Expert Financial Analysis and Reporting

Key Points

Dendreon has made a sweeping change in management by bringing in John Johnson, who was serving as a board member, to be the new President, CEO and Chairman-elect of the Board of Directors. He immediately replaces Mitchell Gold as CEO and Richard Brewer has stepped down as Chairman of the Board. Mr. Gold will serve as Chairman of the Board of Directors until June 30, 2012, and then turn that position over to Mr. Johnson. After that, Mr. Gold will become Executive Chairman of the board. Mr. Gold had been President and CEO since from January 2003. This is an amazing shift of power.

John Johnson was most recently President and CEO of Savient Pharmaceuticals, a position that he had held for only one year. Prior to this, he served as President of Eli Lilly's oncology business which is a multi-billion dollar global franchise based on 30 oncology products. Before that, he served as CEO of ImClone Systems and prior to that was Company Group Chairman of Johnson & Johnson's worldwide Biopharm unit. It is very clear that he has extensive experience in biotechnology and oncology.

While I have no direct knowledge of what initiated this process or how the management change was conducted, I do have some thoughts. It seems to me that this process was initiated by the board. I see no evidence that Mr. Gold on his own decided to relinquish control of the company. Mr. Johnson seems to have clearly been the man that the board wanted very badly and because of his service on the board, they must have had a clear understanding of what he would do with the company. My sources tell me that they recruited him very aggressively and in the end gave him enormous power and control over the company.

Mr. Johnson certainly seems to have impressive credentials. Relative to Mr. Gold, he has much more experience in running large commercial operations in the oncology space. Only time and results will tell, but based on the information we now have, Mr. Johnson seems to be more capable of maximizing the potential of Provenge.

Importantly, I think that Mr. Johnson as a fresh face can change the relationship that Dendreon has with Wall Street. The overly aggressive guidance on Provenge given by the company had to be withdrawn in mid-2011 and led to a crash in the price of the stock. Mr. Gold was rightfully blamed for this and he has lost credibility. Mr. Johnson can start fresh and restore confidence in the company. I am amazed at how invariably the lay press refers to Dendreon as a floundering company and cites Provenge as a disappointment. This is in spite of the company having achieved $224 million of sales in 2011 and having one had one of the ten best oncology launches in the history of the US pharmaceutical industry with Provenge. Dendreon's failure has been in communications and guidance. The Provenge launch has been successful in an absolute sense, but a failure relative to the too lofty expectations set by the company.

Highlights of Dendreon Conference Call Discussing Management Change

I tuned into the conference call held by Dendreon to discuss the management change. I tried to listen carefully to hear what Mr. Johnson was emphasizing and also to listen to his responses to analyst questions. My key takeaways were as follows.

Mr. Johnson said that his top priority was expanding physician use and knowledge of Provenge in the US and abroad and the second priority was reducing COGS as a percentage of sales. Other items high on his list are: (1) with the European Provenge application now validated by the acceptance of the MAA, to assemble a global team to guide the introduction of Provenge in Europe when it comes on stream in mid-2013, (2) advance the pipeline by using the ACI technology platform to find ways to treat other cancers and (3) expand the clinical data base of Provenge.

The goal of the company continues to be to have COGS of 50% of sales when sales reach $500 million. Volume growth is key to reducing COGS but there are also significant opportunities stemming from automation and other steps.

The reimbursement hurdle is not the issue that it was in early 2011. The average time to payment is actually less than 30 days and 75% of patients have minimal or no out-of-pocket costs. In 2011, the company was going through a national coverage analysis, NCA, or a good part of the year. Until the NCA was transmitted to all the Medicare contractors, there was a fair amount of anxiety around reimbursement. This changed in August as physicians could then use a system that was straightforward and produced quick reimbursement. This was an important factor in the upside surprise in fourth quarter revenues.

He was asked about the potential for using Provenge in combination with other drugs. Before answering that question, he emphasized that early and aggressive screening of patients would be a critical driver of growth. He then pointed out that when he was at ImClone, he observed that metastatic colorectal cancer patients went through five stages of therapy and that multiple agents were often used at each stage and multiple stages of therapy involving multiple agents will also be the case with metastatic prostate cancer. He believes that because of its unique mechanism of action and safety profle, that Provenge should be the foundation of care. He emphasized that Provenge can likely be given in combination with MDC 3100 unlike the case with Zytiga because of its steroid requirement.

Dendreon has already begun to organize itself into two marketing and sales groups that will focus on oncologists and urologists, respectively. Mr. Johnson said he is a strong believer in focus. There seems be a particularly good opportunity to do this in urology.

The reimbursement and pricing environment in Europe for Provenge will be even more challenging than what the company has been through in the US. Having survival benefit and short duration of therapy is important.

In regard to Europe, the company has identified at least two manufacturing sites that can serve 80% of the market. The company can use a contract manufacturing organization,CMO, to operate a plant in which case there would not be much of a capital outlay requirement for Dendreon. There might be the possibility of tapping into a company with an existing facility. Provenge could bring some desirable assets to a CMO such as the ability to more efficiently utilize their existing facilities and to give them a foothold in the rapidly emerging market in immuno-oncology.

The company is not committing on whether it will launch Provenge on its own in Europe or if it will look for a partner. Mr. Johnson emphasized that oncology doesn't require a large sales force. He also said that approval in Europe is likely to be staged with one or two countries gaining initial approval and others following. These factors suggest that building its own commercial operation may be economically feasible. Going with a partner would be dependent on terms.

The company is going to have a small office in New Jersey and Mr. Johnson will split time between there and Seattle. He cited the strong base of industry talent on the east coast as a reason for having a presence there. This leaves open the possibility of a shift in corporate headquarters to New Jersey.

When asked about whether he agreed with giving guidance on sales last year, he said that he wasn't on the board at that time and didn't elaborate further.

Mr. Johnson was asked if would consider changing the price of Provenge. His answer implied that he would consider the issue, but that it is unlikely that it will happen.