For Dendreon (Nasdaq:DNDN) bulls, the sky was going to be the limit. Provenge, a high-priced cancer vaccine shown to be effective in serious prostate cancer cases, was going to be a multi-billion dollar blockbuster, and Dendreon was going to ride it on the way to becoming the next Amgen (Nasdaq:AMGN), Biogen Idec (Nasdaq:BIIB), Centocor or Genentech.
And then came the second quarter results.
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A Startling Turn of Events
Dendreon skeptics were certainly out there before August 3. The incredible rise in Dendreon's stock price on the back of a very expensive drug, which offered limited additional survival benefit and was the first ever of its kind, had shorts licking their chops. Even the analyst community (which is often quite bullish and positive as a general rule) had it skeptics. Analysts like Lucy Lu at Citigroup and Lee Lalowski at Credit Suisse, for instance, publicly wondered whether expectations were too high given the cost of Provenge and issues of doctor comfort with the therapy.
Nevertheless, the Street was shocked by what it heard from Dendreon on August 3. Revenue clocked in at about $49 million - well below the $59 million average estimate and 10% below the bottom end of the range. More worrying still was the revelation that sequential growth momentum was well below plan, and management was taking guidance of $350 million to $400 million for the year off the table.
Management was cagey about its new expectations; not something that angry and disappointed investors wanted to hear. Based on what guidance was available, though, it looks like the new sales target may be the in the neighborhood of $170 million to $220 million - well below the prior average estimate of about $371 million. (For related reading, see A Primer On The Biotech Sector.)
A Series of Potential Problems
So, what's wrong with Provenge?
For starters, reimbursement seems to be a sticking point. While the Centers for Medicare and Medicaid Services (CMS) has said it will reimburse for Provenge (and private insurers almost always fall in line behind CMS), timing is still an issue. Clinics or hospitals that wish to provide Provenge must pay for it in full (about $93,000 per patient) and then wait to get reimbursement. That creates some cash flow issues that facility administrators really do not want right now, and many sites may be using Provenge on a limited trial basis to see how the reimbursement process goes.
Also, the actual in-the-field patient opportunity may not be what the bulls thought. Looking at the literature, it seems like there is a fairly narrow window of opportunity (about three to six months) where patients are in a stage of their disease that is ideal for Provenge. That translates into a potential risk that the real patient opportunity is only about one-quarter of the theoretical population. On the other hand, if Provenge shows itself to be as effective in the field as it was in trials, it would stand to reason that doctors will look for tests to better identify potential patients, and this risk could moderate somewhat.
It is also worth mentioning that not every doctor out there is comfortable on the leading edge of new technology. Many clinicians take a "watch and wait" approach, where they wait to see what other doctors do (and what results they get) before trying something themselves. As doctors become more familiar with Provenge, then, the usage rates could climb. (For background reading, see The Ups And Downs Of Biotechnology.)
What Does This Mean for the Sector?
There is certainly a risk now that Provenge won't live up to the expectations of Dendreon or its bulls. What's more, competition is coming in the form of drugs like Johnson & Johnson's (NYSE:JNJ) Zytiga, and the more conventional approach of this compound may give it an advantage if doctors really are concerned about the reimbursement for Provenge or simply how unique it is.
This news could also create some problems for the stocks of companies like Seattle Genetics (Nasdaq:SGEN) or Human Genome Sciences (Nasdaq:HGSI). Are expectations for new drug launches too high in general? Are doctors more skeptical about novel treatments than investors previously believed? The answer to both questions is "probably not", but in a nervous market investors do not want to deal with probabilities.
The Bottom Line
This is clearly a setback for Dendreon, but not a killing blow by any means. Plenty of drugs, especially first-in-class pioneers, have had slow and disappointing beginnings only to go on to become huge blockbusters. In the case of Provenge, it looks like a lot of the problems could be solveable. As docs (or their bosses) get more comfortable with patient identification, drug administration and the reimbursement timeline, demand could pick up significantly in six to 12 months.
Dendreon is not a safe stock by any means, but with this massive reset in expectations it becomes worth watching once again. It is probably prudent to wait for signs that the revenue ramp is picking up, but investors should not write this stock off just yet. (For related reading, see Using DCF In Biotech Valuation.)
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