Dendreon: Doing Well by Doing Good?
Board: Dendreon Corp.
For folks following DNDN, I've been providing updates on a sort-of regular basis. My past two updates from Apr 09 and Jun 10 can be found here: April 9 post, June 10 post.
Also for background, and to answer some questions, this post may be of interest.
So it's time to update DNDN's status as of Jun 11.
In general, the company has made good progress on their priorities since approval of Provenge in Apr 10. They have successfully raised money to fund their execution, executed their plan as advertised, and started to make significant inroads into the market. Taking these points in order:
1. Financing. As of Jun 10, they had order of $550 MM on the books. They have spent a considerable portion of this as they have invested in their facilities and building their workforce and brand recognition. However, they also had another round of financing (convertible debt) raising about $600 MM with truly excellent terms.
As a result, they still have almost $800 MM cash on the books, with only $600 MM medium term debt. By the time the debt is due, CFFO should easily be able to support any payments or refinancing, or their cash hoard should allow them to simply pay it off if desired.
Also note that DNDN carries more than $1300 MM in deferred tax credits, so it will be at least a couple of years before profits are taxable. All in all, DNDN's balance sheet is very strong, with sufficient assets to allow them to execute their business plan without fear of running short of cash.
2. Execution. The past year has been mostly about execution - it was noted both as a critical item to progress and a primary area of risk in my Jun 10 post above. DNDN's execution has been very successful over the past year.
DNDN has achieved approval of the remaining 36 workstations in their NJ facility in 1Q11, in agreement with the timeline indicated in the Jun 10 post. They submitted their application to approve the Seal Beach, California production facility on 28 Feb 11, so the FDA should approve it by 28 June 11. Similarly, the application for the Union City, GA facility was submitted to the FDA on 28 Apr 11, meaning they should have approval by about 28 Aug 11. Both of these dates are basically in agreement with my Jun 10 post, although the Union City facility is a couple months later than I thought. Still, for management to commit to multiple complex projects on a fast track schedule, and then meet those commitments is a confidence builder in several ways: A) management has a good handle on the technical efforts to complete the facilities to FDA standards, B) management provides sober and accurate information about their plans - neither unwarrantably optimistic, nor with excessive conservatism.
At the end of the facility approval process, by 1 Sep, DNDN should have 120 workstations operating - 48 in NJ, and 36 each in CA and GA. In theory, this should provide capacity to serve on order of 20,000 patients annually, although DNDN management has not yet shared information on precisely how productive the workstations will be. For that matter, they probably don't know precisely - many of the production efficiencies will only come with experience, and I suspect management is trying to be prudent and not promise levels of utilization they'll not be able to achieve quickly or, perhaps, at all.
In any event, DNDN should have, by 1 Sep, sufficient capacity installed to easily achieve annual revenues in excess of $1 B, and perhaps approaching $2 B. At that point, it becomes a matter of training prescribing doctors and infusing sites at a rate for prescriptions to increase and match the rate that workstations are brought online. If all goes as planned, Dendreon should have revenues on order of $60 MM in Q211 (+/- $10 MM), $100 MM in Q311 (+/- $20 MM), and $200 MM in Q411 (+/- $30 MM), and should be cash flow positive in Q4. So the question becomes how quickly can the company fill the plant capacity and achieve target revenues? Which leads to ...
3. Market penetration. In June 10, I stated I was not concerned about this and Provenge would quickly become standard of care in the approved indication. Since then a number of issues have come up that have interfered with the market's perception of Provenge penetration but, importantly, have not affected the *actual* market penetration. At least in my opinion...
First, in late Jun 10, CMS issued a notice that they were preparing a National Coverage Assessment for Provenge. I covered the NCA in this post.
I won't repeat myself, but in summary, the NCA is one of those events that spooks the market, but has little actual impact on the value of the underlying business. Meaning that, in my view, it simply provides good buying opportunities on equity price weakness. The final CMS NCD will be published 30 Jun 11; I am certain it will be anti-climatic, with no impact on the Provenge market.
Secondly, there has been considerable press attention focused on the price of Provenge ($31k per infusion, or $93k for a full course of three infusions). But in our wonderful modern medical system, where most of those costs are covered by third parties, this will not impact demand. Furthermore, as Provenge is an infusion medication, the high price simply means that doctors using it make more money, as their fee for infusion is a flat 6% of the cost of the medicine. Higher prices mean doctors have an incentive to prescribe more of it. Patients are not deterred by the high price because they do not see it. And insurers and Medicare can't argue about the price because the political situation makes it impossible (death panels!). So I see little reason the price will restrain demand.
