Dendreon Wounds Are Self-Inflicted, Not the Start of a Biotech Industry Virus

Xconomy National — 

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.

Mitch Gold

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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22 responses to “Dendreon Wounds Are Self-Inflicted, Not the Start of a Biotech Industry Virus”

  1. SteveB says:

    Thanks again Luke. I was in shock when they priced it at 93k. Gold is so arrogant.

  2. Duke says:

    Interviewed at Dendreon 2 yrs ago. People I spoke to were even skeptical about its prospects and couple of new VPs were arrogant. What bothered me was the hocus pocus science backed by likely group of ardent quixotic “paid” wackos parading as patients. Well Gold certainly did 1 thing right to rile up these buffoons. Uh, I didn’t get the job and it was blessing in disguise as I found a better job with top notch sought after biotech firm with blockbuster oncology drug in San Francisco with full relo pkg.

  3. David says:

    Excellent explanation of the original problem.

    Throw in the perfect storm created by Congress last week, the Italian Job, The U.S. Credit Downgrade, & last but not least:
    HIGH FREQUENCY TRADING and you have the DNDN nightmare.

    Had all of these things not combined at the same time the sell off would have been far less damaging.

  4. Tony says:

    DNDN is way oversold.
    They will still make 50% of forecast sales.

    To drop 2/3 is way too much, even with the current market.

  5. Carl says:

    Very well constructed article Mr Timmerman. I’ve worked in biotech for 24 years — an arena that employs some very smart people. It takes a special talent to get to the facts and more importantly, present them in such a way so that the message is clearly understood.

  6. Dave says:

    Good article. While this was a blunder, let’s hope they learn from their mistakes. This technological platform will spawn many drugs for DNDN and the potential to flourish in future years.

  7. Mary says:

    Interesting with the lack of sales and marketing intelligence…similar to another Seattle biotech in the recent past.




  9. Leb says:

    Don’t worry Luke, as you can see lately, dndn’s fall from grace (&short attack where short interest went from 14M to 18M during that Aug 1-15 period) on Aug 3rd was planned by wallstreet; comfortably after the June 2011 shareholder meeting. I promise you that JPM and the rest will convert their notes to shares sometime by Jan 2016 when the note is due. JPM will get their 42million shares:

    Provenge enjoys 12 years market exclusivity under Obamacare and the 1st 3 years (2010-2012) were ramping years altho yoy sales were pretty impressive:

    2010; $49M

    2011: $216

    2012: $322

    Wallstreets “restructuring of shareholders” strategy is nearly complete as short interest moved from 14M (Aug2011) to 47M (Nov2012). Current short interest is still > 30%

    Guess what years 4-6 (out of 12) will bring with Carl Icahns former CEO pick for Imclone? :-D

  10. Leb says:

    In your future articles, please tell everyone to BUY DNDN Luke if you care about the 99% and not the 1% that drove the stock price downward during 2012 via massive shorting ($17- $3.69) to shake out retail.

    DnDn is only treating 3465 patients yearly (2012)…out of the 30,000 men that are “newly diagnosed throughout a year” with mCRPC. When they reach and treat 4,304 annual patient rate (or $400M), that is still only a fraction of the treatable market…
    And we’re not including the 60,000 still living w/mCRPC as these men typically live 2 years after being diagnosed with the terminal condition.
    Do the right thing Luke and tell EVERYONE via your future articles!
    Dont fall for wallstreet touting restructuring fears (successful companies restructure all the time & plan to close old plants years in advance) or layoff fears (CEO JJ is building HIS OWN TEAM and finished offering them & his fellow officers & himself lots of stock & options during the last 2 quarters when the pps was attractively low :-) or competion fears (ethical urologist/oncologists has patient interest at heart and will sequence the various therapies to prolong the dying patients life to the MAX!) stop you from writing the TRUTH ABOUT THE RESURGENCE OF THE NEXT BIG BIOTECH!!