Dendreon Corporation’s (DNDN) first quarter 2011 loss (including stock-based compensation expense but excluding other special items) of 69 cents per share was in line with the Zacks Consensus Estimate. Loss was, however, much narrower than the year-ago loss of 94 cents per share, as the company has started generating revenues from its lead advanced prostate cancer vaccine Provenge, which was absent in the prior-year quarter.

Quarterly Details

Total revenue in the reported quarter climbed to $28.1 million (entirely from Provenge) from $21,000 in the comparable quarter of 2009. The jump was attributable to the presence of Provenge revenue in the current quarter. Revenues were also up 12.4% over the sequentially preceding quarter due to increased demand for the vaccine and the recently approved increased capacity utilization. Revenues were slightly below the Zacks Consensus Estimate of $29 million.

Dendreon also announced that Provenge sales in the month of April clocked $15 million, riding on the back of approval of the remaining capacity at its New Jersey (NJ) facility by the US Food and Drug Administration (FDA), in March 2011. The NJ facility was initially operating at 25% capacity with 12 workstations. Following the FDA nod in March this year the facility worked at full capacity with 48 workstations. We believe the approval has helped in making Provenge more readily available, thus meeting pent-up demand for the vaccine.

Unlike traditional vaccines that prevent diseases, Provenge treats by stimulating the body’s own immune system to attack cancer cells. Provenge is the first product in the new therapeutic class known as active cellular immunotherapies (ACI).

Dendreon’s total operating expenses for the quarter jumped 96% to $112.9 million due to increased manufacturing and commercialization activities for Provenge in the US.

Provenge Update

Dendreon received a huge boost in late March 2011 when the Centers for Medicare and Medicaid Services (CMS) proposed to pay for Provenge. The agency believes there is enough evidence to justify reimbursement for the approved label of the vaccine. The agency did not propose to cover off-label use of the vaccine at the national level due to insufficient evidence. It is currently reimbursed by all 15 local Medicare contractors. However, CMS will give its final decision on the matter in June 2011.

We believe the positive panel recommendation (received in 2010) and the proposed decision memo could lead to Medicare reimbursement in 2011. 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.

Dendreon is working towards expanding its manufacturing facilities for Provenge. Dendreon plans to construct new facilities in Atlanta, Georgia and Los Angeles (LA). Dendreon has filed for FDA approval to start producing commercial material at these facilities. An FDA decision for the LA facility is expected in June 2011. A decision for the Atlanta facility is expected in late August or early September. Hence, the company expects capacity to increase ten folds during 2011.

2011 Guidance Reinforced

Provenge revenue guidance, for 2011, was reiterated at $350–$400 million with approximately half of the sales expected in the final quarter of the year.

Our Recommendation

Currently, we have a Neutral recommendation on Dendreon with a Zacks #2 Rank (short term “Buy” rating). We believe that the launch of Dendreon’s potential blockbuster drug, Provenge, has been impressive. Successful commercialization of Provenge is crucial for the financial performance of Dendreon as it can drive the company to profitability. We are encouraged by the FDA approval of the NJ facility expansion and CMS’ proposed decision to reimburse Provenge for on-label usage, which could subsequently spur sales at Dendreon. However, in the long run, we remain concerned about the company’s dependence on Provenge and the lack of a robust pipeline. We believe Dendreon has little to fall back on if Provenge fails to keep its promise. We also remain cautious of the continuous up tick in operating expenses.

 
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