(DNDN) Dendreon Analyst Maintains Neutral on Shares

We have maintained a Neutral rating on Dendreon Corporation (DNDN) with a target price of $13 per share after appraisal of the second quarter 2011 results.

Dendreon Corporation reported weaker-than-expected second quarter 2011 sales of $49.6 million of its potential blockbuster prostate cancer vaccine Provenge, though up from prior quarters. Revenues also disappointed the Zacks Consensus Estimate of $59 million in the second quarter.

Management surmised that though the physician interest in the vaccine remains solid, its uptake will be slow and gradual. Subsequently, the company withdrew its revenue guidance for the drug, sending its share price down sharply.

Provenge is the first product in a new therapeutic class known as “active cellular immunotherapies.” We believe that Provenge is capable of changing the paradigm of cancer care dramatically. Provenge is also critical for the financial performance of the company in the long term as the product has blockbuster potential and its successful commercialization should drive a company of Dendreon’s size to profitability.

Dendreon is working towards expanding its manufacturing facilities for Provenge. The company has received approval to make Provenge at all its three facilities, New Jersey, Los Angeles and Atlanta, with a total of 120 workstations. All the three facilities are thus expected to be manufacturing commercial material by year end. We believe the facility expansion will help in making Provenge more readily available, thus meeting pent-up demand for the vaccine.

Dendreon is actively ramping up sales force, marketing, and medical education initiatives since the additional capacity is expected to be online by year end. The company expects to have an effective distribution system across the US by the end of 2011 so that it can serve patients efficiently.

We remind investors that in late June 2011 the Centers for Medicare and Medicaid Services (CMS) agreed to fully reimburse the highly expensive Provenge vaccine. The CMS is a federal agency that administers the Medicare and Medicaid programs, which provide health care coverage to millions of people in the US.

Provenge also has the Q-code, 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. We believe the CMS decision and the Q-code have created a favorable reimbursement environment for Dendreon.

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.

Despite the much favorable reimbursement environment for Provenge following the final CMS decision and implementation of the Q-code, management believes most physicians are still unaware of these developments. The customer base is shifting from academic centers to community-based centers where physicians are more concerned about speedy reimbursement and being paid on time.

Due to the short duration of therapy (about 4-6 weeks) the full costs associated with Provenge have to be paid out by the physicians within a month and thereafter they have to wait/hope for reimbursement. These physicians were not comfortable with the cost density of Provenge. Management lacks visibility on when the doctors would turn more comfortable with the positive reimbursement developments as well as the cost density of Provenge. The company now expects modest sequential revenue growth in the remaining quarters of 2011.

Though we still believe in the long-term prospects of Provenge, following the second quarter developments, our visibility on the performance of the drug for the next few quarters has become clouded. Moreover, in the long run, we remain concerned about the company’s dependence on Provenge and the lack of a robust pipeline with none of its candidates likely to hit the market in the near future.

We believe Dendreon has little to fall back on if Provenge fails to keep its promise. Moreover, we note that the prostate cancer market will become more crowded with the recent launch of Johnson and Johnson’s (JNJ) Zytiga. Moreover, Medivation Inc. (MDVN) is developing a prostate cancer therapy, MDV3100, which is undergoing late-stage studies. We also remain cautious of the continuous up tick in operating expenses. Therefore, we prefer to remain on the sidelines at current levels.

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