What Dendreon Can Learn From Robots
If Intuitive Surgical can get urologists to front millions of dollars for robots to perform surgeries, why can't Dendreon convince them to float $93,000 for a month of Provenge?
My firm has been covering Dendreon (DNDN) for most of the last decade. When the company splashed posters at the May 2011 American Urological Association meeting telling urologists Provenge was "Now Available Nationally Without Supply Restrictions," we started asking questions. Why? Because at that point Wall Street still believed Provenge sales were limited solely by manufacturing capacity, and would be until late in 2011.
What we learned from talking to urologists was that Provenge is what my firm termed "uniquely expensive". I've already explored how the cancer drug is not more expensive than comparable treatments, so this was a surprise to me.
What was even more surprising was that while urologists agreed that Provenge wasn't expensive compared to other therapies, they still complained about the effect of prescribing it on practice cash flows. My firm expected urologists to fall all over themselves to prescribe Provenge because of the significant revenue source it provides ($5,800 per patient, the single biggest potential profit center in their practices). Now we were hearing of a barrier to adoption.
What we called "uniquely expensive" back in May, Dendreon has since called "cost density" and blamed it for their inability to forecast future sales, an announcement erasing billions from its market cap. While this issue (plus news of NCCN guidelines allowing for use of competitor Zytiga in pre-chemo patients) led us to recommend August puts as insurance to our clients, I have to be honest and say I am still surprised the impact was this bad, this fast.
Learning From Robots to Fix the Problem
In 2000, Intuitive Surgical (ISRG) received FDA approval for using robots to perform surgery. In May 2001, they received clearance from the FDA for using robots to perform laparoscopic prostatectomy -- prostatectomy being the primary treatment modality for newly-diagnosed prostate cancer. In 2004 and 2005, major studies were published claiming better outcomes for patients undergoing prostatectomy by robot versus by hand. And while the issue of robot versus 'manual' surgery remains a hotly-debated topic at urology meetings, ISRG has seen the benefits.
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Until the last couple of years, ISRG's revenue and machine placement growth has largely come from urologists. This despite price tags exceeding a million dollars for the initial machine and hundreds of thousands of dollars per year in service agreement and consumable costs.
This begs the question: If ISRG can convince urologists to shell out millions for the hardware and hundreds of thousands of year for ongoing costs, why can't Dendreon convince docs to float $93,000 for a month until Medicare pays them back?
This is what Dendreon can learn from robots.
ISRG methodically created an arms race amongst urologists. The company mounted a relentless sales effort regarding how their robots could perform prostatectomies with fewer side effects. Crucially, ISRG backed this sales push with direct-to-consumer efforts telling men they'd have fewer sexual and other side effects. You also shouldn't underestimate the "cool" factor of being operated on by a robot.
This combination of push and pull advertising worked. ISRG convinced urologists they would lose business if they did not offer robotic surgery. ISRG's direct to patient advertising caused a rise in the demand for robotic surgery. This reinforced the sales message to urologists and started a robotic arms race in the field.
You don't just need the graphs above to tell how well this worked. Data published in the journal Cancer in May this year shows the effect on urology practices. Where urologists couldn't afford the infrastructure themselves, they grouped up with other urologists to form larger practices that could afford the robots. Alternately, they worked with local hospitals to fund robot purchases on a co-op basis. Whichever path was taken, the outcomes are clear -- urologists bought into ISRG's central argument: "If you don't offer robotics, your patients will go somewhere else."
Dendreon needs to copy ISRG's playbook. Dendreon needs to create a Provenge Arms Race.
Currently, Provenge's business case to urologists is unbalanced. Urologists take on a uniquely expensive risk when they prescribe Provenge. If Medicare declines to reimburse even one patient in 16, an urologist will lose money prescribing the drug. While Provenge is no more likely than other oncology drugs to fail a reimbursement test, this issue of uniquely expensive (cost density) makes it different. (Incidentally, I would argue now less likely since the Centers for Medicare and Medicaid Services (CMS) issued a National Coverage Assessment requiring on-label Provenge reimbursement. This decision was effective nationwide only this week.)
Dendreon needs to balance this business case the same way ISRG did. The company needs to appeal directly to patients and tell them to ask about Provenge treatment when their PSA starts rising while on hormone therapy, demanding to receive it at the very first sign of metastatic disease. Urologists need to learn -- the hard way and via Dendreon's promotional work -- that if they don't prescribe Provenge, their patients will go to another urologist who will.
The parallels between robots and Provenge are striking. There is skepticism in urology about the efficacy of robots, just like there remains skepticism about Provenge. Both increase the cost of care. We don't know precisely which patients benefit most from either. Robots represented a practice change for urologists, just like Provenge. Robots represented a significant financial investment and risk, just like Provenge. Men see robot surgery as cool, just as they see potential for Provenge's harnessing of their own immune system to fight cancer. Sales were slow to start for robots, eventually exceeded a billion dollars, just as I still believe they can for Provenge.
The number one question Wall Street has is whether this cost density issue masks a demand problem. I don't believe this issue exists. Does Dendreon have to do a better job marketing Provenge? Absolutely. Do urologists need a great deal of education as to how to set their practices up operationally and financially to prescribe Provenge? Absolutely.
Provenge has a marketing and sales problem, not a demand problem. We all naively thought Provenge would largely sell itself. Turns out we were wrong. Like almost every product ever created, smart sales strategies must be employed to maximize Dendreon's return on this investment.
While there is much unique about Provenge, the solution to the mess Dendreon currently finds itself in is not all that special. ISRG solved it with their robots and there is no reason to expect Provenge will be any different. Dendreon management must focus on ameliorating Provenge's unique effect on urology practice cash flows, but they cannot ignore the robot experience.
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