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Debate Over Dendreon's Provenge Coverage Is Settled

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The prostate cancer treatment has experienced positive changes this month, meaning Wall Street no longer has to wait for the the March draft National Coverage Determination from the CMS.

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The cover story in this week's Barron's takes the opinion that slack revenue growth and bored salespeople at big pharma will spur acquisitions in the biotech space. Dendreon (DNDN) is one of the 13 companies mentioned as potential targets in the article. I agree, though the company will need to prove some things in 2011 to get the kind of money shareholders want.

Dendreon has guided for $350 million to $400 million in sales for 2011. Less well known, but important, is the additional guidance that half of these sales are expected in the fourth quarter of 2011. By the last quarter of this calendar year, Dendreon will be producing product from all three of its US manufacturing sites. Cost of goods will come down and Dendreon will start being able to meet the significant demand for this product.

The Barron's article contains the line, "…and the Street wonders whether [Dendreon] can ultimately top $1 billion annually." If we take the midpoint of Dendreon's revenue guidance ($375 million) and follow its guidance that at least half of that comes in the fourth quarter ($187.5 million), Provenge sales will reach an annualized run rate of $750 million by the end of 2011.

With that sort of revenue growth trajectory, it isn't hard to imagine Provenge could hit a billion dollars in 2012.

Reimbursement

Once Provenge was finally approved, the story turned to whether insurers would reimburse its $93,000 sticker price. This story was given a great deal of juice by the Center for Medicare and Medicaid Services (aka CMS) opening a National Coverage Assessment (shortened to NCA) to "determine" whether Provenge would be covered. Many thousands of words were written about this determination by the media.

What hasn't been written is how three key developments in January materially changed this story.

First, Dendreon announced private insurers have made positive coverage determinations covering 80% of potential patients. Private insurers, unlike CMS, are under no Congressional mandate to cover FDA-approved drugs. The fact enough of them have agreed to cover the drug for on-label use to cover 80% of insured American men is a good sign CMS will too.

Second, it's a little known fact private companies administer Medicare and Medicaid under contract by the US government. These private insurers make their own coverage determinations according to rules set by Congress. CMS can override these "local" coverage determinations through the NCA process.

At the time of the CMS panel on Provenge in November, 14 of 15 local subcontractors had already decided to cover Provenge. A couple of weeks ago, so did the fifteenth. Their coverage inclusions and exclusions mirror the FDA-approval label and entry criteria for the pivotal trial. The result is the reimbursement of Provenge with no unexpected restrictions.

This makes it highly likely CMS will make a decision for full on-label coverage of Provenge when CMS issues its draft coverage in March. This is particularly true since this fifteenth subcontractor was likely the reason for the NCA being created in the first place.

That brings us to our third key development. The patient advocacy group Care To Live has been very active on the Provenge story on behalf of men with prostate cancer. Shortly after CMS announced the NCA, Care To Live filed a Freedom of Information Act (FOIA) request to find out why.

The "why" of the NCA isn't an idle question. Some on Wall Street decided maybe it was a problem with Provenge data -- an extension of their failed view that the Provenge data are somehow flawed. The media thought it was because of the "high price" of Provenge. Regulatory insiders suggested the issue was merely confusion about what Provenge was -- drug or a discrete series of already covered procedures.

Care To Live's FOIA answered this. In the 15 pages of documents, there was never a question of whether the drug worked or its price being too high. There were questions, largely from that fifteenth subcontractor, about whether Provenge was a new drug or simply a collection of existing procedures.

Bottom Line on Reimbursement

All 15 CMS subcontractors are covering Provenge. The whole question of CMS coverage had nothing to do with the data or efficacy of Provenge. It was confusion on the part of some local contractors about whether it was a new drug or compilation of existing procedures. The subcontractor who asked this question the loudest decided their questions were sufficiently answered by last November's panel and decided in favor of full, on-label coverage for Provenge.

In light of the new information received over the last month, it is pretty safe to say the March draft National Coverage Determination from CMS will be the least eventful event in Dendreon's history.

It's hard reading Wall Street's mind about why a stock is trading where it is. A number of Dendreon analysts called it their best idea in biotech for 2011 with price targets near or above $50 a share. That's a 43% gain from where Dendreon is trading right now.

If Wall Street is holding back from jumping on the Dendreon bandwagon because of this CMS thing in March, I'm guessing they aren't aware of the change in this story over the last month. Because the reimbursement story did change and it changed for the better.

See February Catalysts for Biotech & Pharma Stocks for more about what's to come for Dendreon as well as other biotechs, including Novartis, MannKind, and Sanofi-Aventis.

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