Dendreon (NAS: DNDN) has made its share of mistakes before. But last week, the Seattle cancer drug developer achieved the biotech equivalent of fumbling the ball on the 1-yard line with time running out on the clock. The failure was so painful, so shocking, it erased two-thirds of the company's stock value -- about $3 billion. It even started a "Dendreon flu" that dragged down biotech stock indexes.
There are plenty of reasons for investors to be nervous, with Uncle Sam's credit rating in question and unemployment running high. Times of anxiety in the market tend to be bad for high-risk sectors like biotech. And sure enough, many biotech investors have run for the exits, worried that Dendreon's flop is a sign that other high-profile biotechs are doomed to fail. But that would be an overreaction. Investors would be wise to write off the Dendreon story as a case of a fine mess at one company, and not really any great cause for industrywide concern.
I've been covering Dendreon for 10 years, and have seen some incredible ups and downs. Very little about this story surprises me anymore. But while writing over the weekend, three days after disaster struck, I'm still slack-jawed about this colossal choke. Heading into last week's second-quarter conference call, the company had forecasted it would generate $350 million to $400 million in sales this year of its immune-booster for prostate cancer, sipuleucel-T (Provenge). But the company recorded $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 projections, according to CEO Mitch Gold on the call. So Dendreon withdrew its sales forecast and didn't provide any other financial guidance, other than to say it expects "modest quarter-over-quarter" growth.
If you assume "modest" translates into 5 percent quarter-over-quarter growth the rest of this year, then Dendreon could generate about $185 million in sales this year. That's a long way from $350 million to $400 million. And the problems leading to the shortfall, Gold said, are expected to last into 2012. It's anybody's guess how long it might take to fix Dendreon's situation, if it ever happens.
It's truly a stunning fall from grace. Dendreon is now planning to cut costs, and make layoffs, in weeks to come. Analysts, who had drawn up models that had Dendreon eclipsing $1 billion in sales, suddenly had to go back to the drawing board. Cory Kasimov of JP Morgan, a Dendreon bull, slashed his 2012 sales forecast from $841 million all the way down to $388 million. "This was obviously a crushing blow to our overweight thesis and one that we certainly did not see coming. We don't think anyone did," Kasimov wrote in an Aug. 4 note to clients.
The official explanation for what went wrong makes you slap your forehead in disbelief. Essentially, Dendreon said most of its physician customers are afraid they won't get reimbursed by Medicare, or they won't get a timely reimbursement, meaning they'll be stuck holding the bag on a drug that costs $93,000 per patient.
It is shocking to hear Dendreon say this in August 2011, given how much time it had to methodically block and tackle on this fundamental question. From the minute that Dendreon won FDA approval of this new product in April 2010, it had two mission-critical tasks in front of it -- manufacturing and marketing. The first challenge was about proving it could manufacture enough of its first-of-a-kind treatment -- which stimulates a patient's own immune cells -- to meet the demand from thousands of prostate cancer patients around the U.S. Dendreon had time to work on building up manufacturing capacity, because the market recognized it would have been irresponsible to spend hundreds of millions on that prior to FDA approval. The second challenge, sales and marketing, was mainly about persuading legions of urologists and oncologists to prescribe the groundbreaking new therapy. Processes needed to be established to ensure the company would get paid in an efficient and timely way, doctors would get reimbursed from insurers, and patients would have easy access even when they couldn't afford the co-pays.
The sales and marketing effort ran into trouble right away, when Dendreon overreached and set the price for its product too high -- at $93,000 per patient. Analysts at the time of approval were only expecting a price of about $62,000, so Dendreon didn't need to go that high. The company argued, correctly, that Provenge was priced in line with other cancer drugs that have shown a similar ability to prolong lives. It also reminded people on many occasions that it spent 15 years and $1 billion on this very big roll of the dice. Basically, it was time to recoup that investment.
But there was a major downside to being that aggressive on price. Dendreon had spent years roiled in controversy about how convincing its clinical trial data were. Not even an FDA approval silenced the doubters. The high price further galvanized opponents in academia and their friends on Wall Street, who questioned whether the drug was worth that much for only a median time of another four months of patient survival. Sure enough, three months after FDA approval, the Centers for Medicare and Medicaid Services opened up an unusual process known as a national coverage analysis, in which it sought to review whether it ought to reimburse doctors for this new treatment, and if so, under what circumstances. Coming a few months after President Obama's health-care reform law passed, people wondered if this was some kind of stealth price control move by Medicare, and whether Dendreon would become the sacrificial lamb.
Much of that uncertainty was supposedly laid to rest last November, when Dendreon persuaded an expert advisory panel that clinical trial evidence supported the company's claims about the drug. The Medicare agency followed up on that hearing by issuing a draft opinion in March in favor of Provenge. By the time the official National Coverage Determination (NCD) was etched into federal policy on June 30, reimbursement was considered a fait accompli on Wall Street. Dendreon had prevailed, the question was settled. Time to move on.
