A recent article in the New York Times discussed the positive results seen with MDV3100, a small molecule from Medivation for the treatment of prostate cancer. According to a late-stage clinical trial, MDV3100 extended median survival in men by 4.8 months. Earlier this year the FDA approved an oral medication, Zytiga from J&J, that addressed a similar prostate cancer indication with a similar extension of survival.

This has a familiar ring, Provenge a novel cancer vaccine approved last year extends survival a similar four months or so. Provenge though is an autologous vaccine that requires extracting white blood cells from a patient and sending them to Dendreon’s facility where the cells are processed and ‘activated’ with antigen and cytokines. The processed cells are returned and administered to the patient in three separate infusions, two weeks apart.

The processing of the cells is an expensive custom process, and Dendreon has priced the product accordingly; $93,000 for the three infusion treatment. This price covers only the processing of the cells and the production of the vaccine. Collecting the white blood cells from the patient and re-infusion are separate expenses.

Labeled a vaccine, Provenge is also a cell therapy, where cells are taken from a patient, transformed ex vivo and then read-ministered.

I had the opportunity to learn about cell therapy in the mid-1990’s working for Rhône-Poulenc Rorer when we acquired Applied Immune Sciences (AIS). AIS at the time had in development a treatment for renal cancer that involved taking a portion of the tumor, activating it with cytokines, and then re-infusing the activated cells. It was a high tech process with technicians in bunny suits working in clean rooms. Although there was one long term remission with the treatment, the results in general were insufficient to continue the program.

As the BD person assigned to AIS I needed to understand the cost of goods associated with this type of autologous cell therapy. This was before pharmaceuticals were priced priced at $50,000 and up for treating cancer.

At the time I estimated the production cost of the AIS autologous cell therapy was on the order of $5,000 (1995 dollars). This included facility overheads, labor costs, materials and shipping. Actual commercial scale costs could have varied from $3,000 and $8,000.

This figure concerned me. We were looking at pricing treatment as high as $20,000 to $30,000, which meant our cost of goods would have been on the order of 17-25%. This was an acceptable figure  given the gross dollar profit for each patient was as much as $27,000. My concern was how we could respond to future competition that weren’t burdened with a similarly high cost of goods, gene therapy, protein or even small molecule treatments.

At the same time we acquired AIS we also were also heavily invested in a gene therapy initiative targeting a variety of conditions including cancer. Gene therapy involves batch manufacturing of viral or non-viral gene based therapeutics that are directly administered to the patient. There is no need to extract cells and treat them ex vivo. Rather than manufacture a personalized treatment for each patient gene therapy medications is manufactured in bulk, much like proteins, albeit at a somewhat higher cost.

This led to the ‘$5,000, $500, $50 and $5 rule of thumb’ for manufacturing costs; $5,000 for cell therapy, $500 for gene therapy $500, $50 for protein and $5 for small molecule courses of therapy.

If it costs you $5,000 to manufacture a treatment and a competitor can manufacture a product that provides the same benefit for $5, $50 or $500, they can kill your value proposition with a relatively minor change in the price they charge. Or they can charge a similar price and kill you with the extra money they can allocate to sales and marketing. If you are planning to introduce a relatively high cost of goods therapy in the market you need to be confident you will have years of relative exclusivity if you want to secure a reasonable return on your investment. This is particularly true with cell therapy treatments and the high cost of production.

Back to Dendreon and Provenge. I suspect the cost of goods for Provenge is at least $5,000 per three infusion course of therapy, when running at or above 80% of capacity. Below 80% overheads start to rise, eroding gross margins. The introduction of Zytiga and potential approval of MDV3100 is a killer for Provenge. Provenge sales have taken off slowly, largely because of pricing, and reimbursement issues. And now Zytiga is on the market offering similar survival benefit at a little more than half the $93,000 price tag of Provenge, without the associated cell collection and re-infusion costs. Provenge seems priced out of the market.

Dendreon’s problem arises in part because they did not properly plan for the entrance of competitors with a lower cost of goods leverage. It’s not clear what they can do. Dropping the price of Provenge will kill the margins but might improve volume. Sticking at $93,000 is possible only if Dendreon can demonstrate much better outcomes, in terms of efficacy, safety, tolerability and/or convenience with Provenge. But given the slow start for Provenge there are limited financial resources or lead time to make the necessary strong value argument. Current sales figures suggest less than 300 patients per month are being treated with Provenge.

There are lots of reasons why Provenge is a less than ideal product from a patient convenience and price perspective. But from a business perspective it’s the manufacturing costs and capital cost requirements that are killing the product and company. And with little room to maneuver because of the high production costs the game seems over.

$5,000/$500/$50/$5. It pays to understand how your cost of goods fits with the market. Cost can be as critical a determinant of success as product performance and marketing smarts.