(DNDN) Medicare to Cover Dendreon’s Provenge

Dendreon Corporation (DNDN) has of late been announcing significant milestones, related to its potential blockbuster cancer vaccine Provenge. Most recently, the company announced that the Centers for Medicare and Medicaid Services (CMS) has agreed to fully reimburse Provenge, an expensive vaccine. CMS is a federal agency that administers the Medicare and Medicaid programs, which provide health care coverage to millions of people in the US.

The agency has issued a final National Coverage Decision (NCD) for Provenge which will require Medicare contractors to cover the use of Provenge for treatment of asymptomatic or minimally symptomatic metastatic castrate resistant (hormone refractory) prostate cancer which is consistent with its label. The agency has also issued specific guidelines to local Medicare Administrative Contractors (MACs) to pay for on-label use of Provenge. Provenge is currently reimbursed by all 15 local MACs. The agency did not propose to cover off-label use of the vaccine at the national level due to insufficient evidence.

The decision from the CMS does not come as a surprise for us as earlier intimation from the agency had supported Provenge coverage. The agency believed there was enough evidence to justify the use of Provenge for the treatment of advanced prostate cancer. Apart from that, last year, the CMS Medicare Evidence Development & Coverage Advisory Committee (MEDCAC) supported reimbursement for on-label use of Provenge vaccine.

We are encouraged by CMS’ decision to reimburse Provenge for on-label usage as it will allow doctors to be more comfortable with prescribing the drug. Moreover, reimbursement of the vaccine by Medicare is crucial for the commercial success of Provenge as it is primarily meant for men older than 60 who are dependent on Medicare for their treatment.

Provenge now also has the Q-code, which becomes effective from July 1. The Q-code is a product specific code that enables electronic submission of claims, which in turn can expedite payment, thereby facilitating the reimbursement process further.

Dendreon also intends to provide grants to independent foundations that provide financial assistance to qualifying prostate cancer patients. Dendreon will also establish a patient assistance program for uninsured patients.

The positive CMS decision comes on the heels of announcement of clearance from the US Food and Drug Administration (FDA) to expand manufacturing facility for manufacturing Provenge in the US. The company’s Los Angeles facility can now be operational with 36 workstations. Earlier, in March 2011, Dendreon’s New Jersey facility received FDA clearance. The facility has 48 workstations, some of which are already operational. The LA and NJ facilities, geared for manufacturing Provenge, now total 84. We believe the expanding manufacturing capacity will significantly increase the availability of Provenge which will help Dendreon to meet pent up demand for the vaccine. The company is also building additional capacity in Atlanta for which the FDA is expected to give its decision in August 2011.

All the above efforts are intended to help in making Provenge easily and broadly accessible to victims of prostate cancer. Prostate cancer is the most common non-skin cancer in men in the U.S. The disease affects more than 2 million men in the US. Efforts such as these would also increase demand for the vaccine.

Our Recommendation

We currently have a Neutral recommendation on Dendreon. The stock carries a Zacks #3 Rank (short-term “Hold” recommendation). We believe that the launch of Provenge has been impressive. Successful commercialization of Provenge is crucial for the financial performance of Dendreon as it can drive the company to profitability. We are encouraged by the company’s efforts to expand capacity and CMS’ decision to reimburse Provenge for on-label usage, which could subsequently spur sales at Dendreon. However, in the long run, we remain concerned about the company’s dependence on Provenge and the lack of a robust pipeline. We believe Dendreon has little to fall back on if Provenge fails to keep its promise. We also remain cautious of the continuous up tick in operating expenses.

Moreover, there are products currently under development for treatment of prostate cancer. Johnson and Johnson’s (JNJ) Zytiga (abiraterone acetate) received FDA approval in April 2011 and Medivation’s (MDVN) MDV3100 is in late stage trials. If these products prove to be successful, the prostate cancer market will become more crowded and competitive.

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