Dendreon has made its share of mistakes before. But last week, the Seattle cancer drug developer achieved the biotech equivalent of fumbling the ball on the 1-yard line with time running out on the clock. The failure was so painful, so shocking, it erased two-thirds of the company’s stock value—about $3 billion. It even started a “Dendreon flu” that dragged down biotech stock indexes.
There are plenty of reasons for investors to be nervous, with Uncle Sam’s credit rating in question and unemployment running high. Times of anxiety in the market tend to be bad for high-risk sectors like biotech. And sure enough, many biotech investors have run for the exits, worried that Dendreon’s flop is a sign that other high-profile biotechs are doomed to fail. But that would be an overreaction. Investors would be wise to write off the Dendreon story as a case of a fine mess at one company, and not really any great cause for industry-wide concern.
I’ve been covering Dendreon (NASDAQ: DNDN) for 10 years, and have seen some incredible ups and downs. Very little about this story surprises me anymore. But while writing over the weekend, three days after disaster struck, I’m still slack-jawed about this colossal choke. Heading into last week’s second-quarter conference call, the company had forecasted it would generate $350 million to $400 million in sales this year of its immune-booster for prostate cancer, sipuleucel-T (Provenge). But the company recorded $49.6 million in sales in the quarter ended June 30, plus another $19 million in the month of July, which was “substantially” lower than its internal projections, according to CEO Mitch Gold on the call. So Dendreon withdrew its sales forecast and didn’t provide any other financial guidance, other than to say it expects “modest quarter-over-quarter” growth.
If you assume “modest” translates into 5 percent quarter-over-quarter growth the rest of this year, then Dendreon could generate about $185 million in sales this year. That’s a long way from $350 million to $400 million. And the problems leading to the shortfall, Gold said, are expected to last into 2012. It’s anybody’s guess how long it might take to fix Dendreon’s situation, if it ever happens.
It’s truly a stunning fall from grace. Dendreon is now planning to cut costs, and make layoffs, in weeks to come. Analysts, who had drawn up models that had Dendreon eclipsing $1 billion in sales, suddenly had to go back to the drawing board. Cory Kasimov of JP Morgan, a Dendreon bull, slashed his 2012 sales forecast from $841 million all the way down to $388 million. “This was obviously a crushing blow to our overweight thesis and one that we certainly did not see coming. We don’t think anyone did,” Kasimov wrote in an Aug. 4 note to clients.
The official explanation for what went wrong makes you slap your forehead in disbelief. Essentially, Dendreon said most of its physician customers are afraid they won’t get reimbursed by Medicare, or they won’t get a timely reimbursement, meaning they’ll be stuck holding the bag on a drug that costs $93,000 per patient.
It is shocking to hear Dendreon say this in August 2011, given how much time it had to methodically block and tackle on this fundamental question. From the minute that Dendreon won FDA approval of this new product in April 2010, it had two mission-critical tasks in front of it—manufacturing and marketing. The first challenge was about proving it could manufacture enough of its first-of-a-kind treatment—which stimulates a patient’s own immune cells—to meet the demand from thousands of prostate cancer patients around the U.S. Dendreon had time to work on building up manufacturing capacity, because the market recognized it would have been irresponsible to spend hundreds of millions on that prior to FDA approval. The second challenge, sales and marketing, was mainly about persuading legions of urologists and oncologists to prescribe the groundbreaking new therapy. Processes needed to be established to ensure the company would get paid in an efficient and timely way, doctors would get reimbursed from insurers, and patients would have easy access even when they couldn’t afford the co-pays.
The sales and marketing effort ran into trouble right away, when Dendreon overreached and set the price for its product too high—at $93,000 per patient. Analysts at the time of approval were only expecting a price of about $62,000, so Dendreon didn’t need to go that high. The company argued, … Next Page »
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