Dendreon's Chinese Water Torture

By Stephen D. Simpson, CFA | November 03, 2011 AAA

Sometimes a notable scientific and technological achievement nevertheless fails as a commercially viable product. With another disappointing quarter in the books and little evident momentum, all but the staunchest Dendreon (Nasdaq:DNDN) bulls have to be entertaining some nagging doubts that the cancer vaccine Provenge is ultimately never going to be the blockbuster that they hoped. Certainly it's not yet over for Provenge, but doctor enthusiasm is decidedly muted and there is a growing roster of promising alternatives for prostate cancer.

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Q3 Results - As Expected on Sales, But Poor Margins
With Wall Street, it's always one thing or another. Dendreon actually met its (lowered) revenue guidance, but with an unexpected boost of about $3 million in royalty revenue from Merck (NYSE:MRK) for the hepatitis drug Victrelis. Provenge sales were up about 28% on a gross basis and 30% on a net basis, and up a bit less than 6% sequentially for the last month of the quarter.

Margins were troubling, though. The gross margin dropped unexpectedly to 14.5% from 38.6% a year ago, and Provenge gross margin was more on the order of 10%. Although it's well known that Provenge is not cheap to create/manufacture, this is a worrisome trend and with about 85% of those COGS being fixed, it highlights the importance of getting to a "critical mass" of revenue. Dendreon reported a net loss for the quarter and ended with less than $40 million in net cash (though the bulk of the company's debt does not mature for another five years).

Where's the Momentum?
Arguably the most troubling part of the Dendreon/Provenge story is the lack of momentum. Consider that Pfizer's (NYSE:PFE) Prevnar vaccine has been on the market longer, is growing faster (35%), and has surmounted $1 billion in quarterly sales. Now of course there is little similarity between a pneumococcus vaccine and a cancer treatment, but my point is that for all of the hype and press, Provenge is still a pretty small drug at present.

The lack of momentum here is concerning. Management mentioned that awareness regarding reimbursement, supposedly one of the major problems with Provenge usage, roughly tripled from 25to 70% between July and September. And yet, clearly, usage has not picked up just because of that. Perhaps even more worrisome is that when management was asked about "same store sales" on the call, they said that usage with existing prescribers was "consistent" - hardly a ringing endorsement for what was supposed to be a breakthrough.

Shades of the Past
Biotech journalist Adam Feuerstein beat me to the punch with an eerie resemblance between Dendreon's Provenge and a once-exciting HIV drug called Fuzeon that was developed and sold by Trimeris. I remember the excitement over this drug - it was a first-in-class fusion inhibitor - and the resulting excitement over Trimeris. Unfortunately, the drug was expensive to make and was unpleasant to administer (twice daily injections in a world where most HIV drugs were and are oral). All in all, it (and Trimeris) failed despite offering some pretty compelling efficacy at the time; the drug never became a standard of care and was eventually ignored in favor of more conventional therapies. (For more on the drug market, read Evaluating Pharmaceutical Companies.)

Competition a Real Threat
Dendreon does not have a lot of time to make Provenge into a success. Johnson & Johnson's (NYSE:JNJ) Zytiga offers good efficacy, a more conventional administration profile, and more cost-effective pricing despite what can be unpleasant side-effects. Beyond that is Sanofi's (NYSE:SNY) Jevtana. The morning after Dendreon's earnings report, Medivation (Nasdaq:MDVN) reported very encouraging data on its MDV3100 drug for prostate cancer (which does not require prednisone like Zytiga). And then there's Exelixis's (Nasdaq: EXEL) cabozantinib - a drug that has become more controversial with management decision to pursue a Phase 3 study with pain as a primary endpoint, but that has shown strong results in earlier studies in both prostate and medullary thyroid cancer.

Perhaps none of these are Provenge-killers in their own right, but there are only so many patients to go around. What's more, much as some people want to cast doctors as brilliant and studious, the fact is that they're still people. Most doctors are not comfortable with cutting-edge technology (until they've seen it work for a few years and is no longer "cutting edge) and most of them read the papers - enough bad press on how other doctors are hesitant to try or use Provenge will likely encourage others to wait as well.

The Bottom Line
Provenege works,and it is hard to completely write off a drug that works. That said, the holiday season usually sees medical activity slow down and it will be harder for Provenge to build a lot of momentum in the next quarter. Perhaps Dendreon would consider a marketing partner or some new strategy to get more docs to try Provenge. It's clear, though, that they have to do something - Provenge's current rate of growth is likely not going to power the sort of financial results that Dendreon needs and there is only so much time before competition will intensify. (For additional reading on investing in this sector, check out A Checklist For Successful Medical Technology Investment.)

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At the time of writing, Stephen D. Simpson, CFA did not own shares in any of the companies mentioned in this article.

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