((President's Conception are very similar to the below interesting commentary from a LUGPA urologist on new Dendreon senior management, MD prescription patterns, and speedy provider reimbursement. ))
Dendreon Corp. (DNDN)
Turnaround in the Making
January 7, 2013 Ling Wang
Senior Biotechnology Analyst
Summer Street Research
Dendreon Corp. (DNDN)
SUMMARY
We recently hosted a conference call with a community-based urologist to
discuss his center’s experience with Provenge. We also analyze in this note the
Provenge sales trend by sectors, based on management’s comments during
prior conference calls. We expect Provenge to continue penetration among
community practices, driven by smoother reimbursement, earlier diagnosis of
metastatic CRPC patients, financial incentives, better appreciation of
immunotherapy, and increased awareness of Provenge. We are not overly
concerned about the expected headwind in the academic sector, given it only
accounts for a small portion of the total revenues. We reiterate our BUY rating
and $18 target price, and we slightly increase our 4Q12 Provenge revenues
estimate to $77.8MM from our prior estimate of $76.8MM.
EVENT
We recently hosted a conference call with a community-based urologist to
discuss his center’s experience with Provenge. We also analyzed the Provenge
sales trend by sectors, based on management’s comments during prior
conference calls.
INTERPRETATION
Anecdotal evidence from our MCRI consultant suggests Provenge will continue
penetration among community urologist practices, driven by smoother
reimbursement, a new imaging test, lucrative financial incentives, better
appreciation of immunotherapy, and increased awareness of Provenge due to
education by KOLs. The expected headwind in the academic sector should be not
be concerning, given that the academic sector only accounts for a small portion
of the total revenues.
ACTION
We reiterate our BUY rating and $18 target price. We continue to expect
Provenge to have a significant turnaround led by the new management team.
We slightly increase our 4Q12 Provenge revenues estimate to $77.8MM from
our prior estimate of $76.8MM.
Dendreon’s flagship product, Provenge (sipuleucel-T), an autologous cellular immunotherapy, was approved in 2010 for the treatment of asymptomatic or minimally symptomatic metastatic CRPC. We believe the current valuation of DNDN
has factored in an extremely bearish scenario for both topline and bottom-line growth, thereby creating a great buying opportunity. In our view, investor concerns relating to “competition” with Zytiga are overdone, as we do not view Zytiga and Provenge as “either/or.” Rather, we expect them to be used in sequence or in combination. Longer term, we see new players, including Johnson & Johnson (JNJ-$71.55-NR), Medivation (MDVN-$53.85-BUY), and Astellas (ALPMF-$46.45-NR) to expand the pre-chemo market by actively targeting urologists and promoting them to proactively identify and
treat mCRPC patients earlier than under the current treatment paradigm. We expect the new management team to turnthe Provenge launch around with more targeted marketing strategies and an upgraded sales/marketing team.
DISCUSSION
Our consultant sees smoother reimbursement, a new imaging test, and lucrative financial incentives as helpful for Provenge adoption.Our consultant works at a large private urology center with more than 20 practicing urologists. In his experience, the reimbursement of Provenge before the NCD coverage had been a nightmare, but it improved dramatically about 1.5 years ago. Now reimbursement is usually secured within two to four weeks, while payment to distributors is 120 days. Therefore, there is minimal cash overlay for the physician offices. A centralized database is used in his center to monitor prostate cancer patients’ disease progress. Once a patient progresses from non-metastatic to metastatic prostate cancer, the database identifies the patient so that he can be treated by the physicians who focus on treating advanced prostate cancer and prescribe Provenge. Currently, the sodium fluoride PET scan (currently free to Medicare patients), a newer test with much improved sensitivity over a traditional PET or bone scan, could help to identify metastatic CRPC patients at an earlier stage. He views the financial incentives of administrating Provenge as helpful for adoption among private practices. Physicians
could earn 6% and a potential rebate of up to 2.25% (based on volume) of Provenge revenues. In his experience, there are very few other procedures more lucrative than Provenge.
Our consultant sees further penetration of Provenge among urologist practices
Our consultant estimates Provenge penetration was around 30% among the LUGPA members in the beginning of 2012and increased to 50% at the end of 2012. He expects Provenge to have deeper penetration among the LUGPA members going forward. Our consultant sees that the importance of immunotherapy is better appreciated on national level. DNDN also did a great job bringing KOLs to educate the private practices. He feels the interest level on Provenge has been significantly improved after two key events during 2012. First, during the ASCO conference in June, data analysis from the
IMPACT trial showed patients with lower tumor burden have higher benefit. Second, during the annual meeting of LUGPA a few months ago, KOLs educated many CEOs of large urologist practices regarding Provenge being great for patients and for the practices. In his opinion, once large practices have the infrastructure in place to administrate
Provenge, it is unlikely for them to stop.
The approval of Zytiga in pre-chemo CRPC does not change how Provenge is used in his center. His center uses Provenge as the frontline therapy, even after Zytiga’s approval for pre-chemo CRPC. Although NCCN guidelines recommend Zytiga and Xtandi (compendium listing for pre-chemo CRPC) for treating patients with pre-chemo CRPC, his center keeps Provenge as the frontline therapy and sequences Zytiga shortly after, driven by the belief that immunotherapy works better in patients with lower disease burden. He expects the sequencing study of Provenge and Zytiga to shed light on whether Zytiga can be administrated concurrently or sequentially.
New management team appears to be commercial savvy
Our consultant believes DNDN management may have underestimated the importance of private practices for Provenge and initially focused primarily on academic physicians. They have realized the importance of private practices and have been increasingly focused on them. In our consultant’s experience, the new management team is very responsive and has significant commercialization experience. DNDN is making new practices to cut down Provenge lag time. Now, once patients experience PSA climbing and short PSA doubling time (i.e. high risk of metastasis), DNDN is doing preauthorization in the background so that when patients come back to the clinic they know exactly how much their out-of pocket
cost is and they can start Provenge infusion fairly quickly. This practice has significantly cut down the lag time, which took a couple of weeks in the past.
We are not overly concerned with the 3Q12 decline in the academic segment
Provenge sales for 3Q12 declined 25% sequentially in academic centers. Given that the academic segment only accounts for ~16% of Provenge’s total revenues, we are not overly concerned with the potential headwind. Unlike community practices, academic centers are more focused on participating in clinical trials and producing research/publishing papers.
Currently, there are at least four phase III trials ongoing in prostate cancer patients covered by the Provenge label (Figure 2). To our knowledge, at least the Prostvac phase III trial excludes Provenge treatment as part of the enrollment criteria. In some trials in which Provenge prior treatment is not an exclusion criteria, DNDN could educate the physicians to treat patients first with Provenge and move on to clinical trials later, since Provenge is an acute therapy. Therefore, there are ways to improve the performance in the academic sector. If we assume a 20% decline in the academic segment in 4Q12, stabilization in the oncology sector, and ~14% increase in the urology sector, 4Q12 sales could still remain flat from 3Q12(Figure 1).
VALUATION
Our target price of $18 is based on the average of revenue multiple and earnings multiple valuation methods: applying a 25x multiple on our fully diluted 2015 EPS of $0.99 discounting back at 15%, we derive a PT of ~$19, and applying a 5x multiple on our 2015 sales projections of $798MM, we derive a PT of ~$18. Our model factors in a risk-adjusted
contribution from Provenge potential sales in the EU, with a probability of success of 50%. In deriving EPS, we project DNDN will improve gross margins to ~65% by 2015.
