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Dendreon 10-K 2011
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
 
 
Form 10-K
 
 
For the fiscal year ended December 31, 2010
 
Commission File Number 000-30681
 
 
 
 
DENDREON CORPORATION
 
 
 
 
     
DELAWARE   22-3203193
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
3005 FIRST AVENUE,
SEATTLE, WASHINGTON
(Address of principal executive offices)
  98121
(Zip Code)
 
(206) 256-4545
 
(Registrant’s telephone number, including area code)
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class   Name of Each Exchange on Which Registered
 
Common Stock, $.001 Par Value Per Share
  The NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
 
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The aggregate market value of the common stock held by non-affiliates of the registrant based on the closing sale price of the registrant’s common stock on June 30, 2010, as reported by the NASDAQ Stock Market, was $4,524,926,424.
 
As of February 23, 2011, the registrant had outstanding 145,520,685 shares of common stock.
 
 
Sections of the registrant’s definitive Proxy Statement, which will be filed on or before April 30, 2011 with the Securities and Exchange Commission in connection with the registrant’s 2011 annual meeting of stockholders, are incorporated by reference into Part III of this Report, as noted therein.
 


 

 
PART I
 
ITEM 1.   BUSINESS
 
 
Dendreon Corporation (“Dendreon”, the “Company”, “we”, “us”, or “our”), a Delaware corporation, is a biotechnology company focused on the discovery, development and commercialization of novel therapeutics that may significantly improve cancer treatment options for patients. Our product portfolio includes active cellular immunotherapy and small molecule product candidates to treat a wide range of cancers.
 
On April 29, 2010, the U.S. Food and Drug Administration (“FDA”) licensed PROVENGE® (sipuleucel-T), our first in class autologous cellular immunotherapy for the treatment of asymptomatic or minimally symptomatic, metastatic, castrate-resistant (hormone-refractory) prostate cancer. Commercial sale of PROVENGE began in May 2010. Prostate cancer is the most common non-skin cancer among men in the United States, with over one million men currently diagnosed with the disease, and the second leading cause of cancer deaths in men in the United States. We own worldwide rights for PROVENGE.
 
Other potential product candidates we have under development include our investigational active cellular immunotherapy, DN24-02, directed against HER2/neu for the treatment of patients with bladder, breast, ovarian and other solid tumors expressing HER2/neu. In December 2010 we filed an Investigational New Drug application with the FDA for DN24-02 for the treatment of invasive bladder cancer. Active cellular immunotherapies directed at carbonic anhydrase 9 (“CA-9”), an antigen highly expressed in renal cell carcinoma, and carcinoembryonic antigen (“CEA”), an antigen expressed in colorectal cancer, are in preclinical development. We are also developing an orally-available small molecule targeting TRPM8 that could be applicable to multiple types of cancer in advanced cancer patients. We commenced our Phase 1 clinical trial to evaluate TRPM8 in 2009 and the trial is ongoing.
 
Commercialization of PROVENGE
 
In 2010, we achieved revenue from PROVENGE of $48.0 million. During 2010, we supported commercial sale of PROVENGE from the available capacity at our manufacturing facility in Morris Plains, New Jersey (“New Jersey Facility”). We anticipate our manufacturing capabilities will significantly increase during 2011 with the licensure by the FDA of additional capacity at our New Jersey Facility in the first quarter of 2011, and licensure of our new facilities in Orange County, California and Atlanta, Georgia anticipated mid-year 2011. On February 28, 2011, we submitted our request to the FDA for licensure of the Orange County facility to manufacture PROVENGE. We expect to establish relationships with and support approximately 450 infusion sites by the end of 2011.
 
Soon after PROVENGE was approved by the FDA, the National Comprehensive Cancer Network (“NCCN”) listed PROVENGE in the NCCN Clinical Practice Guidelines in Oncology for Prostate Cancer and NCCN Drugs & Biologics Compendium as a category 1 treatment recommendation for patients with castrate-resistant prostate cancer. A category 1 recommendation means that “the recommendation is based on high level evidence (e.g., randomized controlled trials) and there is uniform NCCN consensus.” With respect to reimbursement, all of the regional Medicare Administrative Contractors (“MACs”) have established coverage guidelines for on-label use of PROVENGE or have stated that they will process PROVENGE claims. In addition, a significant number of private payers including Aetna, Emblem Health, Humana, Kaiser, CIGNA, HealthNet, Regence of Washington, United Healthcare and WellPoint established local or national coverage. On June 30, 2010, the Centers for Medicare and Medicaid Services (“CMS”) opened a national coverage analysis for PROVENGE. The agency is expected to issue a proposed decision memorandum by March 30, 2011 with an analysis completion date of June 30, 2011. In the event CMS were to impose restrictions or additional requirements on coverage of PROVENGE by Medicare contractors it could have a significant adverse impact on PROVENGE sales. CMS met in November 2010 to consider and review commentary on the currently available evidence regarding the impact of labeled and unlabeled use of autologous cellular immunotherapy treatment on health outcomes of patients with metastatic prostate cancer.
 
Data from the pivotal Phase 3 IMPACT study for PROVENGE was published in the July 29, 2010 issue of the New England Journal of Medicine, showing that PROVENGE demonstrated a statistically significant improvement


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in overall survival compared to control in men with asymptomatic or minimally symptomatic metastatic castration resistant prostate cancer.
 
Following a number of pre-submission meetings with European Union (“E.U.”) National Agencies, we expect that data from our Phase 3 D9902B IMPACT (IMmunotherapy for Prostate AdenoCarcinoma Treatment) study, supported by data from our D9901 and D9902A studies, will be sufficient to seek regulatory approval for PROVENGE in the E.U. We plan to use the clinical data described in our U.S. Biologics License Application to file our marketing authorization application (“MAA”) to the European Medicines Agency (“EMA”) in late 2011 or early 2012. To accelerate the regulatory timeline, initially PROVENGE will be manufactured through a contract manufacturing organization while we concurrently build an immunotherapy manufacturing facility in Europe. We anticipate a regulatory decision from the E.U. in the first half of 2013.
 
Cancer Immunotherapy
 
Cancer is characterized by abnormal cells that grow and proliferate, forming masses called tumors. Under the right circumstances, these proliferating cells can metastasize, or spread, throughout the body and produce deposits of tumor cells called metastases. As the tumors grow, they may cause tissue and organ failure and, ultimately, death. Therapies such as surgery, radiation, hormone treatments and chemotherapy, may not have the desired therapeutic effect and may result in significant detrimental side effects. Active cellular immunotherapies are designed to stimulate the immune system, the body’s natural mechanism for fighting disease, and may overcome some of the limitations of current standard-of-care cancer therapies.
 
 
The immune system is composed of a variety of specialized cells. These cells recognize specific chemical structures called antigens. Foreign antigens trigger an immune response that typically results in the removal of disease-causing agents from the body.
 
The immune system recognizes and generates a strong response to hundreds of thousands of different foreign antigens. Tumors, however, frequently display antigens that are also found on normal cells. The immune system may not be able to distinguish between tumors and normal cells and, thus, may be unable to mount a strong anti-cancer response. Tumors may also prevent the immune system from fully activating. We believe one key to directing the immune system to fight cancers is to modify, or engineer, tumor antigens so that they can be recognized by the immune system and then to manipulate immune system cells to stimulate a response to these engineered antigens.
 
An immune response is started by a specialized class of immune system cells called antigen-presenting cells. Antigen-presenting cells take up antigen from their surroundings and process the antigen into fragments that are then displayed on the surface of the antigen-presenting cell. Once on display, these antigens can be recognized by specific classes of immune cells called lymphocytes. One category of lymphocytes, T lymphocytes (“T cells”), combat disease by killing antigen-bearing cells directly. In this way, T cells may eliminate cancers and virally infected tissue. T cell immunity is also known as cell-mediated immunity and is commonly thought to be a key defense against tumors and cells chronically infected by viruses. A second category of lymphocytes, B lymphocytes (“B cells”), produce specific antibodies when activated. Each antibody binds to and attacks one particular type of antigen expressed on a cell.
 
 
We combine our experience in processing antigen-presenting cells and identifying and engineering antigens to produce active and autologous cellular immunotherapy products, which are designed to stimulate a tumor-directed immune response. We believe that our proprietary technology is applicable to many antigens of interest and, therefore, may be developed to target a variety of solid tumor and blood-borne malignancies.
 
Our approach to active immunotherapy is to:
 
  •  identify or in-license antigens that are expressed on cancer cells and are suitable targets for cancer therapy;
 
  •  create proprietary, genetically engineered antigens that will be optimally processed by antigen-presenting cells; and


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  •  isolate antigen-presenting cells using proprietary methods and combine these antigen-presenting cells with the engineered antigens ex vivo.
 
Antigen Identification.  Our internal antigen discovery programs begin by identifying novel antigens expressed in specific tissues or in malignant cells. We consider the antigens that we find localized in diseased tissue as candidates for antigen engineering. PROVENGE is designed to target the prostate cancer antigen prostatic acid phosphatase (“PAP”), an antigen that is expressed in more than 90% of all prostate cancers. The antigen target for DN24-02, our active cellular immunotherapy candidate in development for the treatment of bladder, breast, ovarian and other solid tumors, is HER2/neu. Through licenses, we have also acquired the opportunity to work with the tumor antigens designated CEA and CA-9. We discovered the tumor antigen TRPM8 and we are presently utilizing this protein as a target for small molecule drug development.
 
Antigen Engineering.  We engineer antigens to produce proprietary active cellular immunotherapies. Our antigen engineering is designed to trigger and maximize cell-mediated immunity by augmenting the uptake and processing of the target antigen by antigen-presenting cells. We can affect the quality and quantity of the immune response that is generated by adding, deleting or modifying selected sequences of the antigen gene, together with inserting the modified antigen into our proprietary Antigen Delivery Cassettetm technology.
 
