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Despite Demand, Biotech Can't Make Anti-Cancer Vaccine Fast Enough to Profit -- Yet

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While sales could reach $1 billion a year, right now the company just can't make it's blockbuster drug fast enough.

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Demand for Dendreon's (DNDN) revolutionary prostate cancer vaccine Provenge is high with about 1,000 prescriptions already written. The company now forecasts up to $400 million in sales next year. Some analysts project the sales will ultimately exceed $1 billion a year, making the product a true blockbuster.

So when will Dendreon start making some money? Certainly not this year. Through the last nine months the Seattle-based biotech spent almost $350 million. It can't produce enough of its high-priced product ($93,000 per treatment) to keep up with demand. Third quarter revenue ($20 million) was lighter than expected -- again because Dendreon can't make enough Provenge. Dendreon lost $79.3 million, or 56 cents a share, in the third quarter.

Other than the sales forecast, the company is giving little guidance on next year. Judging from comments made on the company's conference call with analysts late yesterday, there's much more spending ahead in 2011. For one, the company is probably going to use cash flow from operations as it eyes selling Provenge overseas. Other costs include inventory related expenses and sales and marketing.

Dendreon executives say they're currently holding back marketing spend until the company can increase production capacity. The company plans to expand production next year from one factory in New Jersey to three plants, adding sites in Los Angeles and Atlanta.

One piece of good news for investors watching the spending: The company already committed the dollars to build new plants -- so those costs shouldn't come out of next year's capital expenditures.

As of September 30 Dendreon had around $393 million in cash and investments compared with $606 million at the end of last year. Dendreon execs say they expect to have around $250 million in cash at the end of this year.

CEO Mitchell Gold asked investors to be patient as the company builds out its infrastructure to make Provenge.

"It's one thing to launch a new drug," Gold says. "It's entirely different to launch a new class of therapies that dramatically changes the paradigm of cancer care."

The product is the first of its kind to be approved -- a vaccine that helps patients turn their own immune systems against cancer cells.

Investors should be watching for at least two more catalysts for stock movement this year. First, on November 17 the company will make a presentation to a panel advising US Medicare and Medicaid officials on government reimbursements for the expensive drug. (The vaccine is expensive but it's a single cost for treatment and is shown to extend cancer patients' life by an average of four months.) However, the panel may not make a definitive statement on Provenge because it doesn't vote (like Food and Drug advisory panels). So it may be difficult to determine right away exactly what the government agencies may decide to pay for the medicine.

Second, Dendreon execs promise to give an update on plans to sell Dendreon in Europe, a huge opportunity. So far, the company is mum on any overseas roll out.

Investors who truly believe in Provenge will need great patience until Dendreon gets its factories up and running. But many have been reluctant to wait this one out. And some bumps in the road haven't helped. After Provenge was approved, company insiders, including Gold, sold some of their shares. And the Medicare reimbursement review scared off some investors.

The stock is down almost 30% in the past six month, trading today just above $38. Some analysts see Dendreon trading up to the mid-$50s, a point it hasn't touched since April when US officials approved Provenge. Even with all its peaks and valleys, the stock is up almost 50% this year.

"We view 2011 guidance on Provenge sales to be encouraging," Leerink Swan analyst Howard Liang says. "With capacity expected to increase by 10-fold, management guides a big ramp during 2011."

Liang is a Dendreon believer. He expects Provenge sales to rise up to as much $780 million by 2012. He has a target price on the stock of $55 a share.


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No positions in stocks mentioned.
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