Dendreon failed to live up to expectations for its new prostate cancer drug, and now it is facing some brutal consequences. The Seattle-based biotech company (NASDAQ: DNDN) saw its stock plummet about 60 percent in after-hours trading today after it issued a surprisingly bad second-quarter financial report.
The loss, if it holds up in tomorrow’s trading, would erase more than $2.5 billion of the company’s market valuation.
All that turmoil roiled the market after Dendreon said it has to withdraw its forecast of $350 million to $400 million in full-year sales for sipuleucel-T (Provenge), and that it was unable to offer any revised projection in its place. The company generated $49.6 million in sales in the quarter ended June 30, plus another $19 million in the month of July, which was “substantially” lower than its internal forecasts, CEO Mitch Gold told investors on a conference call. As for guidance, the company only said it expects “modest quarter-over-quarter” growth. The shortfall means that Dendreon is now planning to cut costs, including make some staff layoffs, this quarter.
Dendreon’s CEO obviously had a lot of explaining to do on this call to a group of surprised and frustrated analysts. The company’s sales trajectory has been limited since FDA approval in April 2010, largely because of manufacturing constraints. But those supply limitations are easing now, and Dendreon said it is still unable to quickly ramp up sales because many doctors are cautious about whether they will get reimbursed, and whether they will get reimbursed in a timely manner, when they prescribe the new drug for $93,000 per patient. Even though Medicare said on June 30 that it has agreed to fully reimburse doctors, and it established a special code to speed up the process, many doctors in community treatment centers are still unaware that the process has been streamlined, and they are taking a wait-and-see approach one patient at a time before they get comfortable with the new reimbursement methods, Dendreon said.
Gold, who is well known for bold, even brash statements about the company’s ability to change the lives of patients with this new drug, sounded almost contrite in his conference with analysts. Still, he insisted that it is only a matter of time before Dendreon fixes this situation, and fulfills its potential.
“Many of you have followed Dendreon for a long time,” Gold said. “You’ve seen us overcome challenges many other companies have never had to face. We will overcome these challenges as well.” He added: “We appreciate your support in the past, the present and the future.”
After the company was done explaining itself in a 90-minute conference call, Dendreon stock fell $22.48, or about 63 percent, in after-hours trading to $13.36 at 6:47 pm Eastern time.
The problem, Dendreon said, is primarily happening with small community-based physicians, not the usual top academic centers that have been familiar with the product for years in clinical trials. The product, prescribed by both urologists and oncologists, essentially requires the physician to adopt a new process with an infusion given three times in one month, and that works unlike any other prostate cancer drug on the market. It requires physicians to get more aggressive about treating patients who previously haven’t gotten much therapy, Gold said.
“In many ways, we are building an entirely new market,” Gold said.
There was also an unusual amount of reimbursement uncertainty. Doctors in the first year were required to go through a lot of red tape, recording diagnostic markers like a patient’s PSA score, and then had to endure lots of uncertainty about whether they’d get reimbursed for an expensive medicine, Gold said. And while Dendreon has insisted that the $93,000 price is in line with other cancer drugs, many of the other products reach that price over months or years, not a single expensive month, like Provenge does. The phenomenon, in which so much of the cost is at the front end of the treatment process, makes Provenge a product with high “cost density” which has made physicians wary, Gold said.
This is a big deal for Dendreon, because it will need to win over community physicians in a much bigger way, and go far beyond a few rarefied academic centers, if it wants to reach the multi-billion dollar sales potential that many analysts have predicted. Gold insisted that the market size hasn’t changed, just that it will take longer to grow than the company predicted.
“We see this as a shift of the growth curve to the right,” Gold said.
Dendreon didn’t say how deep its cost-cutting will have to go, or how many people it will need to axe from the payroll to counteract the slow product launch. The company said in its most recent quarterly report that it had about 1,915 employees as of June 30.
Analysts will surely start penciling out how deep the cuts will need to go in order to preserve Dendreon’s existing cash position. The company had about $674 million in cash and investments on hand at the end of June, and burned through about $106 million of its cash reserves in the most recent quarter ended June 30, according to Greg Schiffman, the company’s finance chief. Assuming a cash burn rate of about $30 million a month, if nothing changes, the company has about six quarters worth of cash on its books to run the business, he said.
The cuts will come during this quarter, to provide clarity as soon as possible for investors and employees, Schiffman said.
Dendreon, in its summary of the quarter, pointed the blame mostly at itself. The company needs to educate physicians about how the reimbursement process has been streamlined, it needs to do more to help doctors identify the patients who are candidates for the product, and it needs to “streamline the customer experience” to make it easier for doctors and patients, Gold said.
David Miller, an analyst with Biotech Stock Research in Seattle, summed up the situation in a line. “Docs are not prescribing Provenge until they are certain they are going to be reimbursed.”
And analysts on the call made it clear they aren’t going to be making bullish sales projections anymore, at least until they start seeing real evidence that more doctors around the U.S. are prescribing the new treatment with confidence that they will get paid.
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