Our Antigen Delivery Cassette technology enhances antigen binding and entry into antigen-presenting cells. The Antigen Delivery Cassette targets each engineered antigen to a receptor on antigen-presenting cells and provides a common key to unlock the potential of these cells to process antigen. The antigen-presenting cells process antigen along pathways that stimulate cell-mediated immunity. We believe this process results in a tumor-directed immune response. Our Antigen Delivery Cassette technology also provides us with a foundation on which to build new proprietary antigens.
 
Active Cellular Immunotherapy Production and Delivery.  Our manufacturing process involves two key elements: the antigen in the Antigen Delivery Cassette technology and antigen-presenting cells. To obtain antigen-presenting cells, we acquire white blood cells removed from a patient via a standard blood collection process called leukapheresis. We transport the cells to the manufacturing facility via professional courier service. The cells are further processed using our proprietary cell separation technology. The resulting antigen-presenting cells are then incubated with the required concentration of the antigen under controlled conditions. We subject each dose to quality control testing, including identity, purity, potency, sterility and other safety testing. Our process requires less than three days from cell collection to the administration of the active immunotherapy product candidate.
 
 
 
The American Cancer Society estimated that in 2010 approximately 217,730 new cases of prostate cancer would be diagnosed in the United States, and approximately 32,050 men were expected to die of prostate cancer. Castrate-resistant prostate cancer is an advanced stage of prostate cancer in which the tumor growth is no longer regulated by androgens, or male hormones; it is also referred to as androgen-independent prostate cancer or hormone-refractory prostate cancer.
 
Early-stage, localized prostate cancer may be cured with surgery or radiation therapy. The disease will recur in approximately 20% to 30% of men, at which point hormone ablation therapy is the most commonly used treatment approach. While most prostate cancer initially responds to hormone ablation therapy, the vast majority of these patients will experience disease progression after 18 to 24 months, becoming refractory to hormone treatment, or castrate-resistant. Prior to the approval of PROVENGE, a chemotherapeutic was the only FDA-approved drug that had been proven to prolong survival in men with metastatic, castrate-resistant (hormone-refractory) prostate cancer. We believe that PROVENGE addresses a significant unmet medical need for patients with asymptomatic or minimally symptomatic metastatic, castrate-resistant prostate cancer by prolonging survival with the most common side effects being mild to moderate and of short duration.


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PROVENGE Clinical Trials
 
The following table summarizes the survival results of the three PROVENGE Phase 3 studies in men with asymptomatic or minimally symptomatic, metastatic, castrate-resistant prostate cancer:
 
             
    Clinical Study
    D9901
  D9902A
  D9902B
    N = 127   N = 98   N = 512
 
Median Survival in months:
           
PROVENGE
  25.9   19.0   25.8
Control
  21.4   15.7   21.7
             
Median Survival Benefit:% (months)
  21% (4.5)   21% (3.3)   19% (4.1)
             
Hazard Ratio
  0.586   0.786   0.775
p-value
  p=.010   p=.331   p=.032
             
 
In controlled clinical trials, the most common adverse events (incidence ³15%) reported in the PROVENGE group are chills, fatigue, fever, back pain, nausea, joint ache, and headache. The majority of adverse events were mild or moderate in severity (Grade 1 or 2). In general, they occurred within 1 day of infusion and were short in duration (resolved in £2 days). Serious adverse events reported in the PROVENGE group include acute infusion reactions (occurring within 1 day of infusion) and cerebrovascular events. Severe (Grade 3) acute infusion reactions were reported in 3.5% of patients in the PROVENGE group. Reactions included chills, fever, fatigue, asthenia, dyspnea, hypoxia, bronchospasm, dizziness, headache, hypertension, muscle ache, nausea, and vomiting. No Grade 4 or 5 acute infusion reactions were reported in patients in the PROVENGE group. In Study D9902B, the percentage of patients who discontinued treatment with PROVENGE due to an adverse reaction was 1.5%. To fulfill a post-marketing requirement, we are conducting a registry of approximately 1,500 patients to further evaluate a small potential safety signal of cerebrovascular events observed in the Phase 3 clinical trials included in the safety data for the PROVENGE label. In the four randomized clinical trials of PROVENGE in prostate cancer patients included in the safety data, cerebrovascular events were observed in 3.5% of patients in the PROVENGE group compared with 2.6% of patients in the control group.
 
 
Clinical Trial — D9901.  In June 2001, we completed enrollment in our first Phase 3 clinical trial of PROVENGE, D9901, which was a randomized double-blind controlled study in 127 men with asymptomatic, metastatic, castrate-resistant (hormone-refractory) prostate cancer. The trial was designed to measure a delay in time to disease progression. Time to the onset of disease related pain was a secondary endpoint that was to be evaluated in concert with the results from a second, identical companion trial, D9902. After disease progression, control patients were given the option to receive salvage therapy consisting of an autologous immunotherapy made from cells cryopreserved at the time of control product generation on a separate open label study. The protocols for both trials required patients to be followed for survival for three years after enrollment.
 
In 2002, an analysis of the primary endpoint in trial D9901 demonstrated a 31% reduction in the risk of disease progression for patients who received PROVENGE compared to patients who received control. At 6 months following randomization, 31.9% of patients receiving PROVENGE were progression free compared to 13.3% of patients in the control arm. This analysis closely approached but did not achieve statistical significance. We completed the planned three year follow-up for survival on the D9901 patients and disclosed in February 2005 that a significant survival advantage was seen in those patients who had been randomized to the PROVENGE arm compared to those who had been randomized to receive control. According to the final three year intent-to-treat analysis, patients who received PROVENGE had a median survival of 25.9 months compared to 21.4 months for patients in the control arm, a 4.5 month or 21% improvement (p-value = 0.01, hazard ratio = .586). This hazard ratio implies that patients who received PROVENGE have a 41% reduction in risk of death than that of patients who were randomized to receive control.
 
Clinical Trial — D9902A.  D9902, the companion study to D9901, was stopped in 2002 after 98 of 120 patients were enrolled when the analysis of the completed D9901 trial showed that no statistically significant


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benefit in time to disease progression had been observed in the overall group, but that a benefit was seen in the subgroup of patients with Gleason scores of seven and less. We amended the D9902 protocol to bifurcate the study into our completed randomized D9902A Phase 3 trial consisting of the original 98 patients and the ongoing D9902B Phase 3 study, discussed below, which was later amended to open the trial to men regardless of Gleason score and to elevate survival to the primary endpoint.
 
In October 2005, we disclosed final results from D9902A. Trial D9902A also did not meet its primary endpoint of showing a statistically significant delay in time to disease progression. In the D9902A study, the three-year final survival analysis in the intent-to-treat population of the double-blind, controlled study of treatment with PROVENGE in 98 men with asymptomatic, metastatic, castrate-resistant (hormone-refractory) prostate cancer showed those patients who received PROVENGE had a median survival of 19.0 months compared to 15.7 months for patients in the control arm, a 3.3 month or 21% reduction in the risk of death (p-value = 0.331, hazard ratio = .786). A Cox multivariate regression analysis of overall survival, which adjusts for the same prognostic factors known to influence survival utilized in D9901, met the criteria for statistical significance (p-value = 0.023; adjusted hazard ratio = .522). The hazard ratio observed in this analysis was similar to that seen in our D9901 trial.
 
Clinical Trial — D9902B.  On April 14, 2009, we announced that the IMPACT study had met its primary endpoint of overall survival and exhibited a safety profile consistent with prior Phase 3 studies. On April 28, 2009, at the American Urological Association annual meeting, we presented detailed results of the IMPACT study. The IMPACT study had a final enrollment of 512 patients with asymptomatic or minimally symptomatic, metastatic, castrate-resistant prostate cancer and was a multi-center, randomized, double-blind, controlled study. Final results from the IMPACT study showed that PROVENGE extended median survival by 4.1 months compared to control (25.8 months versus 21.7 months). The IMPACT study achieved a p-value of 0.032, exceeding the pre-specified level of statistical significance defined by the study’s design (p-value less than 0.043), and PROVENGE reduced the risk of death by 22.5% compared to control (hazard ratio=0.775).
 
Clinical Trial — P09-1.  In 2009, we initiated a Phase 2 open-label study of sipuleucel-T. The trial allowed us to provide sipuleucel-T to men with metastatic castrate-resistant prostate cancer while marketing approval for PROVENGE was being pursued, obtain safety data, evaluate the magnitude of immune responses to treatment with sipuleucel-T, and to further characterize the cellular components of sipuleucel-T. This trial was closed to new enrollment following FDA approval of PROVENGE.
 
Clinical Trial — P07-1.  In August 2008, we initiated a Phase 2 trial of PROVENGE in men with localized prostate cancer who are scheduled to undergo a radical prostatectomy. The trial called NeoACT (NEOadjuvant Active Cellular immunoTherapy), or P07-1, is anticipated to enroll approximately 40 patients. The study will assess safety of an immune response induced by sipuleucel-T in men with localized prostate cancer.
 
Clinical Trial — P07-2.  In August 2008, we initiated a Phase 2 trial of PROVENGE called ProACT (PROstate Active Cellular Therapy) or P07-2. The multicenter trial is enrolling approximately 120 patients with metastatic, castrate-resistant (hormone-refractory) prostate cancer. All patients will receive active treatment but will be randomized into one of three cohorts that will receive PROVENGE manufactured with different concentrations of the prostate antigen component. Patients will receive three infusions of PROVENGE, each approximately two weeks apart. We are conducting the trial to explore the effect of antigen concentration on CD54 upregulation, a measure of product potency, as well as on immune response. Overall survival data will also be collected.
 