Finally, some people and the market have been concerned about competition. Since Provenge was approved, two other prostate cancer drugs have been approved, and each time the DNDN stock price has taken a hit. A) Jevtana, however, is a second line chemo, and will not have any impact on Provenge takeup. B) Abiraterone (Zytiga) is of greater competitive concern, but I believe those concerns are overblown. Zytiga is an androgen synthesis inhibitor, and has considerable promise for patients who have failed primary hormone blocking therapy. However, the regimen is quite severe, requiring prednisone, so doctors are not going to prescribe it casually and, I expect, will almost always use it following Provenge treatment. At most, I expect Zytiga to reduce Provenge addressable market by about 5%, which I expect to have negligible impact on Provenge revenues.
So the path forward for Provenge still seems quite clear to me. Certainly 2nd hand accounts from events like the recent ASCO conference, and from prescribing doctors, have all been very positive - I know of no exceptions to this, other than a few snide comments about price. DNDN has been initiating various advertising efforts in targeted markets. Immunotherapy is getting significant positive attention in the medical and public press, and thus far DNDN seems to have had no difficulty stimulating demand. I still foresee no problem with Provenge market meeting or exceeding the ultimate capacity of the manufacturing facilities. In fact, I am still of the opinion that it will be clearly evident to DNDN that demand will exceed capacity, such that I expect them to announce plans for new production facilities reasonably soon - almost certainly, IMO, before the end of 2012, and maybe before end-2011. My guess is still that they'll be looking for Midwestern locations - perhaps Texas, maybe Chicago or Minneapolis.
The die is cast for 2011. By the end of the year, Provenge will be pulling in quarterly revenues on order of $200 MM. Beyond that, the company has provided no guidance, but I expect revenues to keep increasing and to reach close to $400 MM/quarter by the end of 2012 based only on the existing three production facilities and the current Provenge label.
Expansion overseas is in the cards, but the timing is uncertain. A Provenge production facility in Germany should be ready in 2013; approvals and pricing are of greater concern. Still, I have modeled some revenues starting in 2014 and growing at a similar trajectory to the US, albeit with a lower ultimate plateau. My lower case model sensitivities all eliminate overseas revenue simply because of the uncertainties.
Expansion of Provenge to earlier stage prostate cancer is almost a certainty in my mind. Trials will take a long time to complete unless new survival endpoint proxies are developed, but the logic is too compelling and the side effect to therapeutic ratio too beneficial. There is going to be incredible interest from both doctors and patients to try earlier Provenge as they gain familiarity with the treatment and see the impact on late stage patients. Medicare and insurer's efforts to restrict off-label usage will be fighting the tide. They'll slow down adoption, but they won't be able to stop it. The only real question in my mind is timing. Again, my lower case model sensitivities eliminate all revenues from label expansion/off-label usage because of these uncertainties.
DNDN's pipeline is currently getting absolutely no respect in the market. That is because the market at this time simply can't see the possibilities of the Cassette technology platform. DNDN is starting a trial for Neuvenge in Her2/Neu positive bladder cancer this year. After this, they expect to start developing antigen targets for the Cassette at a rate of about one per year. Note they have the cash to do this - see financial section above. It is still early days, but the analogies for what they are doing (attempting to do) in the other cancers are so precisely equivalent to Provenge that you need to be very skeptical indeed to not see that they are likely to have several more successes. This would create astounding value. After all, Amgen did not stop once they had Epogen - once you have a platform, you keep developing it until you have extracted as much value as possible. A decade down the road, when DNDN has half a dozen -venge's in the market or late in trials, people will be scratching their heads wondering why they couldn't see what was happening. At least don't complain that you were never told ;-)
There are so many ways to value an early stage biotech that it is a wonder any two people can ever agree on a sale price in the market. I myself run several different methods on DNDN, ranging from very simple (price/revenue ratios) to quite complex cash flow models with sensitivities. The only thing all my models universally agree on - even the low side sensitivities - is that DNDN is currently dismally undervalued by the market. Current market cap is about $6 B; the absolute lowest value I can calculate based only on current revenue and profit trajectory is about 50% higher. Most model runs show values higher yet and, in fact, the valuations can get quite frothy depending on what assumptions I include for future developments - label expansion, geographic expansion, pipeline, etc. But don't take my word for it - DNDN now has enough visibility of future revenues to allow everyone to do their own modeling.
I don't know when the market will wake up to DNDN's revenues and future possibilities and start putting some value in. But I'm in no hurry. Been holding DNDN for 6 years now, and another 6 or 12 or more won't be any problem. I'm confident that if they continue to execute with excellence that it will eventually be recognized and rewarded by the market. I'm equally confident that the immunotherapies DNDN is developing are a true paradigm shift in medicine, which will have tremendous benefits for patients. Doing well by doing good - I like the feeling.
Best of luck to all,
(Disclosure: long time DNDN bull - long common, long calls, short puts)