We have maintained a Neutral rating on Dendreon Corporation ( DNDN ) with a target price of $8.75 following appraisal of third quarter 2011 results.
Dendreon Corporation reported third quarter 2011 loss of 67 cents per share which was narrower than the Zacks Consensus Estimate of a loss of 70 cents due to better-than-expected third quarter revenues. Total revenue in the reported quarter climbed to $64.3 million (including rebates and charge-backs) from $20.2 million in the comparable quarter of 2010. The jump was attributable to higher Provenge revenue in the current quarter versus low Provenge sales in the third quarter of 2010. The year-ago period was only the second quarter of its launch.
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. Moreover, approval of three manufacturing facilities (Atlanta, Los Angeles, and New Jersey) by the US Food & Drug Administration (FDA) has significantly increased Dendreon's manufacturing capacity.
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. 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 that though the physician interest in the vaccine remains solid, its uptake will be slow and gradual. 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 and did not freely prescribe the drug. Accordingly, Provenge performed much below the company's internal expectations in the second and third quarters of 2011, forcing Dendreon management to withdraw its revenue guidance for the drug.
Though reimbursement trends are improving with the average time to payment coming down from several months to approximately 30 days, management lacks visibility on when the doctors will become more comfortable with the positive reimbursement developments as well as the cost density of Provenge.
Though we still believe in the long-term prospects of Provenge, given the sluggish Provenge sales, our visibility on the drug's performance 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. Therefore, we prefer to remain on the sidelines at current levels.