 
Clinical Trial — P-11.  In November 2006, we disclosed preliminary results from our ongoing PROTECT (PROVENGE Treatment and Early Cancer Treatment) (“P-11”), Phase 3 clinical trial in patients with androgen-dependent (hormone sensitive) prostate cancer. The study was designed to explore the biologic activity of PROVENGE in patients with recurrent prostate cancer prior to the development of metastatic disease. Among the preliminary findings, the study showed a median time to biochemical failure (BF) of 18.0 months for subjects in the PROVENGE group compared to 15.4 months for subjects in the control group (HR=0.936; p = 0.737). When the analysis was restricted to patients with confirmed BF, the HR for BF was 0.797 in favor of PROVENGE (p = 0.278). In addition, the study showed a 35% increase in PSA Doubling Time (“PSADT”) for patients randomized to


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PROVENGE compared to control (125 vs 93 days; p = 0.046, F-test) based on an analysis of PSADT calculated from 90 days following randomization to BF or the initiation of systemic therapy. PSADT calculated after testosterone recovery to baseline levels demonstrated a 48% increase in PSADT for the PROVENGE arm (155 vs 105 days; p=0.038). PSADT is currently considered to be one of the best predictors of clinical outcome in patients with PSA recurrence following primary therapy. This study is closed to enrollment, however, patients continue to be followed for the clinical secondary endpoints of distant failure and overall survival.
 
Clinical Trial — P-16.  In 2005, an open label Phase 2 clinical trial, P-16, was completed, testing PROVENGE together with bevacizumab (Avastin®) to treat patients with androgen-dependent prostate cancer. The trial was conducted at the University of California San Francisco and was sponsored by the National Cancer Institute. In February 2005 at the Multidisciplinary Prostate Cancer Symposium, we announced that the combination of PROVENGE and bevacizumab increased PSADT, in patients with prostate cancer that had relapsed after prior surgical and radiation therapy. The median pre-treatment PSADT for the 21 evaluable patients was 6.7 months and the median on-treatment PSADT was 12.7 months, an approximate 90% increase in PSADT (p = 0.004). In July 2006, results from this study were published in the American Cancer Society’s journal, Cancer. The research showed the combination immunotherapy significantly increased PSADT in patients with prostate cancer that had relapsed after prior surgical and radiation therapy.
 
Clinical Trial — D9905.  In 2005, we completed a Phase 2 clinical trial, D9905, evaluating men with biochemical recurrence after prostatectomy. The median pre-treatment PSADT, for the 19 evaluable patients in D9905, was 5.2 months and the median on-treatment PSADT was 7.9 months, approximately a 52% increase in PSADT.
 
 
Active Cellular Immunotherapies and Immunotherapy Targets
 
DN24-02.  DN24-02 is our investigational active immunotherapy for the treatment of patients with bladder, breast, ovarian and other solid tumors expressing HER2/neu. Results from an earlier Phase 1 study targeting the HER2/neu antigen showed that treatment stimulated significant immune responses in patients with advanced, metastatic HER2/neu positive breast cancer, which were shown to be enhanced following booster infusions. Twenty-two percent of patients had evidence of anti-cancer activity. This included one patient who experienced a partial response lasting approximately 6 months and three patients who had stable disease for over a year (74.9-94.0 weeks) without the addition of any other cancer therapy other than the continuation of bisphosphonates. Two additional patients had stable disease for up to 20 weeks. These results were published in the August 20, 2007 issue of the Journal of Clinical Oncology. In December 2010, we filed an Investigational New Drug application with the FDA for DN24-02 for the treatment of invasive bladder cancer. The randomized Phase 2 study will evaluate the safety and efficacy of DN24-02 in patients with HER2+ invasive transitional cell carcinoma of the bladder following cystectomy. The primary endpoint is to evaluate overall survival. Approximately 180 patients are expected to be enrolled at clinical sites throughout the U.S.
 
We are currently using our Antigen Delivery Cassette technology to develop active cellular immunotherapy product candidates targeted to antigens other than PAP and HER2/neu.
 
Carbonic Anhydrase IX.  We in-licensed the CA-9 antigen from Bayer Corporation, Business Group Diagnostics. Over 75% of primary and metastatic renal cell carcinomas highly express the transmembrane protein CA-9, whereas expression of CA-9 in normal kidney is low or undetectable. CA-9 is also expressed in other cancers such as non-small cell lung and breast tumors but not in the corresponding normal tissue. As such, CA-9 represents an attractive antigen target for study as a potential immunotherapy. In May 2006, preclinical data were presented at the American Association of Immunology Conference demonstrating that a genetically engineered active immunotherapy product candidate targeted at CA-9 significantly prolonged survival in animal tumor models. We are investigating the use of active immunotherapy product candidates targeted at CA-9.
 
Carcinoembryonic Antigen.  We in-licensed CEA from Bayer Corporation, Business Group Diagnostics. CEA was found to be present on 70% of lung cancers, virtually all cases of colon cancers and approximately 65% of


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breast cancers. We are investigating the use of active cellular immunotherapy product candidates targeted at CEA in breast, lung and colon cancer.
 
 
TRPM8.  Small molecules are a diverse group of natural and synthetic substances that generally have a low molecular weight. They are either isolated from natural sources such as plants, fungi or microbes, or they are synthesized by organic chemistry. Most conventional pharmaceuticals, such as aspirin, penicillin and many chemotherapeutics, are small molecules. The protein encoded by the gene first designated trp-p8, is an ion channel. It was identified through our internal antigen discovery program. As progress has been made in the discovery of other ion channel members of the trp (Transient Receptor Potential) family, trp-p8 (sub-family M) has come to be more commonly referred to as TRPM8. A patent on the gene encoding this ion channel was issued to us in 2001. In normal human tissues, it is expressed predominantly in the prostate and is over-expressed in hyperplastic prostates. A study found it to be present in 100% of prostate cancers and approximately 71% of breast cancers, 93% of colon cancers and 80% of lung cancers. Ion channels like TRPM8 may be an attractive target for manipulation by small molecule drug therapy. Small molecule agonists have been synthesized that activate the TRPM8 ion channel and induced cell death (apoptosis). The small molecule agonists are orally bioavailable and in December 2008 an Investigational New Drug application was filed with the FDA for clinical evaluation of the product candidate D3263 HCI in subjects with advanced cancer. In 2009, we commenced our Phase 1 clinical trial to evaluate TRPM8 and the trial is ongoing.
 
 
To support our commercialization efforts, we have made significant investments in manufacturing facilities and related operations. In February 2007, we started to manufacture PROVENGE for clinical use in our New Jersey Facility. Commercial manufacture of PROVENGE began in May 2010. To date all commercial product has been manufactured in the New Jersey Facility.
 
As of December 31, 2010, approximately 25% of the capacity at our New Jersey Facility had been approved by the FDA for commercial manufacturing. We have completed validation activities necessary to support FDA licensure of the additional capacity. Subject to license by the FDA, we expect the additional capacity to be available in the first quarter of 2011.
 
During July and August 2009, we entered into new facilities leases in Atlanta, Georgia (the “Atlanta Facility”) and Orange County, California (the “Orange County Facility”) for an aggregate of approximately 340,000 square feet of space we intend to use for commercial manufacturing. We commenced occupation of the Atlanta Facility and Orange County Facility during the third quarter of 2010 and have commenced validation activities for these facilities. These facilities will be available for commercial manufacture of PROVENGE after review and license by the FDA, which we anticipate to occur mid-year 2011. Upon FDA license of the Orange County Facility and the Atlanta Facility, we anticipate that U.S. commercial production will be divided among our New Jersey Facility, Orange County Facility, and Atlanta Facility.
 
In February 2011, we entered into a technology transfer and manufacturing agreement with a third-party contract manufacturer in Europe for the manufacture of PROVENGE for EU clinical trials, and potentially commercial sale following our receipt of marketing approval for the EU, in advance of our establishment of our own manufacturing facility in Europe.
 
As of December 31, 2010, our manufacturing operations employed approximately 750 individuals and our commercial team included approximately 87 individuals employed in sales, marketing, and government affairs. During the second half of 2010, our field based teams were primarily focused on training infusion sites and customer education in addition to sales activity for PROVENGE.
 
The manufacture of our active cellular immunotherapy candidates, such as PROVENGE, begins with a standard cell collection process called leukapheresis. The resulting cells are then transported to a manufacturing facility, undergo the process to manufacture PROVENGE and the final product is returned to a health care provider for infusion into the patient. Our most significant provider for leukapheresis procedures for the manufacture of PROVENGE is the American Red Cross. We also have agreements with, among others, Puget Sound Blood Center,


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New York Blood Center, Blood Group of America, and Hemacare as providers of commercial leukapheresis services. We continue to pursue commercial arrangements with other vendors in order to have a network of commercial leukapheresis suppliers to meet the geographical and volume requirements for PROVENGE.
 
We utilize two commercial couriers for transport of the leukapheresis material and final product. We oversee transportation of the leukapheresis material and the final product through an integrated information technology tracking system.
 
 
We currently depend on specialized vendor relationships that are not readily replaceable for some of the components for our active immunotherapy candidates. We have a supply agreement with Diosynth RTP, Inc. (“Diosynth”) covering the commercial production of the recombinant antigen used in the manufacture of PROVENGE. On May 12, 2010, we entered into a Second Amendment to the supply agreement to extend the term of the agreement through December 31, 2018, and unless terminated, the agreement will renew automatically thereafter for additional 5-year terms. The agreement may be terminated upon written notice by us or Diosynth at least 24 months before the end of the initial term or a renewal term or by either party in the event of an uncured material breach or default by the other party.
 
We currently have a commitment with Diosynth to purchase antigen through 2011 for a total of $77.6 million related to two orders. As of December 31, 2010, we have paid $38.4 million toward the orders and have a remaining obligation of approximately $39.2 million. We began receiving shipments of the first order in the third quarter 2010 and expect delivery of the second order to commence in mid-2011. In addition, in 2010 we entered into commitments with Diosynth to purchase antigen in 2012 for a total of $41.5 million and in 2013 for a total of $43.8 million. In February 2011, we paid $9.9 million toward the 2012 order.
 
In September 2010, we entered into a development and supply agreement with GlaxoSmithKline LLC. This agreement is intended to provide a second source for the commercial production and supply of the recombinant antigen used in the manufacture of PROVENGE. The term of the agreement is through December 31, 2015, unless earlier terminated pursuant to the terms of the agreement, and provides for one or more two-year extensions to the then expiring term. At December 31, 2010, we have a remaining payment obligation for the transfer of the antigen production process aggregating $14.6 million payable through September 2011. Upon execution of the agreement, we placed an initial order for approximately $8.3 million, with delivery of commercial orders to commence in 2012.
 