Or so we thought. While Dendreon spent much of the past year pooh-poohing the impact of the Medicare agency's review, saying regional Medicare units were reimbursing docs in the interim, a more worrisome side of the story emerged on last week's conference call. While regional Medicare units had been reimbursing doctors who prescribed Provenge for the past year, that was apparently happening under very strict criteria for certain patients -- not the broad group of people who are actually eligible under the FDA-approved prescribing information. That created a lot of hassles, and confusion among doctors about exactly which patients were eligible for reimbursement. And just as doctors learned the ropes of that arcane process, they are now being told that the patient eligibility rules and financial reimbursement processes are changed again, to make things smoother. Trouble is, only about one-fourth of doctors have gotten the message in the past few weeks, Dendreon said.
Looking back now, the national Medicare review "really did create headwinds for us over the last year. We now need to educate physicians that it's gone away," Gold said on the call.
Even if Dendreon does a great job now in getting the word out about smooth sailing at Medicare, doctors aren't necessarily going to line up and start prescribing Provenge a lot. That's because even though Dendreon priced its drug like comparable cancer drugs, there's an unusual "cost-density" with Provenge that puts physicians' necks on the line. As with many cancer drugs, once a doctor prescribes Provenge, he or she has to buy it, typically using their own private practice checking account. Since Dendreon's drug is given through three infusions in one month, doctors have to shell out for a full $93,000 bill for giving one month of infusions to one patient. Other costly cancer drugs run up big tabs over many months, or even years, meaning that doctors can spread out the pain of reimbursement uncertainty.
Shockingly, Dendreon said on the call that it wasn't really aware of how far and wide the reimbursement anxiety extended among small community-based physician practices until very recently. What that essentially means is that the company admitted it didn't really understand a vitally important segment of its customer base very well, even after it was a full year into a product launch.
Things didn't have to turn out this way. If Dendreon had priced its product more modestly, like around $65,000 to $70,000, the company could have still made plenty of money. There would have been much less grumbling among patients, and doctors. I'm willing to wager that Medicare never would have bothered to open up that messy yearlong reimbursement review.
But even if you assume Medicare had Dendreon in its crosshairs no matter what, the reimbursement problem could have been better managed. Dendreon's sales team had precious months this spring in which it could have explained to doctors that specific changes were coming down the pike. They certainly could have spread the word, with specific instructions, since the official decision came in writing on June 30.
Dendreon has some bright and capable people on its management team, but this series of blunders makes you wonder who's minding the store. Even though this was one of the most anticipated cancer drug debuts in recent years, the company didn't hire a senior vice president of sales and marketing until three weeks before the FDA approval arrived in April 2010. Many companies have a person like that on board, along with key lieutenants, at least a year before a product introduction.
The senior vice president of sales and marketing who was hired late in the game, Varun Nanda, looked like he had the perfect resume for this job, having worked on cancer drug sales and marketing at Roche's Genentech unit. But seven months later, Nanda was gone. No official explanation was given for the departure of this executive in a critical position. Then the position -- which ought to be one of the plum marketing jobs in all of biotech -- remained vacant for six months. Now Dendreon said it has a new SVP of commercial on board, Robert Rosen, who Gold said has experience marketing major cancer drugs like trastuzumab (Herceptin) and sorafenib (Nexavar).
Rosen has his work cut out. Even if he and his team do a great job of explaining to doctors what the deal is with Medicare, those doctors are not taking Dendreon's word for it, Gold said. They will want first-hand evidence, on a patient-by-patient basis, to prove that they will get reimbursed, before they get comfortable prescribing multiple patients in a row, he said.
Gold, who's trained as a urologist, should have been able to see some of these concerns coming a mile away. When Dendreon says it didn't really foresee how skittish urologists might be about reimbursement, it rings hollow. Equally galling, the company kept referring to how it didn't see this coming because it only recently started moving beyond the top academic centers and pitching its drug to smaller, community-based urologists and oncologists. The billion-dollar sales projections always depended on wide adoption by community physicians. It's hard to believe Dendreon could have been so far out of touch with the needs of their practices.
There were lots of moving parts to the Provenge launch, and Dendreon appears to have executed well on important aspects like manufacturing and supply chain logistics. But when you're touting a company into something worth $5 billion, and hiring a staff of 2,000 people around the country, there are no excuses for major stumbles like this.
Given all the mistakes Dendreon has made, and the unique profile of its infusion-based medicine, I don't think it means other companies are doomed to follow its lead. Just this year, Bristol-Myers Squibb successfully rolled out ipilimumab (Yervoy) and Vertex Pharmaceuticals nailed its launch with telaprevir (Incivek).
Since this is biotech, and it's a risky business, there will always be companies like Dendreon who let big opportunities slip through their fingers. But there are also companies out there proving they can hang onto the ball, and drag a couple of tacklers into the end zone at crunch time. Let's all hope investors can still see the difference.
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