The approval of Dendreon's (NAS: DNDN) Atlanta manufacturing facility was supposed to be the pinnacle of risk reduction. Gaining approval to produce more of its prostate cancer treatment, Provenge, seemed to be the last potential road block on Dendreon's road to riches after gaining approval to expand the manufacturing plant in New Jersey and establishing a new plant in Los Angeles.
Instead, the approval last week was just a glaring reminder that the biotech currently has much more supply capacity than it has demand. Earlier this month, Dendreon announced that it wouldn't make its sales guidance for the second-half of the year because doctors weren't prescribing the drug at nearly the level it expected.
The Atlanta plant won't be completely worthless. Provenge is a patient-specific treatment that's made to order. Immune cells are removed from the patient, sent to one of Dendreon's facilities where they're trained to attack the cancer, and then sent back to a facility near the patient where they're put back into the patient. This has to be done relatively quickly -- cells don't live outside the body for very long -- so the Atlanta facility will make scheduling easier for prostate cancer patients in the south.
But don't be fooled into thinking that going from two manufacturing plants to three will instantly increase sales by 50%. In order to get sales back toward the hyper growth Dendreon expected it could achieve, the biotech needs to convince doctors to prescribe it more often. It's really that simple.
Figuring out why doctors aren't prescribing Provenge isn't as simple. Cancer treatments such as Bristol-Myers Squibb's (NYS: BMY) Yervoy have done just fine launching with a high price tag. And Seattle Genetics (NAS: SGEN) wasn't scared to attach a high price tag to its new lymphoma drug Adcetris. Drug development isn't cheap and patients and their insurance companies will have to foot the bill. A recent survey suggested that doctors weren't prescribing the treatment for a variety of reasons, including that the efficacy doesn't justify the $93,000 price tag.
I think Dendreon's theory that doctors are scared of fronting a large amount of money before being reimbursed is completely reasonable. Unlike other cancer treatments that are dosed over a long time frame, Provenge requires three doses two weeks apart, so the entire cost of the treatment is paid over just one month. Unfortunately, the only solution for the problem is time. As doctors become more convinced that they'll be reimbursed by insurance companies and Medicare, they'll increase their prescriptions of the drug.
Assuming it's just a price density issue, the new Atlanta plant will be humming along close to full capacity eventually.
At the time thisarticle was published Want to know the latest drug stock we've picked for the Fool's market-beatingRule Breakersnewsletter?Click hereto take a look at all our recommendations with a free 30-day trial. Fool contributorBrian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Motley Fool owns shares of Dendreon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.