Any production shortfall that impairs the supply of the antigen would have a material adverse effect on our business, financial condition and results of operations. If we were unable to obtain sufficient quantity of antigen, it is uncertain whether alternative sources could be developed.
 
The cell separation devices and related media that isolate the cells for our active immunotherapy product candidates from a patient’s blood and other bodily fluids are manufactured by third party contractors in compliance with cGMP. We use third party contractors to produce commercial quantities of these devices and media for PROVENGE.
 
 
We devote significant resources to research and development programs directed at discovering new products such as PROVENGE. On December 31, 2010, we employed approximately 150 individuals in research and development functions. Our costs associated with research and development expenses were $75.9 million in 2010, $61.6 million in 2009 and $50.1 million in 2008.
 
 
As a matter of regular course, we have obtained and intend to actively seek to obtain, when appropriate, protection for our current and prospective products, and proprietary technology by means of U.S. and foreign patents, trademarks, and applications for each of the foregoing. In addition, we rely upon trade secrets and contractual agreements to protect certain of our proprietary technology and products. PROVENGE is a novel biologic, and it is difficult to predict how competition could develop and accordingly which aspects of our related intellectual property may prove the most significant in the future. We have three issued U.S. patents with claims relating to immunostimulatory compositions, including PROVENGE, and to methods of treating specific diseases,


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including prostate cancer, using the immunostimulatory compositions. We also have four issued U.S. patents with claims relating to the cell separation devices and related media and certain aspects of the manufacturing process used to produce PROVENGE. The scheduled expiration dates of our U.S. patents related to PROVENGE are in 2014 through 2018. Outside of the U.S., we have in certain territories corresponding issued patents related to PROVENGE that are scheduled to expire in 2015 through 2019. Patent expiration dates may be subject to patent term extension depending on certain factors. In addition, following expiration of a basic product patent or loss of patent protection resulting from a legal challenge it may be possible to continue to obtain commercial benefits from other characteristics such as clinical trial data; product manufacturing trade secrets; patents on uses for products; and patents for special formulations of the product or delivery mechanisms.
 
We also own or license issued patents or patent applications that are directed to potential small molecule pharmaceutical compounds that are modulators of ion channel and protease activity, to methods of making the compounds and to methods for treating specific diseases using the compounds.
 
We protect our technology through United States and foreign patent filings, trademarks and trade secrets that we own or license. We own or license issued patents or patent applications that are directed to the media and devices by which cells can be isolated and manipulated, our Antigen Delivery Cassette technology, our antigen-presenting cell processing technology, immunostimulatory compositions, methods of making the immunostimulatory compositions, methods for treating specific diseases using the immunostimulatory compositions, our small molecule product candidates, and methods for treating certain diseases using the product candidates. We have filed foreign counterparts to these issued patents and patent applications in a number of countries.
 
We intend to continue using our scientific experience to pursue and patent new developments to enhance our position in the cancer field. Patents, if issued, may be challenged, invalidated, declared unenforceable, circumvented or may not cover all applications we desire. Thus, any patent that we own or license from third parties may not provide adequate protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties may not result in issued patents. Also, patents may not provide us with adequate proprietary protection or advantages against competitors with, or who could develop, similar or competing technologies, or who could design around our patents. In addition, future legislation may impact our competitive position in the event brand-name and follow-on biologics do not receive adequate patent protection. From time to time, we have received invitations to license third party patents.
 
We also rely on trade secrets and know-how that we seek to protect, in part, by using confidentiality agreements. Our policy is to require our officers, employees, consultants, contractors, manufacturers, outside scientific collaborators and sponsored researchers and other advisors to execute confidentiality agreements. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties except in specific limited circumstances. We also require signed confidentiality agreements from companies that receive our confidential data. For employees, consultants and contractors, we require agreements providing that all inventions conceived while rendering services to us shall be assigned to us as our exclusive property.
 
 
The biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. Pharmaceutical and biotechnology companies, academic institutions and other research organizations are actively engaged in the discovery, research and development of products designed to address prostate cancer and other indications. There are products currently under development by other companies and organizations that could compete with PROVENGE or other products that we are developing. Products such as chemotherapeutics, androgen metabolism or androgen receptor antagonists, endothelin A receptor antagonists, antisense compounds, angiogenesis inhibitors and gene therapies for cancer are also under development by a number of companies and could potentially compete with PROVENGE and our other product candidates. In addition, many universities and private and public research institutes may in the future become active in cancer research, which may be in direct competition with us. Two chemotherapeutics (docetaxel and cabazitaxel) have been approved by the FDA for the therapeutic treatment of metastatic, androgen-independent prostate cancer, and may compete with PROVENGE as treatments for men who are asymptomatic or minimally symptomatic.


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Our competitors include major pharmaceutical companies. These companies have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing. In addition, smaller competitors may collaborate with these large established companies to obtain access to their resources.
 
Our ability to commercialize PROVENGE and our other potential products and compete effectively will depend, in large part, on:
 
  •  the effectiveness of our sales and marketing efforts;
 
  •  the willingness of physicians to adopt a new treatment regimen consisting of infusion of an immunotherapy;
 
  •  our ability to accurately forecast and meet demand for PROVENGE and our product candidates if regulatory approvals are achieved;
 
  •  the perception by physicians and other members of the health care community of the safety, efficacy and benefits of PROVENGE or our other products compared to those of competing products or therapies;
 
  •  our ability to manufacture PROVENGE and other products we may develop on a commercial scale;
 
  •  reimbursement policies for PROVENGE or our other product candidates, if developed and approved,
 
  •  the price of PROVENGE and that of other products we may develop and commercialize relative to competing products;
 
  •  our ability to advance our other product candidates through clinical trials and through the FDA approval process;
 
  •  our ability to recruit, train, retain, manage and motivate our employees; and
 
  •  our ability to sustain our commercial scale infrastructure, including our manufacturing facilities, development of a distribution network, information technology infrastructure and configure existing operational, manufacturing and financial systems and other operational and financial systems necessary to support our increased scale as we grow our commercial organization.
 
Competition among products approved for sale will be based upon, among other things, efficacy, reliability, product safety, price-value analysis, and patent position. Our competitiveness will also depend on our ability to advance our product candidates, license additional technology, maintain a proprietary position in our technologies and products, obtain required government and other approvals on a timely basis, attract and retain key personnel and enter into corporate relationships that enable us and our collaborators to develop effective products that can be manufactured cost-effectively and marketed successfully.
 
Regulatory
 
 
Governmental authorities in the United States and other countries extensively regulate the preclinical and clinical testing, manufacturing, labeling, storage, record-keeping, advertising, promotion, export, marketing and distribution, among other things, of biologic products. In the United States, the FDA subjects pharmaceutical and biologic products to rigorous review under the Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal statutes and regulations.
 
 
To obtain approval of our product candidates from the FDA, we must, among other requirements, submit data supporting safety and efficacy as well as detailed information on the manufacture and composition of the product candidate. In most cases, this entails extensive laboratory tests and preclinical and clinical trials. The collection of these data, as well as the preparation of applications for review by the FDA are costly in time and effort, and may require significant capital investment. We may encounter significant difficulties or costs in our efforts to obtain FDA approvals that could delay or preclude us from marketing any products we may develop.


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A company typically conducts human clinical trials in three sequential phases, but the phases may overlap. Phase 1 trials consist of testing of the product in a small number of patients or healthy volunteers, primarily for safety at one or more doses. Phase 1 trials in cancer are often conducted with patients who are not healthy and who have end-stage or metastatic cancer. Phase 2 trials, in addition to safety, evaluate the efficacy of the product in a patient population somewhat larger than Phase 1 trials. Phase 3 trials typically involve additional testing for safety and clinical efficacy in an expanded population at geographically dispersed test sites. A company must submit to the FDA a clinical plan, or “protocol,” which must also be approved by the Institutional Review Boards at the institutions participating in the trials, prior to commencement of each clinical trial. The trials must be conducted in accordance with the FDA’s good clinical practices. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time.
 
To obtain marketing authorization, a company must submit to the FDA the results of the preclinical and clinical testing, together with, and among other things, detailed information on the manufacture and composition of the product, in the form of a new drug application or, in the case of a biologic, like PROVENGE, a biologics license application.
 
We are also subject to a variety of regulations governing clinical trials and sales of our products outside the United States. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries and regions must be obtained prior to the commencement of marketing the product in those countries. The approval process varies from one regulatory authority to another and the time may be longer or shorter than that required for FDA approval. In the European Union, Canada and Australia, regulatory requirements and approval processes are similar, in principle, to those in the United States.
 
 
Congress enacted the Food and Drug Administration Modernization Act of 1997 (the “Modernization Act”) in part to ensure the availability of safe and effective drugs, biologics and medical devices by expediting the development and review for certain new products. The Modernization Act establishes a statutory program for the review of Fast Track products, including biologics. A Fast Track product is defined as a new drug or biologic intended for the treatment of a serious or life-threatening condition that demonstrates the potential to address unmet medical needs for this condition. Under the Fast Track program, the sponsor of a new drug or biologic may request that the FDA designate the drug or biologic as a Fast Track product at any time during the development of the product, prior to a new drug application submission.
 
Post-Marketing Obligations
 
The Food and Drug Administration Amendments Act of 2007 expanded FDA authority over drug products after approval. All approved drug products are subject to continuing regulation by the FDA, including record-keeping requirements, reporting of adverse experiences with the product, sampling and distribution requirements, notifying the FDA and gaining its approval of certain manufacturing or labeling changes, complying with certain electronic records and signature requirements, submitting periodic reports to the FDA, maintaining and providing updated safety and efficacy information to the FDA, and complying with FDA promotion and advertising requirements. Failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, suspension of manufacturing, seizure of product, injunctive action, criminal prosecution, or civil penalties.
 
