Five Key Factors Weighing on Dendreon

Five Key Factors Weighing on Dendreon

Shares of Dendreon Corporation (DNDN) have declined significantly from an all-time high of $57.67 in late April 2010 when the company received U.S. Food and Drug Administration [FDA] approval for Provenge® [sipuleucel-T], the first active immunotherapy approved for the treatment of cancer in the U.S.  Today, shares of Dendreon traded as low as $28.01, down more than 50% from their high, prompting us to briefly review some of the key factors weighing on the company at this time.

Product pricing and reimbursement

The cost of Provenge has been set at $93,000 for a course of treatment, which consists of three infusions at approximately two-week intervals.  In view of the fact that Provenge has been demonstrated to extend survival by 4.1 months, this translates into an average cost of $23,000 per month of added survival.

In comparison, Taxotere® [docetaxel] by Sanofi-aventis (SNY) is indicated for the treatment of patients with androgen independent [hormone refractory] metastatic prostate cancer and administered every 3 weeks for 10 cycles.  Assuming an average monthly cost of $4,000 for Taxotere [source: Cancer Res 2009;69(24 Suppl):Abstract nr 1076], this is an approximate total cost of $40,000 per patient. In the pivotal TAX 327 study, median survival for prostate cancer patients receiving Taxotere was 18.9 months versus 16.5 months in the control arm, which results in an average cost of $16,666 per month of added survival.  Unlike Provenge, however, treating common adverse reactions with Taxotere, such as infections, neutropenia, anemia, nausea, diarrhea, and others, increases the total cost of therapy – so the pricing of Provenge doesn’t appear completely out of line. [note: updated survival analysis of the TAX 327 study demonstrates a 2.9 month survival advantage, which lowers the average cost to $13,793 per month of added survival with Taxotere.  Source: Journal of Clinical Oncology, Vol 26, No 2 (January 10), 2008: pp. 242-245.]

Nonetheless, the Centers for Medicare and Medicaid Services [CMS] has initiated a National Coverage Analysis [NCA] of Provenge. In CMS’s announcement of the NCA, CMS is requesting public comments on the effects of Provenge on health outcomes in patients with prostate cancer. While the news doesn’t reflect a change in Medicare coverage policy or impact existing coverage decisions and a decision isn’t expected for a year, it does highlight sensitivity on the part of payors over the pricing of certain cancer treatments.

Supply constraints

Dendreon is making Provenge available through approximately 50 centers, all of which were approved Provenge clinical trial sites, and expects to increase capacity over the next year.  The increased capacity will be a result of the anticipated licensure of its expanded New Jersey, Georgia and California facilities in mid-2011.

In the short term, however, Dendreon officials have indicated that the company will only be able to supply 2,000 treatments to patients.  At a cost of $93,000 per treatment, this limits potential sales to approximately $186 million.

According to a June 28 article by Bloomberg reporter Tom Randall, Dendreon’s Chief Operating Officer Hans Bishop indicated that facilities will be able to churn out medicine each year valued at between $1.25 billion and $2.5 billion by the end of 2011.

Competitive landscape

In early April 2010, we published a 150-page industry report titled “Cancer Vaccine Therapies: Failures and Future Opportunities,” which included an overview of the cancer immunotherapy market, interviews with several key opinion leaders, profiles of nearly 40 companies, and a discussion of the scientific, clinical, and commercial considerations for the major industry participants.

In the report, we highlighted the fact that numerous active immunotherapies are in late-stage clinical development for prostate cancer.  In fact, nine product candidates are in clinical trials for the treatment of prostate cancer, representing the largest therapeutic area within the active immunotherapy market.  Beyond competition from other active immunotherapies, however, Provenge could also face competition from small molecule products.

For example, Johnson & Johnson (JNJ) acquired Cougar Biotechnology, Inc. for approximately $1.0 billion in cash in 2009.  Cougar Biotechnology’s oncology portfolio included abiraterone acetate [CB7630], an orally active acetate salt of the steroidal compound abiraterone.  Abiraterone acetate, which can suppress testosterone production by both the testes and the adrenals to castrate-range levels, is currently in two Phase III clinical trials for the treatment of prostate cancer according to [Trial identifier numbers NCT00638690 and NCT00887198].  Both studies list a primary completion date of mid-2011.

Insider sales

Trading conducted by corporate officers, key employees, directors, or significant shareholders must be reported to the Securities and Exchange Commission [SEC], usually within a few business days of the trade.  Some investors follow the activity of insiders, believing that they might have better insights into the health of a corporation and that their trades convey important information – although this isn’t always the case.

In this regard, according to a Form 4 filed with the SEC, Dendreon’s Chief Executive Officer [CEO] beneficially owned 555,211 shares of the company’s common stock as of April 29, 2010 – the day Provenge was approved by the FDA.  The CEO sold more than half of those shares at prices ranging from $51 to $54.70, reducing his beneficial holdings to 224,359 the next day.  Other insiders also sold during the period.

Priced for perfection

Recall that Eli Lilly & Co. (LLY) purchased ImClone Systems for $6.5 billion back in 2008.  ImClone’s only product – Erbitux® [cetuximab] – had generated annual sales of approximately $1.3 billion in 2007.  Therefore, ImClone was valued at a 5x multiple to prior year sales.

At its 52-week high, Dendreon had a market capitalization of approximately $7.8 billion.  At a 5x multiple, this would imply an annual revenue run rate of $1.56 billion, which is consistent with the company’s planned manufacturing capacity by the end of 2011 and many analyst projections over the coming years.

But Dendreon isn’t generating $1.56 billion in annual sales yet and concerns over pricing, reimbursement, and competition, combined with insider selling, help explain the decrease in market valuation since the approval of Provenge.

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