UPDATE 4-Dendreon plunges as Provenge prospects wither

Thu Aug 4, 2011 4:27pm EDT

* Shocks investors by pulling forecast for debut drug

* Company points to reimbursement qualms for doctors

* News likely to dissuade potential buyers, partners

* Shares dive 67.4 percent (Adds analyst comment, options trading; updates shares)

By Bill Berkrot

NEW YORK, Aug 4 (Reuters) - Dendreon Corp DNDN.O lost two thirds of its market value on Thursday after abandoning its forecast for its debut drug, prostate cancer vaccine Provenge, shocking its biggest backers on Wall Street.

Dendreon said late on Wednesday it could not deliver on promised sales of the high-priced drug because doctors weren't confident enough about getting reimbursed. [ID:nN1E7721QB]

Analysts, caught off guard by a company retreat from a 2011 forecast steadfastly maintained since November, were left questioning the company's business model.

Some said the disclosure would dissuade bigger drugmakers from considering a bid for Dendreon and could ward off marketing partners.

"I took my Dendreon model to the woodshed by cutting my peak Provenge sales estimates by more than 50 percent," ISI Group analyst Mark Schoenebaum said in a research note.

In addition to pulling its forecast, Dendreon reported disappointing second-quarter sales, and said it would trim expenses and jobs. By Thursday morning, it was the subject of a wave of brokerage downgrades on the stock.

"We were taken aback by this explanation as our own checks, recent milestones and management's tone just a few weeks ago have all been positive," said Baird Equity Research analyst Christopher Raymond, who cut his rating on the stock to "neutral" from "outperform," and slashed his price target to $20 from $56.

Dendreon shares closed down 67.4 percent at $11.69 on Nasdaq, slashing the value of stakes for investors like S.A.C. Capital Advisors, Vanguard Group, BlackRock Financial Management and Soros Fund Management, who were among its top 10 shareholders as of March 31.

The decline also hit other biotech stocks, with the NYSARC Biotech index .BTK off more than 10 percent.

A LESS APPEALING TARGET

Provenge is a new type of cancer drug, tailored to each patient, that works by stimulating the person's immune system to fight tumors. It costs $93,000 for a course of treatment.

Once considered an acquisition target, Dendreon could have more trouble selling itself despite what would now be a far lower price.

"Buyers prefer to pay a premium for a sure thing or a success that has already occurred than to go bottom fishing on a failed launch," said Lazard Capital Markets analyst Joel Sendek.

Michael Becker, president of the MD Becker Partners consulting firm, said Dendreon shares may even be priced too richly, given the problems with the company.

"The very fact that Dendreon was unsuccessful in securing a corporate partner either prior to FDA approval or shortly thereafter really underscores the fundamental flaw in their business model," Becker said, citing the patient-specific nature of the drug, its high price, competition from easier-to-use medicines and Provenge's minimal efficacy.

Since the approval of Provenge a year ago, Dendreon management has blamed limited manufacturing capacity for a slow sales ramp. With far more production stations approved and on line, the company had said 2011 sales would reach $350 million to $400 million, including a blowout fourth quarter that would account for half of that total.

That forecast is now gone, along with some $3 billion of the biotechnology company's market value, and the company is pointing to reimbursement concerns.

Dendreon said only about 25 percent of potential Provenge prescribers were aware of a June 30 decision by Medicare to cover the drug's cost. Doctors can now use a so-called Q code on the drug that can help speed up reimbursement.

Dendreon said educating doctors on Provenge reimbursement will be a priority for its sales force.

Dendreon also indicated a problem for some doctors in identifying the right patients for the drug and understanding its delivery. This was particularly the case among urologists who are less familiar with infused drugs than oncologists.

ANY CHANCE FOR A PARTNER?

Provenge had initial success with large academic medical centers less concerned about the timeliness of reimbursement payments. The company said adoption among small community practices of urologists and oncologists has been much slower because they want to be assured that they will get paid before ordering Provenge.

While the company said more than 300 infusion sites were prepared to treat patients with Provenge by the end of July, it said they were averaging less than one patient per center.

A major pharmaceutical or biotech partner with a large sales force well versed in cancer drugs could go a long way to addressing Dendreon's problems. With limited cash and disappointing sales, Dendreon may need one to get its drug off the ground outside the United States.

"They previously stated they would use cash flow from U.S. business to fund the European launch, and it seems to me that unless the U.S. launch really picks up, the only practical way to move forward expeditiously in Europe is with a partner," Lazard's Sendek said.

Dendreon also faces competition from new advanced prostate cancer drug Zytiga backed by Johnson & Johnson's (JNJ.N) marketing muscle, as well as other easier-to-use medicines on the horizon.

Dendreon's woes have made some investors wealthier. About 11 percent of the company's outstanding shares were shorted by those betting against Provenge, according to Starmine data.

Options players were still seeking a way in on Thursday, with call buying at the August strike prices of $15 and $13, said Jon Najarian, founder of optionMonster.com.

"It's safe to say that amateurs are betting on a near-term bounce, but professionals are betting that it would take a long time for the bounce," he said. (Additional reporting by Vidya L Nathan and Kavyanjali Kaushik in Bangalore, Angela Moon in New York and Doris Frankel in Chicago. Editing by Michele Gershberg and Robert MacMillan)

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