The FDA may require post-marketing studies or clinical trials to develop additional information regarding the safety of a product. These studies or trials may involve continued testing of a product and development of data, including clinical data, about the product’s effects in various populations and any side effects associated with long-term use. The FDA may require post-marketing studies or trials to investigate known serious risks or signals of serious risks or identify unexpected serious risks and may require periodic status reports if new safety information develops. Failure to conduct these studies in a timely manner may result in substantial civil fines.
 
Drug and biologics manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and to list their products with the FDA. The FDA periodically inspects manufacturing facilities in the United States and abroad in order to assure compliance with the applicable current


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good manufacturing practices (“cGMP”) regulations and other requirements. Facilities also are subject to inspections by other federal, foreign, state or local agencies. In complying with the cGMP regulations, manufacturers must continue to expend time, money and effort in record-keeping and quality control to assure that the product meets applicable specifications and other post-marketing requirements. We must ensure that any third-party manufacturers continue to expend time, money and effort in the areas of production, quality control, record keeping and reporting to ensure full compliance with those requirements. Failure to comply with these requirements subjects the manufacturer to possible legal or regulatory action, such as suspension of manufacturing or recall or seizure of product.
 
Also, newly discovered or developed safety or efficacy data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications, additional preclinical or clinical studies, or even in some instances, revocation or withdrawal of the approval. Violations of regulatory requirements at any stage, including after approval, may result in various adverse consequences, including the FDA’s withdrawal of an approved product from the market, other voluntary or FDA-initiated action that could delay or restrict further marketing, and the imposition of civil fines and criminal penalties against the manufacturer and BLA holder. In addition, later discovery of previously unknown problems may result in restrictions on the product, manufacturer or BLA holder, including withdrawal of the product from the market. Furthermore, new government requirements may be established that could delay or prevent regulatory approval of our products under development, or affect the conditions under which approved products are marketed.
 
Biosimilars
 
The Biologics Price Competition and Innovation Act (“BPCIA”) was passed on March 23, 2010 as Title VII to the Patient Protection and Affordable Care Act. The law provides for an abbreviated approval pathway for biological products that demonstrate biosimilarity to a previously-approved biological product. The BPCIA provides 12 years of exclusivity for innovator biological products. The BPCIA may be applied to our product in the future and could be applied to allow approval of biosimilars to our products.
 
Federal Anti-Kickback, False Claims Laws & The Prescription Drug Marketing Act
 
In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws are relevant to certain marketing practices in the pharmaceutical industry. These laws include anti-kickback statutes and false claims statutes. The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the federal anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor.
 
Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. Several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also implicate false claims laws. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services, reimbursed under Medicaid and other state programs. A number of states have anti-kickback laws that apply regardless of the payor.


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State Laws
 
Marketing Restrictions.  A number of states have requirements that restrict pharmaceutical marketing activities that go beyond commitments made related to adhering to the PhRMA Code for Interactions with Healthcare Professionals. These state requirements limit the types of interactions the Company may have with healthcare providers in these jurisdictions.
 
Healthcare Reform.  Certain states, such as Massachusetts, are pursuing their own programs for health reform. These programs may include cost containment measures that could affect state healthcare benefits, particularly for higher priced drugs.
 
Sale of Pharmaceutical Products.  In addition, many U.S. states have enacted their own laws and statutes applicable to the sale of pharmaceutical products within the state, with which we must comply with. We are also subject to certain state privacy and data protection laws and regulations.
 
Medicare Part B Coverage and Reimbursement of Drugs and Biologicals
 
Medicare Part B provides limited coverage of outpatient drugs and biologicals that are furnished “incident to” a physician’s services. Generally, “incident to” drugs and biologicals are covered only if they satisfy certain criteria, including that they are of the type that is not usually self-administered by the patient and they are reasonable and necessary for a medically accepted diagnosis or treatment. PROVENGE currently is covered under Medicare Part B (as well as other government healthcare programs).
 
Medicare Part B pays providers that administer PROVENGE under a payment methodology using average sales price (“ASP”) information. Manufacturers, including us, are required to provide ASP information to CMS, an agency within the U.S. Department of Health and Human Services, on a quarterly basis. This information is used to compute Medicare payment rates, updated quarterly based on this ASP information. The Medicare Part B payment methodology for physicians is ASP plus six percent and only can change through legislation. For 2011, the reimbursement rate in the hospital outpatient setting is ASP plus five percent, and CMS could change this in future years. There is a mechanism for comparison of ASP of a product to widely available market prices for the product, which could cause further decreases in Medicare payment rates, although this mechanism has yet to be utilized. If a manufacturer is found to have made a misrepresentation in the reporting of ASP, the statute provides for civil monetary penalties of up to $10,000 for each misrepresentation for each day in which the misrepresentation was applied.
 
Data Privacy
 
Numerous U.S. federal and state laws govern the collection, use and disclosure of personal information including state security breach notification laws, state health information privacy laws and federal and state consumer protection laws. Other countries also have, or are developing, laws governing the collection, use and transmission of personal information. In addition, most health care providers who prescribe our product and from whom we obtain patient health information are subject to privacy and security requirements under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect our business, including recently enacted laws in a majority of U.S. states requiring security breach notification. These laws could create liability for us or increase our cost of doing business.
 
 
In many of the markets where we may do business in the future, the prices of pharmaceutical products are subject to direct price controls (by law) and to drug reimbursement programs with varying price control mechanisms. In the United States, the Medicare program is administered by CMS. Coverage and reimbursement for products and services under Medicare are determined in accordance with the Social Security Act and pursuant to regulations promulgated by CMS as well as the agency’s subregulatory coverage and reimbursement determinations. On June 30, 2010, CMS opened a national coverage analysis for PROVENGE. The agency is expected to issue


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a proposed decision memorandum by March 30, 2011 and a final national coverage decision (“NCD”) by June 30, 2011. Restrictions on coverage of PROVENGE in the NCD could have a material adverse effect on the coverage, reimbursement and sales of PROVENGE.
 
Moreover, the methodology under which CMS makes coverage and reimbursement determinations is subject to change, particularly because of budgetary pressures facing the Medicare program. For example, the Medicare Modernization Act of 2003 made changes in reimbursement methodology that reduced the Medicare reimbursement rates for many drugs, including oncology therapeutics. Medicare regulations and interpretive determinations also may determine who may be reimbursed for certain services.
 
In the European Union, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of such products to consumers. The approach taken varies from member state to member state. Some jurisdictions operate positive and/or negative list systems under which products may only be marketed once a reimbursement price has been agreed. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products, as exemplified by the role of the National Institute for Health and Clinical Excellence in the United Kingdom, which evaluates the data supporting new medicines and passes reimbursement recommendations to the government. In addition, in some countries cross-border imports from low-priced markets (parallel imports) exert commercial pressure on pricing within a country.
 
 
We are subject to a variety of federal, state and local regulations relating to the use, handling, storage and disposal of hazardous materials, including chemicals and radioactive and biological materials. Our operations produce such hazardous waste products. Although we believe that our safety procedures for handling and disposing of these materials complies with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. We generally contract with third parties for the disposal of such substances, and store our low level radioactive waste at our facilities until the materials are no longer considered radioactive. We are also subject to various laws and regulations governing laboratory practices and the experimental use of animals.
 
We are also subject to regulation by the Occupational Safety and Health Administration (“OSHA”), and the Environmental Protection Agency (the “EPA”), and to regulation under the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other regulatory statutes, and may in the future be subject to other federal, state or local regulations. OSHA and/or the EPA may promulgate regulations that may affect our research and development programs.
 
 
As of February 15, 2011, we had 1,497 employees. None of our employees are subject to a collective bargaining agreement or represented by a labor or trade union, and we believe that our relations with our employees are good.
 
 
Dendreon®, the Dendreon logo, Dendreon Targeting Cancer, Transforming Lives®, PROVENGE® and the Antigen Delivery Cassettetm are our trademarks. All other trademarks that may appear or be incorporated by reference into this annual report are the property of their respective owners.
 
 
We make available, free of charge, through our investor relations website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after they are filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). You


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may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room located at 100 F Street NE, Washington DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The address for our web site is http://www.dendreon.com and the address for the investor relations page of our web site is http://investor.dendreon.com. The information contained on our web site is not a part of this report.
 
ITEM 1A.   RISK FACTORS
 
The risks described below may not be the only ones relating to our company. Additional risks that we currently believe are immaterial may also impair our business operations. Our business, financial condition, and future prospects and the trading price of our common stock could be harmed as a result of any of these risks. Investors should also refer to the other information contained or incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 2010, including our consolidated financial statements and related notes, and our other filings from time to time with the Securities and Exchange Commission, or SEC.
 
Risks Relating to our Product Commercialization Pursuits
 
PROVENGE is our only FDA-approved product. If we fail to achieve and sustain commercial success for PROVENGE, our business will suffer, our future prospects may be harmed and our stock price would likely decline.
 
On April 29, 2010, the FDA licensed our autologous cellular immunotherapy, PROVENGE® (sipuleucel-T), for the treatment of men with asymptomatic or minimally symptomatic, metastatic, castrate-resistant (hormone-refractory) prostate cancer. PROVENGE currently generates substantially all of our revenue. Prior to the launch of PROVENGE in May 2010, we had never sold or marketed a pharmaceutical product. Unless we can successfully commercialize another product candidate or acquire the right to market other approved products, we will continue to rely on PROVENGE to generate substantially all of our revenue and fund our operations. Our ability to maintain or increase our revenues for PROVENGE will depend on, and may be limited by, a number of factors, including the following:
 
  •  acceptance of and ongoing satisfaction with PROVENGE as the first in a new class of therapy in the United States and by the medical community, patients receiving therapy and third party payers and eventually in foreign markets if we receive additional marketing approvals;
 
  •  our ability to develop and expand market share, both in the United States and potentially in the rest of the world if we receive marketing approvals outside of the U.S., in the midst of numerous competing products for late stage prostate cancer, many of which are in late stage clinical development;
 
  •  successfully expanding and sustaining our manufacturing capacity to meet demand;
 
  •  whether physicians are willing to adopt PROVENGE as part of the treatment paradigm for men with metastatic castrate-resistant prostate cancer;
 
  •  whether data from clinical trials for additional indications are positive and whether such data, if positive, will be sufficient to achieve approval from the FDA and its foreign counterparts to market and sell PROVENGE in such additional indications;
 
  •  adequate coverage or reimbursement for PROVENGE by government healthcare programs and third-party payors, including private health coverage insurers and health maintenance organizations; and
 
  •  the ability of patients to afford any required co-payments for PROVENGE.
 
