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Will Dendreon Shares Continue to Slide?

Courtesy of Benzinga.

Dendreon (NASDAQ: DNDN) recently announced that margins for its flagship drug Provenge had fallen from 42% to 10%, another round of bad news surrounding the revolutionary prostate cancer treatment. The company had previously pulled its bullish fiscal year sales forecast in favor of modest quarterly growth and laid off 500 employees. “We didn’t expect nearly as much gross margin deterioration,” stated Cowen & Co analyst Eric Schmidt. “Can you really make a business unless that gross margin dramatically improves?”

Dendreon previously reported cost density problems related to sales and marketing of Provenge. The drug’s hefty upfront cost of $93,000 posed a serious problem to prospective doctors, as they would need to cover the cost upfront while awaiting reimbursement from insurance providers. As a result, many doctors found it difficult to prescribe Provenge given the constraints it could have on their business. While most cancer treatments retail for $6,000 to $7,000 a month on average, the monthly cost could be spread out over time, lessening the burden on doctors’ office budgets.

Dendreon faces a problem in that Provenge cannot be mass manufactured and must be specially tailored for each patient. Each patient must have a sample of white blood cells extracted, then sent to the production factory where it is incubated to create the vaccine, where it is directed to an incubation center to be infused into the patient. It then creates an immune response to fight off cancer cells. This process is incredibly time and resource intensive, and may restrict Provenge to a small niche of cancer patients.

Dendreon faces additional problems in that new prostate cancer therapies have emerged since Provenge was approved by the FDA in 2010. Johnson & Johnson’s Zytiga and Sanofi’s Jevtana have proven to have similar anticancer profiles, without the complexity or cost. While Dendreon believes that it can break even on Provenge with $500M in annual sales, it does not appear that it will obtain the blockbuster status that investors had originally projected a year and a half ago.

There are a few silver linings in the pipeline. Dendreon still owns the full rights to Provenge, and plans on applying for European approval in early 2012. The company also has $500M in cash, roughly equivalent to $3.36 per share. Medicare also announced that it would give full coverage of the drug and issued a Q Code which would allow physicians to claim reimbursement within 30 days. The number of sites approved for Provenge treatment increased from 135 in March 2011 to 680 in September. Despite the complexities, patients continue to demand access to Provenge, regardless of physician reservations.

While Dendreon faces major hurdles in Provenge distribution, one cannot argue the fact that the company’s revenue from the drug has grown in every quarter since its release. Investors who believe in modest growth potential would be wise to snap up some shares given the huge hit that the stock has taken over the past few months. However, there are still risks in the drug’s costs, margins, and potential competitors, so it may be wise to monitor these factors and how they affect Provenge in the coming quarters.

Neither Benzinga nor its staff recommends that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. All information contained on this website is provided as general commentary for informative and entertainment purposes, and does not constitute investment advice. Benzinga will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on this information, whether specifically stated in the above Terms of Service or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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