Expert Financial Analysis and Reporting

Introduction

Over the last few months, I have been speaking to physicians and researchers who are using and studying Provenge. Based on my research, I am recommending purchase of Dendreon.

This note summarizes the opinions of the diverse group of people that I listened to and interviewed. I have grouped their comments into four categories: (1) negative comments on Provenge, (2) positive comments on Provenge, (3) other comments on Provenge and (4) comments on Dendreon’s marketing of Provenge.

This note starts with the negative views on Provenge. If you only read this section, you might rush to short the stock. However, as is the case with all new drugs, there is no universality of opinion and there are opposing points of view that are encouraging. It is also apparent that Dendreon made some major marketing blunders when it introduced Provenge which negatively impacted the launch.

Investment View

I have put together this note so that a reader can draw their own conclusions. My view is that this note supports buying Dendreon, but I understand that others might not reach that conclusion. The primary reasons behind my buy recommendation are as follows:

1. Provenge is at the forefront of a paradigm shift in the way that physicians think about cancer treatments. Cancer vaccines like Provenge, immunomodulators like Yervoy and targeted therapies act differently than chemotherapy in that they do not necessarily produce a quick shrinkage in the tumor or halt its progression even though they are effective. I think that many of the criticisms directed against Provenge and these other drugs are the result of doctor’s being unable to use traditional measures to determine if a drug is working.
2. I have never seen a drug peak in its first year of marketing barring the emergence of an unforeseen side effect which is not the case with Provenge. Usually, a drug enjoys three to four years of rapid growth following launch. Dendreon made major mistakes in introducing Provenge that hurt the launch. Even so, Provenge with estimated sales of $215 million for 2011 would come in as the second most successful new cancer drug introduction that I am aware of, lagging only Celgene’s Revlimid which had first year sales of $305 million. I think that the marketing mistakes are correctable.
3. Investors have dismissed the potential of Provenge in Europe. I think that the market potential may be of the same magnitude as the US. I think that a launch is possible in 2013.
4. Investors are concerned about emerging competitive threats to Provenge, but I do not think that it will be the case that physicians will have to make a choice between using Provenge or Zytiga or MDV3100. In the asymptomatic castrate resistant disease setting in which Provenge is indicated, I think that these drugs will be used in sequence or perhaps in combination and that Provenge will probably be used first. It is likely that most patients at this stage of prostate cancer will receive each of these drugs at some point during their treatment.
5. There is an economic incentive for physicians to use Provenge that reinforces the clinical value as one course of Provenge therapy produces the same level of reimbursement as two radical prostatectomy surgeries.
6. Provenge has the advantage of being the first mover in the prostate cancer vaccine space. This provides enormous advantages as much academic and industry research will investigate various ways to use Provenge because it is the only approved prostate cancer vaccine. This will lead to the generation of enormous amounts of data that could expand the role of Provenge in prostate cancer.
7. The ultimate role of Provenge in treating prostate cancer will take many years to determine. However, it is likely that over time it will be used more widely in other stages of prostate cancer and in combination with other therapies, both of which will expand usage.
8. I believe that Provenge has been the whipping boy for criticism of pricing of cancer drugs, but it is really priced pretty much in line with other cancer therapies. The concern over pricing as it is specific to Provenge should fade.

There are things that I worry about.

1. I may be underestimating the concern about high prices of new cancer drugs and this coupled with only moderate efficacy and lack of understanding about how Provenge works might cause physicians to shy away from the drug.
2. The initial marketing mistakes made by Dendreon may be harder to correct and take longer than I am estimating.
3. I have just gone over a recent report presented at ASCO 2011from a group led by Solo that suggests that the number of new asymptomatic castrate resistant prostate cancer patients each year is only 4,600, significantly below the 30,000+ that Dendreon indicates to be the market. If this is the case the addressable market for Provenge is only $430 million per year instead of $2.8 billion. However, given the difficulty in making this estimate and given the takeoff of Provenge in its first year even though it has barely penetrated the urology market which is the largest potential market segment, I am inclined to discount the 4,600 estimate of Solo. Others may give it more weight.

If I am right, I think that the Dendreon investment thesis will develop in two phases. The first will be a regaining of confidence that Provenge still has significant growth opportunities and that the shortfall in expectations resulted from naivety on the part of management in setting expectations way too high. I expect this to cause a significant bounce back in stock price over the next half year. The second phase of the stock price movement will be driven by honing in on long term sales and earnings prospects. This phase will begin sometime next year when management, investors and analysts can have enough confidence to put together longer term sales and earnings forecasts. I recently wrote a detailed report on what management is saying that might be useful background information.