If for any reason we became unable to continue selling or manufacturing PROVENGE, our business would be seriously harmed and could fail.


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If PROVENGE were to become the subject of problems related to its efficacy, safety, or otherwise, our revenues from PROVENGE could decrease.
 
PROVENGE, in addition to any other of our drug candidates that may be approved by the FDA, will be subject to continual review by the FDA, and we cannot assure you that newly discovered or developed safety issues will not arise. With the use of any newly marketed drug by a wider patient population, serious adverse events may occur from time to time that initially do not appear to relate to the drug itself. Any safety issues could cause us to suspend or cease marketing of our approved products, cause us to modify how we market our approved products, subject us to substantial liabilities, and adversely affect our revenues and financial condition. In the event of a withdrawal of PROVENGE from the market, our revenues would decline significantly and our business would be seriously harmed and could fail.
 
Adoption of PROVENGE for the treatment of patients with advanced prostate cancer may be slow or limited for a variety of reasons including competing therapies, perceived difficulties in the treatment process and access to reimbursement. If PROVENGE is not successful in broad acceptance as a treatment option for advanced prostate cancer, our business would be harmed.
 
The rate of adoption of PROVENGE for advanced prostate cancer and the ultimate market size will be dependent on several factors including educating treating physicians on the patient treatment process with PROVENGE and immunotherapies generally. As a first in class therapy, PROVENGE utilizes a unique treatment approach, which can have associated challenges in practice for treating physicians. A significant portion of the prospective patient base for treatment with PROVENGE may be under the care of urologists who are less experienced with infusion treatments. Acceptance by urologists of PROVENGE as a treatment option may be measurably slower than adoption by oncologists of PROVENGE as a therapy and may require more educational effort by us. In addition, the tight manufacturing and infusion timelines required for treatment with PROVENGE will require treating physicians to adjust practice mechanics, which may result in delay in market adoption of PROVENGE as a preferred therapy.
 
PROVENGE is presently only approved in the U.S. for the treatment of metastatic asymptomatic or minimally symptomatic castrate-resistant prostate cancer. Earlier diagnosis of metastatic prostate cancer will be increasingly important, and screening, diagnostic and treatment practices can vary significantly by geographic region. In order to achieve global success for PROVENGE as a treatment we will need to pursue approvals by non-U.S. regulatory authorities, which may result in significant investment in obtaining required data and manufacturing capability. Data from our completed clinical trials of PROVENGE in the U.S. may not be sufficient to support approval for commercialization by regulatory agencies governing the sale of drugs outside the US. This could require us to spend substantial sums to develop sufficient clinical data for licensure by authorities outside the U.S. Submissions for approval by non-U.S. regulatory authorities may not result in marketing approval by these authorities for the requested indication. In addition, certain countries require pricing to be established before reimbursement for the specific indication may be obtained. We may not receive or maintain marketing approvals at favorable pricing levels or at all, which could harm our ability to market PROVENGE globally. Prostate cancer is common in many regions where the healthcare systems are limited and reimbursement for PROVENGE may be limited or unavailable, which will likely limit or slow adoption in these regions. If we are unable to successfully achieve the full global market potential of PROVENGE due to diagnosis practices or regulatory hurdles, our future prospects would be harmed and our stock price could decline.
 
Products we may potentially commercialize and market may be subject to promotional limitations.
 
We may not be able to obtain the labeling claims necessary or desirable for the promotion of our products. The FDA has the authority to impose significant restrictions on an approved product through the product label and allowed advertising, promotional and distribution activities. The FDA also may approve a product for fewer indications than are requested or may condition approval on the performance of post-approval clinical studies. We may also be required to undertake post-marketing clinical trials. If the results of such post-marketing studies are not satisfactory, the FDA may withdraw marketing authorization or may condition continued marketing on commitments from us that may be expensive and/or time consuming to fulfill. Even if we receive FDA and other regulatory approvals, if we or others identify adverse side effects after any of our products are on the market, or if


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manufacturing problems occur, regulatory approval may be withdrawn and reformulation of our products, additional clinical trials, changes in labeling of our products and additional marketing applications may be required, any of which potential concerns could harm our business and cause our stock price to decline.
 
 
We are rapidly expanding our operations to support commercial launch of PROVENGE, and we may encounter unexpected costs or difficulties.
 
We have and expect to continue to significantly increase our investment in commercial infrastructure. We will need to effectively manage the expansion of our operations and facilities and continue to grow our infrastructure to commercialize PROVENGE and pursue development of our other product candidates. We must effectively manage our supply chain, third-party vendors and distribution network, all of which requires strict planning in order to meet production timelines for PROVENGE. We continue to add manufacturing, quality control, quality assurance, marketing and sales personnel, and personnel in all other areas of our operations, including executive-level personnel, to support commercialization and pursue non-U.S. marketing approvals, which strains our existing managerial, operational, financial and other resources. In pursuing rapid expansion, we must continue to monitor quality and effective controls, or we risk possible delays in approval of the facilities by the FDA for commercial manufacturing. Any delay in readiness of our expanded New Jersey facility and new facilities in Orange County, California and Atlanta could result in the loss of revenue from potential sales of PROVENGE, and adversely impact market acceptance for PROVENGE. If we fail to manage the growth in our systems and personnel appropriately and successfully in order to achieve our commercialization plans for PROVENGE our revenues could suffer and our business could be harmed.
 
We are presently not at capacity sufficient to manufacture PROVENGE in quantities sufficient to fulfill patient demand.
 
We have experienced and may continue to experience in the near future constraints in our ability to manufacture PROVENGE in sufficient quantities to satisfy market demand. Until the additional capacity from the expansion of our New Jersey Facility is available, which is anticipated for the first quarter of 2011, and at the new manufacturing facilities in Atlanta, Georgia and Orange County, California, which is anticipated for mid-year 2011, we expect to be constrained in our ability to manufacture PROVENGE to supply the potential market.
 
 
All of those involved in the preparation of a therapeutic drug for clinical trials or commercial sale, including our existing supply contract manufacturers and clinical trial investigators, are subject to extensive regulation by the FDA. Components of a finished therapeutic product approved for commercial sale or used in late-stage clinical trials must be manufactured in accordance with Current Good Manufacturing Practices. These regulations govern manufacturing processes and procedures and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Our facilities and quality systems and the facilities and quality systems of some or all of our third party contractors must pass inspection for compliance with the applicable regulations as a condition of FDA approval of our products. In addition, the FDA may, at any time, audit or inspect a manufacturing facility involved with the preparation of PROVENGE or our other potential products or the associated quality systems for compliance with the regulations applicable to the activities being conducted. The FDA also may, at any time following approval of a product for sale, audit our manufacturing facilities or those of our third party contractors. If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulation occurs independent of such an inspection or audit, we or the FDA may require remedial measures that may be costly and/or time consuming for us or a third party to implement and that may include the temporary or permanent suspension of a clinical trial or commercial sales, recalls, market withdrawals, seizures or the temporary or permanent closure of a facility. Any such remedial measures imposed upon us or third parties with whom we contract could materially harm our business.


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Manufacturing difficulties, disruptions or delays could limit supply of our products and limit our product sales.
 
Manufacturing biologic human therapeutic products is difficult, complex and highly regulated. We currently manufacture PROVENGE in the U.S. and plan to manufacture our product candidates. We may need to contract with a third-party manufacturer in order to commence clinical trials in the European Union prior to establishment of our own facility to supply the European market. Our ability to adequately and timely manufacture and supply our products is dependent on the uninterrupted and efficient operation of our facilities and those of our third-party contract manufacturers, which may be impacted by:
 
  •  availability or contamination of raw materials and components used in the manufacturing process, particularly those for which we have no other source or supplier;
 
  •  capacity of our facilities and those of our contract manufacturers;
 
  •  the performance of our information technology systems;
 
  •  compliance with regulatory requirements;
 
  •  inclement weather and natural disasters;
 
  •  changes in forecasts of future demand for product components;
 
  •  timing and actual number of production runs for product components;
 
  •  potential facility contamination by microorganisms or viruses;
 
  •  updating of manufacturing specifications; and
 
  •  product quality success rates and yields.
 
If the efficient manufacture and supply of our products is interrupted, we may experience delayed shipments or supply constraints. If we are at any time unable to provide an uninterrupted supply of our products to patients, we may lose patients and physicians may elect to prescribe competing therapeutics instead of our products, which could materially and adversely affect our product sales and results of operations.
 
Our manufacturing processes and those of our third-party contract manufacturers must undergo a potentially lengthy FDA or other regulatory approval process and are subject to continued review by the FDA and other regulatory authorities. It is a multi-year process to build and license a new manufacturing facility and it can take significant time to qualify and license a new contract manufacturer. In order to maintain supply, mitigate risks and to satisfy anticipated demand for PROVENGE, we must successfully implement manufacturing projects on schedule.
 
If regulatory authorities determine that we or our third-party contract manufacturers or certain of our third-party service providers have violated regulations or if they restrict, suspend or revoke our prior approvals, they could prohibit us from manufacturing our products or conducting clinical trials or selling our marketed products until we or the affected third-party contract manufacturers or third-party service providers comply, or indefinitely. Because our third-party contract manufacturers and certain of our third-party service providers are subject to FDA and foreign regulatory authorities, alternative qualified third-party contract manufacturers and third-party service providers may not be available on a timely basis or at all. If we or our third-party contract manufacturers or third-party service providers cease or interrupt production or if our third-party contract manufacturers and third-party service providers fail to supply materials, products or services to us, we may experience delayed shipments, and supply constraints for our products.
 
