.

The Contract Manufacturing Facility in Europe would support the new study there. The new Dendreon facility should be ready around the time of approval.

Any message change on prostate cancer since Provenge approval? We are in a golden era now for prostate cancer. Good data sets are coming out for drugs for the chemo-sensative prostate cancers.

Still 2000 patients for 2010? That was for middle of the year, which would be in July 2011.

New Jersey expansion should come online some time in March, but new clinics are already ready to go when that capacity does come online.

How will you raise money, equity or debt? Looking at the alternatives, no decision yet.

CMOs capable of making provenge? Yes, we used 2 CMOs in the U.S. before we began manufacturing our own.

See the accompanying press release: Dendreon Announces Plans to Seek Marketing Authorization for PROVENGE in Europe

Dendreon First Provenge Revenue

On August 3rd Dendreon had its first analyst conference call where revenues for Provenge were reported. I bought the stock back in 2005; Dendreon had been public well before that, and also had a venture capital phase. This shows what time frames can be like in the development of drugs and other therapies.

Revenues for Provenge for prostate cancer commenced in May, but the bulk of Q2 revenues came in June, bringing the total to $2.8 million. The good news is that in July revenue was $5.2 million. No specific guidance was provided, but I would expect Q3 revenue above $20 million. Meanwhile the first Provenge facility (New Jersey) is having its capacity quadrupled, with full capacity expected to be available in early 2011. Run rate is expected near $1 billion per year, or $250 million per quarter. Two additional production facilities will be built, but that will take into 2012. Note that Provenge is not a drug. The facilities boost the immune response of patients' blood.

For my detailed notes from the conference see Dendreon Q2 2010 Analyst Conference Call.

A concern of investors was that, given that the Provenge treatments cost $93,000 (3 blood treatments of $31,000 each) and, like most cancer therapies, do not help everyone, it might be difficult to obtain private or Medicare reimbursement for the treatments. In particular the decision by Medicare to do a national review has led to uncertainty. Management named specific private health insurers that have approved Provenge and said all but one local Medicare regions that have considered the issue have given the go ahead for reimbursement. When Medicare makes a national ruling it will apply to all regions. So there is a small upside and a major downside to the actual ruling. I think Medicare will approve Provenge because of its benefits and safety, but no one can guarantee that right now.

That said, Dendreon is lucky to have a large cash reserve put together when investors were excited by the FDA approval of Provenge. They are burning rapidly through the reserve, but the money is mostly going into build out of the facilities.

My overall take is that there is a fair degree of risk in Dendreon right now, but the upside potential to the stock in the 2011 to 2012 time frame is high. Beyond that we can only speculate whether the success with prostate cancer will be repeated with other types of cancer.

You can also learn a lot about investing in biotechnology from studying Dendreon's history. See my Dendreon page for what this situation looked like in the past.

Is the Dendreon Sky Falling?

When I checked a few moments ago the auction price of Dendreon (DNDN) stock had fallen to $34.70 per share. That gives Dendreon a market capitalization of just over $4.7 billion. It is a big disappointment for all those investors who bought Dendreon during the last minute run up to the announcement that the FDA had approved Provenge for prostate cancer, or even as the stock soared briefly above $57 per share in late April. Dendreon first moved above $34 per share in March 2010.

I listened to the Dendreon presentation at the Goldman Sachs Global Healthcare conference of June 16. You can access audio files of Dendreon presentations at the Dendreon Investor Page.

The number of American patients who fit the label today for castrate-resistant, metastatic, non-symptomatic prostate cancer was estimated at 103,000, with about 30,000 new patients per year. Obviously the global number would be much larger. Dendreon is already treating patients, but this year will be able to treat only 2000. In 2011 they could treat 8,000, if new capability comes along on schedule. Pricing was not discussed at the conference, but rumors are the charge per patient for the 3 treatment course is around $90,000. Given that Dendreon expects $500 million in revenue (that might be an end-of year run rate) the first year, and $1 billion per year in sales from their New Jersey facility when built out, and $1.25 billion in annual revenue by 2012, I think they need a higher price are a larger number of patients served to hit those numbers. Apparently insurers and Medicare are not balking at the price, but I would bet the health agency in Great Britain will. In any case approvals outside the U.S. will probably take at least a couple of years.

Dendreon expects to be cash flow positive in 2011. Which means GAAP, and possibly non-GAAP, net losses due to depreciation and amortization on the vast sum invested to get us to the current day. My guess is the first GAAP profits may be in 2012.

So if you think (and I do) that Dendreon is going to be able to extend its technology to earlier forms of prostate cancer and to other forms of cancer, it makes sense to build gradual a position in 2010 and 2011 if shares are in the $30 to $40 range.

This scenario has happened to other companies, notably Onyx Pharmaceuticals (ONXX). Bullish enthusiasm is tempered when profits don't flow in immediately. What could be profits from Provenge may get spent, in part or maybe even in whole, trying to generate clinical trial wins in other forms of cancers. This discourages short term investors, and only pays off for long term investors if indeed other indications get FDA approval.

The good news (for investors, not for patients or taxpayers) is that at $100,000 a pop Provenge should have a very high gross margin. The expense is mainly in the research, not so much in the actual operation of immunizing the patients.

We will know a lot more after the Q4 2010 results are reported. We'll see in numbers how much revenue is generated, cost of goods sold, and operating expenses. The reality of building further capacity will also be easier to estimate.

Right now most investors are risk-averse, and most willing to take on risk are doing so in very short time frames. So if you believe we are in a typical, protracted macroeconomic upcycle (I do), you can buy 2012 profits now in a wide variety of growing companies for very attractive prices. Just because there was a market run up in 2009 after the panic does not mean that all stocks are now overpriced. Each stock requires individual analysis.

You can also learn a lot from history. See my Dendreon page for what this situation looked like in the past. For the latest financial numbers, check out the Dendreon Q1 2010 press release.