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How Dendreon Can Fix Its Broken Relationship With Wall Street


Dendreon needs to demonstrate that it can creatively address the urology practice cash-flow issue and return Provenge sales to prior quarter-over-quarter growth rates.

Dendreon (DNDN) is down hugely this morning on last night's earnings miss and guidance rescission. The NASDAQ Biotech Index (^NBI) and associated ETF (IBB) are down also. This is not a good day for the biotech sector, as the reimbursement issues faced by Dendreon seem, at the 10,000-foot level, to fit with the debt ceiling deal reimbursement worries that have plagued health care since the debt deal was announced.

They are, however, two different things. There is nothing in the debt deal that affects drug pricing. The reductions contemplated by the debt deal are focused on providers -- not drug companies. Health-care reform is still the biggest customer-producing legislation to come out of Washington since the Medicare drug benefit and continues to be a positive driver for the industry.

Dendreon's issue is more micro. Literally, urology practices don't have a big enough credit line to absorb the cost of Provenge between the time they put patients on the drug and when the Medicare subcontractors who administer Medicare get around to paying them. As a result, urologists put a couple of patients on Provenge, get paid, put a couple more on, get paid, etc. This has slowed the rate of revenue growth more than the company expected.

The company argues a recent issuance of a Q-code (July 1) will speed reimbursement because urologists can now file for reimbursement from the Medicare subcontractors electronically. This speeds reimbursement time to as fast as two weeks. Also, the National Coverage Determination that was in the news in June will be published by all the subcontractors next week, finally making reimbursement policies uniform across the US. Dendreon management argues these two things -- combined with much more education and handholding on the reimbursement side by Dendreon's sales force -- will work to fix its current growth rate problems.

Bears argue this is just a demand problem and point to the fact that urologists aren't even identifying all the patients in their practice who are Provenge-eligible. I think the bears are wrong. We've seen over and over how a new drug entering a new market helps create that market through the proper application of sales force calls and direct-to-consumer advertising. The Provenge rollout is no different.

Urologists did not refer patient to oncologists for chemotherapy until those patients had pain from their disease. As such, once a man's PSA started rising, urologists did not bother to do additional tests until the patient started complaining about pain or lethargy. Urologists, particularly those outside academic centers, didn't feel there was any need to conduct regular scans until pain was present because there was no therapy they could give them.

There is now in the form of Provenge. Urologists need to be taught that they have to screen their patients for metastatic disease after their PSA goes up instead of just watching them until they develop pain. Fortunately for Dendreon, Amgen (AMGN) is out there preaching the same message on its new drug Xgeva to help prevent/treat disease metastatic to the bone.

Because of this, there are plenty of patients out there for Provenge. They won't fall off the trees like many expected. As with every other drug launch, the sales force will have to educate prescribing physicians to look for these patients. While there is much unique about Provenge, this aspect of building a market through an effective sales force is not unique.

Patients are eager to have access to Provenge and the drug is easy to take. It also has the advantage of working, making men almost three times more likely to be alive in three years than if they don't take the drug. Assuming Dendreon can work through this odd urology practice cash-flow issue, revenue growth should increase and Dendreon management can start repairing a currently very broken relationship with Wall Street.

It's an open question how long it will take Dendreon management to repair this relationship. This isn't the first time they've had to do so. Previously, Dendreon decided to cancel a partnership deal they indicated to Wall Street was all but a done deal. It took years and finally getting approval before Wall Street forgot that.

In some ways, repairing the damage this time should be simpler. Dendreon needs to demonstrate that it can creatively address this urology practice cash flow issue and return Provenge sales to prior quarter-over-quarter growth rates. When they reissue guidance, they'll need to prove they can hit that guidance. Finally, they need to book enough sales for Wall Street to buy back into the idea this can be a blockbuster drug selling over a billion dollars. This won't happen overnight and Wall Street will continue to judge Dendreon one quarterly earnings report at a time.
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