Dendreon Corporation (DNDN) reported third-quarter 2011 loss (including stock-based compensation expense but excluding other special items) of 67 cents per share, which was narrower than the Zacks Consensus Estimate of 70 cents due to a slightly better-than-expected performance of its prostate cancer vaccine Provenge in the quarter. Loss was, however, much wider than the year-ago loss of 54 cents per share.
Quarterly Details
Total revenue in the reported quarter climbed to $64.3 million (including rebates and charge-backs) from $20.2 million in the comparable quarter of 2010. The jump was attributable to the higher Provenge revenue in the current quarter versus low Provenge sales in the third quarter of 2010 as it was only the second quarter of its launch. Revenues were also above the Zacks Consensus Estimate of $63 million. In the quarter, Dendreon recorded Provenge revenue of $61 million and royalty revenue of approximately $3 million. The royalty revenue was related to intellectual property licensed to Merck (MRK) for its newly hepatitis C product Victrelis.
Earlier, Dendreon had reported July and August 2011 Provenge gross revenue of approximately $19 million and $22 million, respectively. In October, Dendreon recorded Provenge revenue of $26.4, slightly above the September revenue of $25 million. In November 2011, Dendreon expects bookings to be lower than third quarter levels. Accordingly management expects to see modest revenue growth in the fourth quarter due to the impact of the holiday season. Dendreon’s total operating expenses for the quarter jumped 63.9% to $143.8 million.
Provenge Update
Despite the favorable reimbursement environment for Provenge followingthe final Centers for Medicare and Medicaid Services (CMS) decision to pay for Provenge and implementation of the Q-code, management announced at the second quarter call that most physicians were unaware of these developments. Moreover, due to the short duration of therapy (about 4-6 weeks) the full costs associated with Provenge have to be paid out by the physicians within a month and thereafter they had to wait/hope for reimbursement. These physicians were thus not comfortable with the cost density of Provenge and did not freely prescribe the drug. All this led to disappointing Provenge revenue in the second quarter and subsequent withdrawal of original Provenge guidance of $350-$400 million by Dendreon management.
Management announced at the third quarter conference call that awareness for the favorable reimbursement environment is improving. Thepercentageof urologists and oncologists who areaware of CMS’ National Coverage Decision (NCD) and Q-codehas gone up from 25% in July to 70% in September. Moreover, reimbursement trends were improving with the average time to payment coming down to approximately 30 days. The number of centers (where patients can be treated with Provenge) increased from 300 at the end of the July to more than 425 at the end of the third quarter.
In September 2011, Dendreon announced that it will lay off 500 employees tantamount to roughly a quarter of its workforce as part of a drastic restructuring plan. The plan was announced to reduce spending to cope with disappointing sales of Provenge. Dendreon also announced the departure of its chief operating officer Hans Bishop.Dendreon has received approval to manufacture Provenge at three facilities: New Jersey, Los Angeles and Atlanta. It had hired employees at these facilities well in advance in order to keep the manufacturing process smooth in the hope that Provenge will prove to be a hit among doctors. However, with Provenge sales failing to meet exalted expectations, management felt that it was significantly overstaffed resulting in the inevitable workforce reduction.
Our Recommendation
We currently have a Neutral recommendation on Dendreon. The stock carries a Zacks #3 Rank (Hold rating) in the short run.
The successful commercialization of Provenge is crucial for the financial performance of Dendreon as it can drive the company to profitability. Though we still believe in the long-term prospects of Provenge, following below expected performance of Provenge, our visibility on the performance of the drug for the next few quarters has become clouded. We believe the stock will remain range bound for some time and prefer to remain on the sidelines until visibility on Provenge’s performance improves. The company’s weak margins due to its high fixed costs also concern us. Moreover, in the long run, we remain concerned about the company’s dependence on Provenge and the lack of a robust pipeline. We believe Dendreon has little to fall back on if Provenge fails to keep its promise.
Besides, the competitive milieu is intensifying with Johnson and Johnson’s Zytiga, launched in the second quarter of 2011 in the US, posing competition to Provenge. Moreover, there are products currently under development for the treatment of prostate cancer like Medivation’s (MDVN) MDV3100, which is in late-stage trials. If these products are successful, the prostate cancer market will become more crowded and competitive.
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