We rely on complex scheduling and product tracking systems.
 
We have developed a comprehensive, integrated IT system for the intake of physician orders for PROVENGE, to track product delivery, and to store patient-related data we obtain for purposes of manufacturing PROVENGE. We rely on this system in order to maintain the chain of identity for each patient-specific dose of PROVENGE, and to ensure timely delivery of product prior to expiration. In addition, this system stores and protects the privacy of the required patient information for the manufacture of PROVENGE. If our systems were to fail or be disrupted for an


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extended period of time we could lose product sales and our revenue and reputation would suffer. In the event our systems were to be breached by an unauthorized third party, they could potentially access confidential patient information we obtain in manufacturing PROVENGE, which could cause us to suffer reputational damage and loss of customer confidence. Any one of these events could cause our business to be materially harmed and our results of operations would be adversely impacted.
 
Risks Relating to Our Clinical Trial and Product Development Initiatives
 
Our clinical and pre-clinical candidates in the pipeline for other potential cancer immunotherapies and small molecule products may never reach the commercial market for a number of reasons.
 
In order to sustain our business, we focus substantial resources on the search for new pharmaceutical products. These activities include engaging in discovery research and product development, conducting preclinical and clinical studies, and seeking regulatory approval in the United States for product candidates and abroad for PROVENGE and other products we may market in the future. Our long term success depends on the discovery and development of new drugs that we can commercialize. Our cancer immunotherapy and small molecule program pipeline candidates are still at a relatively early stage in the development process. There can be no assurance that these product candidates or any other potential therapies we may pursue will become a marketed drug. In addition, we may find that certain products cannot be manufactured on a commercial scale and, therefore, they may not be economical to produce, or may be precluded from commercialization by proprietary rights of third parties.
 
A significant portion of the research that we are conducting involves new and unproven technologies. Research programs to identify disease targets and product candidates require substantial technical, financial and human resources, whether or not we ultimately identify any candidates. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield candidates for clinical development for a number of reasons, including difficulties in formulation which cannot be overcome, timing and competitive concerns.
 
An IND must become effective before human clinical trials may commence. The IND application is automatically effective 30 days after receipt by the FDA unless, before that time, the FDA raises concerns or questions about the product’s safety profile or the design of the trials as described in the application. In the latter case, any outstanding concerns must be resolved with the FDA before clinical trials can proceed. Thus, the submission of an IND may not result in FDA authorization to commence clinical trials in any given case. After authorization is received, the FDA retains the authority to place the IND, and clinical trials under that IND, on clinical hold. If we are unable to commence clinical trials or clinical trials are delayed indefinitely, we would be unable to develop additional product candidates and our business could be materially harmed.
 
Preclinical testing and clinical trials for product candidates must satisfy stringent regulatory requirements or we may be unable to utilize the results.
 
The pre-clinical testing and clinical trials of any product candidates that we develop must comply with regulations by numerous federal, state and local government authorities in the United States, principally the FDA, and by similar agencies in other countries. Clinical trials are subject to continuing oversight by governmental regulatory authorities and institutional review boards and must meet the requirements of these authorities in the United States, including those for informed consent and good clinical practices. We may not be able to comply with these requirements, which could disqualify completed or ongoing clinical trials. We may experience numerous unforeseen events during, or as a result of, the testing process that could delay or prevent commercialization of our product candidates, including the following:
 
  •  safety and efficacy results from human clinical trials may show the product candidate to be less effective or safe than desired or earlier results may not be replicated in later clinical trials;
 
  •  the results of preclinical studies may be inconclusive or they may not be indicative of results that will be obtained in human clinical trials;
 
  •  after reviewing relevant information, including preclinical testing or human clinical trial results, we may abandon or substantially restructure programs that we might previously have believed to be promising;


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  •  we or the FDA or similar regulatory authorities in other countries may suspend or terminate clinical trials if the participating patients are being exposed to unacceptable health risks or for other reasons; and
 
  •  the effects of our product candidates may not be the desired effects or may include undesirable side effects or other characteristics that interrupt, delay or cause us or the FDA to halt clinical trials or cause the FDA or foreign regulatory authorities to deny approval of the product candidate for any or all target indications.
 
Each phase of testing is highly regulated, and during each phase there is risk that we will encounter serious obstacles or will not achieve our goals, and accordingly we may abandon a product in which we have invested substantial amounts of time and money. In addition, we must provide the FDA and similar foreign regulatory authorities with pre-clinical and clinical data that demonstrate that our product candidates are safe and effective for each target indication before they can be approved for commercial distribution. We cannot state with certainty when or whether any of our products now under development will be approved or launched; or whether any products, once launched, will be commercially successful.
 
 
We discuss with and obtain guidance from regulatory authorities on certain aspects of our clinical development activities. These discussions are not binding obligations on the part of regulatory authorities. Under certain circumstances, regulatory authorities may revise or retract previous guidance during the course of our clinical activities or after the completion of our clinical trials. The FDA may also disqualify a clinical trial in whole or in part from consideration in support of approval of a potential product for commercial sale or otherwise deny approval of that product. Even if we obtain successful clinical safety and efficacy data, we may be required to conduct additional, expensive trials to obtain regulatory approval. Prior to regulatory approval, the FDA may elect to obtain advice from outside experts regarding scientific issues and/or marketing applications under FDA review. These outside experts are convened through the FDA’s Advisory Committee process. An Advisory Committee will report to the FDA and make recommendations. Views of the Advisory Committee may differ from those of the FDA, and may impact our ability to commercial a product candidate.
 
 
Clinical trials for our product candidates may require that we identify and enroll a large number of patients with the disease under investigation. We may not be able to enroll a sufficient number of patients, or those with required or desired characteristics to achieve diversity in a study, to complete our clinical trials in a timely manner.
 
Patient enrollment is affected by factors including:
 
  •  design of the trial protocol;
 
  •  the size of the patient population;
 
  •  eligibility criteria for the study in question;
 
  •  perceived risks and benefits of the product candidate under study;
 
  •  availability of competing therapies and clinical trials;
 
  •  efforts to facilitate timely enrollment in clinical trials;
 
  •  patient referral practices of physicians;
 
  •  the ability to monitor patients adequately during and after treatment; and
 
  •  geographic proximity and availability of clinical trial sites for prospective patients.
 
If we have difficulty enrolling a sufficient number of patients with sufficient diversity to conduct our clinical trials as planned, we may need to delay or terminate ongoing or planned clinical trials, either of which would have a negative effect on our business.


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Risks Relating to Our Financial Position and Operations
 
 
As of December 31, 2010, our accumulated deficit was $1.2 billion. We have incurred net losses as a result of research and development expenses, clinical trial expenses, contract manufacturing expenses and general and administrative expenses in support of our operations and research efforts. We anticipate that near term we will continue to fund our ongoing research, development and general operations from available cash, including proceeds from our January 2011 convertible notes offering, and revenue generated from commercial sales of PROVENGE as we expand our operations including our manufacturing capabilities, continue our clinical trials, apply for regulatory approvals and build commercial infrastructure outside the U.S. and invest in research and product development. The majority of our resources continue to be used in support of the commercialization of PROVENGE. Even if we are able to successfully realize our commercialization goals for PROVENGE, because of the numerous risks and uncertainties associated with commercialization of a biologic, we are unable to predict when we will become profitable, if at all. Even if we do produce revenues and achieve profitability, we may not be able to maintain or increase profitability.
 
 
It is expensive to develop and commercialize cancer immunotherapy and small molecule product candidates. We plan to continue to simultaneously conduct clinical trials and preclinical research for a number of product candidates while pursuing commercial acceptance and our marketing goals for PROVENGE. Our product development efforts may not lead to commercial products, either because our product candidates fail to be found safe or effective in clinical trials or because we lack the necessary financial or other resources or relationships to pursue our programs through commercialization. Even if commercialized, a product may not achieve revenues that exceed the costs of producing and selling it. Our capital and future cash flow may not be sufficient to support the expenses of our operations and we may need to raise additional capital depending on a number of factors, including the following:
 
  •  the rate of progress and cost of our research and development and clinical trial activities;
 
  •  to establish additional manufacturing and distribution capability for the potential non-U.S. marketing of PROVENGE; and
 
  •  to remain competitive in the event of the introduction into the marketplace of competing products and other adverse market developments.
 
We may not be able to obtain additional financing if and when needed. If we are unable to raise additional funds on terms we find acceptable, we may have to delay, reduce or eliminate some of our clinical trials and our development programs. If we raise additional funds by issuing equity or equity-linked securities, further dilution to our existing stockholders will result. In addition, the expectation of future dilution as a result of our offering of securities convertible into equity securities may cause our stock price to decline.
 
Difficulties we may encounter managing our growth may divert resources and limit our ability to successfully expand our operations.
 
We have been and continue to be engaged in a period of rapid and substantial growth, which places a strain on our commercial, clinical, administrative and operational infrastructure. We will need to continue to manage multiple locations and additional relationships with various collaborative partners, suppliers and other third parties. Our ability to manage our operations and growth effectively requires us to continue to hire necessary personnel and to continue to improve our reporting systems and procedures as well as our operational, financial and management controls. We may not be able to effectively manage a rapid pace of growth and timely implement improvements to our management information and control systems. Any failure by us to appropriately monitor and manage our business growth could cause one or more of our initiatives to fail to meet its goals, thus harming our business and near term prospects.


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Our existing indebtedness could adversely affect our financial condition.
 
Our existing indebtedness includes an aggregate of $27.7 million in outstanding 4.75% Convertible Senior Subordinated Notes due 2014 (the “2014 Notes”) which bear interest at 4.75% and an aggregate of $620 million in outstanding Convertible Senior Notes due 2016 (the “2016 Notes”) which bear interest at 2.875%. Our indebtedness and annual debt service requirements may adversely impact our business, operations and financial condition in the future. For example, it could:
 
  •  increase our vulnerability to general adverse economic and industry conditions;
 
  •  limit our ability to raise additional funds by borrowing or engaging in equity sales in order to fund future working capital, capital expenditures, research and development and other general corporate requirements;
 
  •  require us to dedicate a substantial portion of our cash to service payments on our debt; or
 
  •  limit our flexibility to react to changes in our business and the industry in which we operate or to pursue certain strategic opportunities that may present themselves.
 
