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DENDREON: Are Great Expectations Gone with The Wind?

Prohost Biotech - Wednesday, August 10, 2011

But first, let us remember what we wrote in yesterday’s article related to the market’s situation. We read:  “The question is, when would big funds and institutions, sitting on billions of dollars decide that time has come to buy at the price of sand what’s much more important than gold? When would they decide to upgrade what should be upgraded and downgrade what deserves a downgrade in case any stock remained overvalued? Is this not what puts the market back on its tracks, so it could resume its function? Are there any stocks that analysts feel that they might have bottomed during the stocks’ slaughtering?”

Today, we wonder:

Have analysts gone mute? Or they don’t need to talk because the big bear is doing their job? Could it really be that all analysts are betting against all stocks? If not, why have they all become mute, declining to upgrade the many firms that have bottomed during the hurricanes? The question is: Would bottoming mean anything to wealthy funds, financial institutions and private investors when the market is experiencing such a tremendous pressure? What is the message we are supposed to get? Abandon the market, as we, the owners, managers and advisory board intend to put it in Las Vegas, hoping that late at night, under the influence, a desperately lost soul would care, or dare to try to find its luck there.


Today, we, nevertheless, decided to tackle a firm that lost 70% of its market value for issues unrelated to the market’s apoptosis. We mean Dendreon’s (DNDN). Its current problem wouldn’t have been so tragic, or a problem at all, if it were not for the exaggerated speculations of the the firm’s therapeutic cancer vaccine Provenge’s sales. Prohost was the first to advocate buying Dendreon’s stock when they it had fallen sharply to a low single-digit price after the FDA denied approval of the vaccine a few years ago against the committee’s positive recommendation. Prohost was also the first to advocate selling the stock when the price shot up to the low thirties. In both situations we acted out of logic, mathematics, and out of our understanding of how oncologists and third party payers conduct their businesses under various circumstances.

With regard to the FDA rejection, we were convinced that the vaccine’s clinical trial results were positive enough for both safety and efficacy, especially when considering the advanced conditions of the recruited patients who had no conventional treatments left to offer them help. We were sure that there were no convincing negative findings, which would enable the FDA to argue against approving the vaccine. More important, we were of the opinion that if a therapeutic vaccine would reach the market and used on a large number of patients by a large number of oncologists, it might lead to a better understanding and use of the drug and therapeutic vaccines in general. If successful, we believed, therapeutic vaccines would possibly change the way cancer is currently managed.

In our decision to sell the stock when it soared, we acted out of conviction that the stock price has gone far beyond the reasonable expectations of the drug’s sales, especially in the early period of the drug’s commercialization. We were well aware that oncology specialists do not rush to prescribe novel therapeutics. Provenge is the first therapeutic cancer vaccine to be granted FDA approved. Convinced and skeptical oncologists alike would take their time in planning the use of such a novel therapeutic. They usually wait and observe and use the exotic drug with caution. They try to observe the circumstances of its successes and failures and find the reasons for them. In other words they do their best to find a formula, which would produce the optimal therapeutic effect of the drug in hand. Their attempts would include identifying candidates that would benefit most from the drug.

Another reason for our decision to sell the stock is our understanding of the difficulty of the reimbursement decision, especially when the third party payers find themselves facing a drug that sells for $93,000 and a developing firm that tries to tell them, I am handing you a cure a cure. This is our price, so take it or leave it.

Although we recognized the historical importance of Dendreon’s Provenge as the first serious therapeutic vaccine to be FDA approved, and we believed it could help patients with hormone-resistant prostate cancer, we never considered it a cure. Provenge is not a cure. Its use might help patients, but it is doubtful it will be prove it is cost-effective, unless it demonstrates first that it could prevent, or at least delay the recurrence of cancer. Such a proof requires oncologists to gain more familiarity and experience with the vaccine’s use and to collect long-term results. It might take a couple of years before the task could bear fruit, if any, regarding its value/price assessment.

Dendreon has committed two nonfatal, but costly, mistakes. The first was committed as the firm and some analysts contributed to investors’ impression that the drug will generate billions of dollars in revenues. The second mistake was that Dendreon did not care about notifying its shareholders and the investment community about its existing and continuing reimbursement problems. The Centers for Medicare and Medicaid Services (CMS) decision to cover the use of Provenge for asymptomatic or minimally symptomatic metastatic castrate-resistant (hormone refractory) prostate cancer has not really ended the problem, as it seemed to the shareholders reading the press release about this decision.

So, on August 3, investors were surprised to hear that Provenge’s sales did not meet analysts’ expectations. This anger turned into fury when the firm withdrew its revenue guidance for the remainder of the year because of “reimbursement issues” that they were not aware of, or of its impact on the drug’s sales.

Having said that, we do believe, however, that the selloff was exaggerated and that Provenge’s sales will still grow, but slowly for a while. In the meantime, Dendreon has received a succession of good news. At the end of June, the FDA approved a second Provenge manufacturing facility. At the same time, the government agency overseeing Medicare announced a favorable coverage decision for the drug and issued Provenge a specific Q-code that allows for electronic submission of claims, which is expected to accelerate time to payment for oncology centers and oncologists. Moreover, a third Provenge manufacturing facility currently under construction is expected to be FDA approved at the end of this month.

Good news also is Dendreon’s determination to cut down its costs. As a matter of fact, Dendreon has, indeed, narrowed its second quarter net loss to $114.6 million, or 79 cents a share from a net loss of $142.6 million, or $1.04 a share for the same quarter a year earlier.

Applying the same logic that led us to selling DNDN, to reassess the same stock now after it has given away around 70% of its value implied the stock is worth watching at this time. DNDN would provide an investment opportunity if reimbursement, for example, would turn into a routine. This usually occurs when after an agonizing period of waiting for the money, hospitals and oncology clinics begin to receive regular payments, which has been the case with many other new drugs. Ecstatic good news would be that would announce that experts have found their way towards selecting candidates who would benefit most Provenge. Even better news would be that would announce that oncologists have found the right formula for getting the utmost results out of the vaccine’s use. All require a thorough follow up on the firm’s news and activities for the next few months.

Until then, we are neutral on DNDN.

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