There are not many of us who have not had cancer enter into our lives in one way or the other-either for ourselves or a loved one. The lure of a cure for a disease that is so devastating is strong to the general public, and to investors.
Immunotherapy holds great promise in the eyes of research scientists as well as medical practitioners-and is understandable by the rest of us, so it has an allure: a drug to make your body stand up and fight cancer on its own. While Dendreon seemed to be riding on the back of the expected returns of that promise, its main product, Provenge, is having problems living up to the hype.
Delivering on the promise of the "development hype" is one, big challenge facing Dendreon, as well as many of the companies occupying the biotech niche. Being at the forefront of medical technology is not enough to attract new, or keep current, investors once a clinical trial has been declared a success. The product must also be able to be monetized (it has to be able to achieve and sustain a commercial success). It must, at some point, be able to generate enough net revenue to cover both operational and production costs, as well as an expected return on investment, if it wants to keep investors. This is the basis of Corporate Management 101, and is often the elusive concept for managers of developmental technology-whether in infotech or biotech.
Dendreon's stock has slid 77 % over the past 52 weeks, fluctuating between a high of $43.96 to a low of $6.46, mostly due to swings in the sales forecasts. The largest drop occurring in July, 2011, immediately after Dendreon's CEO, Dr. Gold, announced a revision of the marketing forecast to almost half of what had been previously published. The S&P is populated with any number of companies that have recovered from revised sales forecasts, so the question is: can Dendreon be counted among those ranks?
The sales forecast was based on the projected success of its drug Provenge, an immunotherapy drug targeted at metastatic, Stage IV prostate cancer. Prostate cancer affects over 200,000 people every year, and was the cause of 33,700 fatalities in the USA in CY 2011.
Provenge is not targeted at the entire population. It is designed foradvanced stage cancer that has already spread to other organs (metastatic cancer),and is asymptomatic. This is a much smaller subset of the entire population. The drug's claim, and supporting clinical trial data presented to the FDA, is to prolong life by four months. It shrinks tumors, but does not eliminate them. And it does not have a claim as a cure. So, the targeted patient population for Provenge are patients who are looking for a "last resort" therapy. The target population is basically the patients who will end-up succumbing to the disease.
Is that revised sales forecast a cautious approach to bumps in the launch of a new product, or are there some inherent weaknesses in the ability to successfully commercialize Dendreon's primary product, Provenge? The actual target audience is not only limited-it's shrinking.
Major issues to consider on whether Provenge's success, which is Dendreon's only current product offering on the market, can continue to hinge on the sales forecast.
The ISI Group estimates the number of eligible patients for Provenge to be 30,000. Dendreon's management estimates about 30,000- 35,000 become eligible each year. The number of patients who die from prostate cancer in C.Y. 2011: about 33,700. Basically, the fatality list is the target market for Dendreon. With an average diagnosis for prostate cancer at age 67, and the average age at time of death closer to 80, this is clearly a Medicare-covered disease.
Medicare will cover Provenge, at about 80% of the $93,000 price tag. So assume coverage for the population is not a big issue.
To generate the billions in sales that Dendreon felt was a potential target market, every single fatality patient would have to be a candidate for Provenge, and that is not the case. Only asymptomatic patients (patients without symptoms) are eligible.
SmithonStocks reported a study by the Solo group as estimating this patient population to be at about 4,600. This yields sales of $430 million per year. While more in line with a reasonable sales projection as product acceptance grows, given the CY 2011 sales of $228 million, it is short of the $500 million break even point stated by Dendreon. While SmithonStocks did state it discounted the estimate, (without giving a reason), it does seem more reasonable than the false assumption that the entire Stage IV population is asymptomatic and so a target population for Provenge.
Once again, going into the future, the entire eligible population will also drop as the success of early detection efforts drop the number of fatalities of prostate cancer at a historical rate of 3% over every 5 year period. Much of the sales forecasts by a number of market analysts, include a continual rise in sales, but this is a very confined, well-defined, non-growth market. So where is the new target market going to come from to meet those sales numbers?
Other Issues facing Dendreon
Competition comes under the name of Zytiga, from the behemoth drug manufacturer Johnson & Johnson (NYSE:JNJ). A cheaper alternative, Zytiga is also an oral drug, which is a much more "patient-friendly" approach than the IV infusion required by Provenge. In addition, Zytiga actually had better clinical outcomes, while Provenge's outcome studies and clinical trial data is under attack.
Dendreon has received approval to market in the European Union, but recently, Zytiga was not given the green light by the clinical guidance organization for the NHS (National Health Service) in Great Britain. The reason: cost did not justify the outcome. Provenge costs more than Zytiga, and just like Great Britain, most of continental Europe is on a nationalized insurance plan. They also have a very different attitude and approach to end-of-life care than is held in the USA.
Provenge's patents expire between 2014-2018 which is not that far away. However, IV infusion therapy drugs rarely have a generic counterpart. On the other hand, its main competitor is an oral drug, which is subject to competition from developed generics. While this is a very confined market, it is a high-priced drug, which might make it attractive for a generic. Zytiga's patent expires in 2014, and although there is no current generic approved or developed, it is a possible specter on the horizon. Remember the recent lesson of Pfizer's (NYSE:PFE) best selling drug of all time, Lipitor, which lost over 50% of it market in less than a quarter, due to competition from generics.
While the market analysts generally agree they are neutral on Dendreon, the target market issue, and the amount of revenue it needs to generate, as well as resistance to high cost drugs with limited clinical return in the European market, does not paint a rosy outlook for the company as a whole.
About the author:
I fundamentally analyze every business from the top down.
In my personal life, I have a strong Jewish faith and enjoy playing Scrabble and entrepreneurship.