Expert Financial Analysis and Reporting

Investment Conclusion

Both Zytiga and Provenge have had very successful launches in the US. Fears that Zytiga would negatively impact sales of Provenge are not borne out by the quarterly sales trends reported so far for the products. Provenge in 4Q, 2011 reported an upside sales surprise at the same time that Zytiga reported very strong sales. I have buys on both Dendreon (DNDN) and Johnson & Johnson (JNJ). I continue to feel that both drugs have significant roles to play in treating metastatic prostate cancer and physicians will not consider these drugs in an “either or” context. So far the data supports this hypothesis, but it is still early days.

Background

I have written extensively about Dendreon’s (DNDN) Provenge, Johnson & Johnson’s (JNJ) Zytiga (abiraterone) and the prostate cancer market as a whole. There has been much discussion about what role these drugs will play in the treatment of prostate cancer.

Prostate cancer patients can be cured of their disease with surgery if the cancer is caught before it metastasizes. Once it has metastasized, the disease is slowly progressing, but almost never curable. The treatment for metastatic patients starts with hormone therapy which essentially reduces the levels of testosterone in the body to castration levels; testosterone drives the growth of prostate cancer. Inevitably after three to five years, the hormone therapy fails and the next step is chemotherapy, usually Taxoterre.

Provenge was approved for use after hormone therapy has failed and before chemotherapy. Zytiga was approved about one year later for use after chemotherapy fails. There is a phase III clinical trial of Zytiga in pre-chemotherapy patients that is now underway. Based on the mechanism of action and the success in the post-chemotherapy setting, it is highly probable that Zytiga will also be effective in the pre-chemotherapy setting and then will be indicated for the same disease state as Provenge.

Investors have been uncertain about how the approval of Zytiga would affect Provenge sales. My short term view was that because Zytiga is indicated for use after chemotherapy and Provenge before, that Zytiga and Provenge would be used on different patient groups. My longer term view is that the drugs will most likely be used sequentially in pre-chemotherapy patients with Provenge given first and Zytiga given several months later.

There were some analysts who took the view that Zytiga would be used off-label in pre-chemotherapy patients before it received approval for that setting. Of course, analysts with this point of view felt that when Zytiga eventually receives approval in the pre-chemotherapy setting, it would be much preferred over Provenge.

The disappointing launch of Provenge when viewed against overly exuberant guidance given by Dendreon management caused a sharp selloff of Dendreon’s stock. It led many investors and analysts to speculate that off-label use of Zytiga was having a negative effect on Provenge. All of this helped drive Dendreon to a closing price of $6.55 on November 23, 2011. Then, to the surprise of the market, Dendreon announced sales of Provenge for the fourth quarter that was better than expected. Please see my report Provenge Sales Surprise on the Upside: Bodes well for the Stock. The stock roared back to a current price of $14.19.

Comparing Zytiga and Provenge Sales Trends

I am starting a tracking of quarterly sales of Provenge and Zytiga to help investors follow this situation. Dendreon gives out detailed quarterly sales of Provenge which is only approved for the US market. JNJ is not yet giving exact quarterly sales numbers for Zytiga, but has provided guidance that allows the approximation of sales in the US and abroad. These are shown in the following table:

Source: SmithOnStocks, Dendreon and Johnson & Johnson Financial Reports

These numbers indicate that Zytiga has had a very rapid ramp as has Provenge. Both have had very successful launches. It is hard to draw firm conclusions, but the numbers reported so far are suggestive that Zytiga is not crowding Provenge out of the pre-chemotherapy market.

Disclosure: The author of this article owned shares of Dendreon at the time this note was written. This should be taken into account as it may introduce bias into the conclusions and interpretations that are made. In reading this note, you acknowledge that you have not used it as the sole basis of your decision making and that all investment decisions are based on your own analysis. An investment in Dendreon carries substantial risk and investors could potentially lose much of their investment. The reader acknowledges that he/she has carefully read the Investment Approach, Terms/Conditions and Disclosures sections in the About Us section of the website. The reader acknowledges that he/she will not hold SmithOnStocks accountable for any investment loss that may be incurred if a decision is made to invest in Dendreon.