Reimbursement concerns can finally be put to rest after CMS released a draft guidance memo this afternoon that supports continued coverage of Provenge for the on-label indication (asymptomatic or minimally symptomatic castrate resistant prostate cancer). As mentioned in our preview earlier this week, we and the Street largely expected this outcome, but it still remained an overhang on the stock. An unexpected positive surprise was more lax language regarding off-label use than we were expecting. All in, we consider this the best case scenario from CMS. With the reimbursement box now checked, we expect incremental buyers will be more willing to step in now that their fears of the ?but what if? scenario are more or less gone. Investor focus is likely to fully shift to demand and competition, and we see DNDN as well positioned on both issues. We reiterate our OW rating on DNDN, which remains our top pick.
? The verdict is pretty clear . . . no threat to on-label use of Provenge. The proposed decision reads as follows: ?The Centers for Medicare and Medicaid Services (CMS) proposes that the evidence is adequate to conclude that the use of autologous cellular immunotherapy treatment - sipuleucel-T; PROVENGE improves health outcomes for Medicare beneficiaries with asymptomatic or minimally symptomatic metastatic castrate-resistant (hormone refractory) prostate cancer, and thus is reasonable and necessary for that indication.? Moreover, CMS does not believe that ?coverage with evidence? is necessary. The bottom line is that reimbursement should continue without interruption or any new barriers, and this decision will likely also increase physician confidence in the process.
? Language regarding off-label use less restrictive than anticipated. In reading the memo, we were most surprised by CMS?s plan to ?leave it to our local administrative contractors to implement noncoverage? decisions regarding off-label use. Indeed CMS appears to be forward looking, citing that this will give regional MACs the flexibility for quick implementation should future evidence support use outside the current label. That said CMS does feel "the evidence to support off-label uses is virtually nil at this time," and we still do not model any off-label sales.
? A national coverage decision (NCD) is expected but with little impact to the current process. Following a public comment period, a final determination will be made and CMS will make a final determination and issue a final decision memorandum by Jun 30. Considering that all 15 regional MACs (local Medicare contractors) already cover Provenge, we assume that implementation of an NCD with the contents of the proposed memo will be virtually a formality with little change to current reimbursement procedures.
DNDN: Positive CMS Decision Announced; Another Overhang Removed; Buy DNDN
Event CMS issued its preliminary coverage determination for Provenge as expected and stated that evidence is adequate to cover Dendreon's Provenge according to its approved label for asymptomatic or minimally symptomatic hormone refractory prostate cancer. The final decision is expected in June 2011 after a public comment period.
Impact We believe this positive CMS outcome was as expected, especially after the positive MEDCAC vote in November 2010 to discuss the parameters for coverage of Provenge. We believe the announcement removes another important overhang from the Dendreon story despite the outcome of the previous MEDCAC panel. The DNDN bears, in our belief, were still looking for any potential hiccup in the reimbursement process at CMS. Recall that major private payors are already on board with reimbursement for this first ever U.S. approved cancer immunotherapy. With this overhang removed, investors can now focus entirely on the execution story for Provenge sales. To this end, we have still not reached the one year anniversary of the Provenge launch and in 2011, the company is expected to increase manufacturing capacity 10-fold. Dendreon has previously guided for 2011 Provenge revenue of $350-400 million (~50% in 4Q11 based on capacity build out). Overall, our thesis remains unchanged on Dendreon and recommend investors purchase shares at these levels as we believe Provenge will achieve blockbuster status.
Action We reiterate our Buy rating and $55/share price target. Our Buy rating is based on 1) our projected sales for Provenge, 2) momentum behind the Provenge story based on what we perceive to be significant patient demand and 3) our perception that Dendreon represents a viable takeout candidate.
Price: $35.54 at market close on 3/30/2011
Refer to important disclosure information and rating System Definition at the end of this report. Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
VALUATION
We reiterate our Buy rating and $55 price target. Our valuation of Dendreon is based on our probability-weighted clinical net present value (NPV) valuation model. We believe that this method is appropriate in capturing the value of the clinical stage pipeline. Factors that could prevent shares from achieving our price target include the potential for setbacks in sales projections due to any delays in the manufacturing build out or any logistical issues in bringing Provenge to patients.
RISKS
Ex-U.S. regulatory risk. With FDA approval for Provenge in hand, regulatory risk now exists going forward as Dendreon looks to gain potential in the E.U. Any perceived delays in manufacturing or discussions with regulatory authorities in the E.U. could negatively impact our valuation.
Execution Risk. Following the anticipated Provenge approval, Dendreon becomes an execution story and downside potential to our valuation is possible should Dendreon not meet manufacturing timelines to meet demand or not meet sales estimates.
Development and Clinical Risk. As with all development stage biotechnology companies, any setbacks in clinical studies, including delays and negative data, could have a negative impact on Dendreon's shares.
COMPANY DESCRIPTION
Dendreon Corporation, a biotechnology company, engages in the discovery, development, and commercialization of therapeutics to enhance cancer treatment options for patients. The company's product portfolio includes active cellular immunotherapy, monoclonal antibody, and small molecule product candidates to treat various cancers. Provenge is the company's lead product and received FDA approval for androgen independent prostate cancer on April 29, 2010.
PRR Price at posting:
22.9¢ Sentiment: LT Buy Disclosure: Held
(20min delay)