The accounting method for convertible debt securities that may be settled in cash, such as the 2014 Notes and the 2016 Notes, could have a material effect on our reported financial results.
 
In May 2008 (and effective for fiscal years beginning after December 15, 2008), the Financial Accounting Standards Board, which we refer to as FASB, issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), which subsequently was included under FASB Accounting Standards Codification Section 470-20, Debt with Conversion and other Options (“ASC 470-20”). Under ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for our outstanding convertible notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheets and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the notes. As a result, we will be required to record non-cash interest expense as a result of the amortization of the discounted carrying value of the notes to their face amount over the term of the notes. We will report higher interest expense in our financial results because ASC 470-20 will require interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the notes.
 
Finally, because the notes will be convertible at any time until close of business on the second scheduled trading day immediately preceding the maturity date, applicable accounting rules may require us to classify all or a portion of the outstanding principal amount of the notes as a current rather than long-term liability which would result in a material reduction in our net working capital.
 
 
The holders of the 2014 Notes may choose at any time to convert their notes into common stock prior to maturity in June 2014. The holders of the 2016 Notes may choose at any time to convert their notes prior to maturing in January 2016, and upon conversion we may issue cash, stock, or a combination thereof at our option. The 2014 Notes are convertible into our common stock, initially at the conversion price of $10.28 per share, equal to a conversion rate of approximately 97.2644 shares per $1,000 principal amount of the 2014 Notes. The 2016 Notes are convertible into our common stock initially at the conversion rate of 19.5160 shares per $1,000 principal amount, or approximately $51.24 per share, subject to adjustment. The number of shares of common stock issuable upon conversion of the 2014 Notes and 2016 Notes, and therefore the dilution of existing common stockholders, could increase under certain circumstances described in the indentures under which the 2014 Notes and 2016 Notes were issued. The conversion of the 2014 Notes and potentially the 2016 Notes will result in the issuance of additional shares of common stock, diluting existing common stockholders.


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Future sales of our common stock will depend primarily on the market price of our common stock, the terms we may receive upon the sale of debt or convertible securities, the interest in our company by institutional investors and our cash needs. In addition, we may register additional equity, debt or other convertible securities with the SEC for sale in the future. Each of our issuances of common stock or securities convertible into common stock to investors under a registration statement or otherwise will proportionately decrease our existing stockholders’ percentage ownership of our total outstanding equity interests and may reduce our stock price.
 
Our business, financial condition and future prospects could suffer as a result of carrying out strategic alternatives in the future.
 
We may decide it is in our best interests to engage in a strategic transaction that could dilute our existing stockholders or cause us to incur contingent liabilities, commitments, or significant expense. In the course of pursuing strategic alternatives, we may evaluate potential acquisitions or investments in related businesses, products or technologies. Future acquisitions or investments could subject us to a number of risks, including, but not limited to:
 
  •  the assumption of additional indebtedness or contingent liabilities;
 
  •  risks and uncertainties associated with the other party to such a transaction, including but not limited to the prospects of that party and their existing products or product candidates and regulatory approvals;
 
  •  the loss of key personnel and business relationships;
 
  •  difficulties associated with assimilating and integrating new personnel, intellectual property and operations of an acquired company;
 
  •  our inability to generate revenue from acquired technology and/or products sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs; and
 
  •  the distraction of our management from our existing product programs and initiatives in pursuing such a strategic merger or acquisition.
 
In connection with an acquisition, we must estimate the value of the transaction by making certain assumptions that may prove to be incorrect, which could cause us to fail to realize the anticipated benefits of a transaction. We may incur as part of a transaction substantial charges for closure costs associated with the elimination of duplicate operations and facilities and acquired in-process research and development charges. In either case, the incurrence of these charges could adversely affect our results of operations for particular quarterly or annual periods. Any strategic transaction we may pursue may not result in the benefits we initially believe, and/or result in costs that end up outweighing the benefits, and may adversely impact our financial condition and business prospects.
 
Risks Related to Regulation of the Pharmaceutical Industry
 
PROVENGE and our other products in development cannot be sold if we do not maintain or gain required regulatory approvals.
 
Our business is subject to extensive regulation by numerous state and federal governmental authorities in the United States, including the FDA, and potentially by foreign regulatory authorities, with regulations differing from country to country. In the United States, the FDA regulates, among other things, the pre-clinical testing, clinical trials, manufacturing, safety, efficacy, potency, labeling, storage, record keeping, quality systems, advertising, promotion, sale and distribution of therapeutic products. Failure to comply with applicable requirements could result in, among other things, one or more of the following actions: notices of violation, untitled letters, warning letters, fines and other monetary penalties, unanticipated expenditures, delays in approval or refusal to approve a product candidate; product recall or seizure; interruption of manufacturing or clinical trials; operating restrictions; injunctions; and criminal prosecution. We are required in the United States and in foreign countries to obtain approval from regulatory authorities before we can manufacture, market and sell our products. Obtaining regulatory


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approval for marketing of a product candidate in one country does not ensure we will be able to obtain regulatory approval in other countries but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries. Once approved, the FDA and other U.S. and foreign regulatory agencies have substantial authority to require additional testing, change product labeling or mandate withdrawal of our products. The marketing of our approved products will be subject to extensive regulatory requirements administered by the FDA and other regulatory bodies, including adverse event reporting requirements. In general, the FDA requires advertising and promotional labeling to be truthful and not misleading, and marketed only for the approved indications and in accordance with the provisions of the approved label. The FDA routinely provides its interpretations of that authority in informal communications and also in more formal communications such as untitled letters or warning letters, and although such communications are not final agency decisions, companies may decide not to contest the agency’s interpretations so as to avoid disputes with the FDA, even if they believe the claims to be truthful, not misleading and otherwise lawful. If the FDA or other regulatory authorities were to challenge our promotional materials or activities, they may bring enforcement action. The manufacturing facilities for our approved products are also subject to continual review and periodic inspection and approval of manufacturing modifications. The FDA stringently applies regulatory standards for manufacturing. Manufacturing facilities that manufacture drug products for the United States market, whether they are located inside or outside the United States, are subject to biennial inspections by the FDA and must comply with the FDA’s current good manufacturing practice, or cGMP, regulations.
 
The FDA can delay, limit or withhold approval of a product candidate for many reasons, including the following:
 
  •  a product candidate may not demonstrate sufficient safety in human trials or efficacy in treatment;
 
  •  the FDA may determine that certain aspects of the clinical testing, manufacture, or quality control are not in compliance with the regulations;
 
  •  the FDA may interpret data from preclinical testing and clinical trials in different ways than we interpret the data or may require additional and/or different categories of data than what we obtained in our clinical trials;
 
  •  the FDA may require additional information about the efficacy, safety, purity, stability, identity or functionality of a product candidate;
 
  •  the FDA may not approve our manufacturing processes or facilities or the processes or facilities of our contract manufacturers; and
 
  •  the FDA may change its approval policies or adopt new regulations that impact our business.
 
Our failure to obtain approval, significant delays in the approval process, or our failure to maintain approval in any jurisdiction will prevent us from selling a product in that jurisdiction and receiving product sales revenues. Any product and its manufacturer will continue to be subject to strict regulations after approval, including but not limited to, manufacturing, quality control, labeling, packaging, adverse event reporting, advertising, promotion and record-keeping requirements. Any problems with an approved product, including the later exhibition of adverse effects or any violation of regulations could result in restrictions on the product, including its withdrawal from the market, which could materially harm our business. The process of obtaining approvals in foreign countries is subject to delay and failure for many of the same reasons.
 
Regulatory agencies could also add new regulations or change existing regulations at any time, which could affect our ability to obtain or maintain approval of our products. The 2007 creation of the Food and Drug Administration Amendments Act of 2007 (“FDAAA”) significantly added to the FDA’s authority, allowing the FDA to (i) require sponsors of marketed products to conduct post-approval clinical studies; (ii) mandate labeling changes to products and (iii) require sponsors to implement a REMS (“Risk Evaluation and Mitigation Strategy”) for a product. Failure to comply with FDAAA requirements could result in significant civil monetary penalties, reputational harm and increased product liability risk. The process of obtaining required FDA and other regulatory approvals, including foreign approvals, is expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. PROVENGE and our investigational cellular immunotherapies are novel; therefore, regulatory agencies may lack experience with them, which may lengthen the


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regulatory review process, increase our development costs and delay or prevent commercialization of PROVENGE outside of the U.S. and with respect to our active immunotherapy products under development. We are unable to predict when and whether any changes to regulatory policy affecting our business could occur, and such changes could have a material adverse impact on our business. If regulatory authorities determine that we have not complied with regulations in the research and development of a product candidate, a new indication for an existing product or information to support a current indication, they may not approve the product candidate or new indication or maintain approval of the current indication in its current form or at all, and we would not be able to market and sell it. If we were unable to market and sell our products or product candidates, our business and results of operations would be materially and adversely affected.
 
 
The requirements governing the conduct of clinical trials, manufacturing, testing, product approvals, pricing and reimbursement outside the United States vary greatly from country to country. In addition, the time required to obtain approvals outside the United States may differ significantly from that required to obtain FDA approval. We may not obtain foreign regulatory approvals on the timeframe we may desire, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and foreign regulatory authorities could require additional testing. Failure to comply with these regulatory requirements or obtain required approvals could impair our ability to develop foreign markets for our products and may have a material adverse effect on our business and future prospects.
 
Our product sales depend on adequate coverage and reimbursement from third-party payers.
 
Our sale of PROVENGE is dependent on the availability and extent of coverage and reimbursement from third-party payers, including government healthcare programs and private insurance plans. We rely in large part on the reimbursement coverage by federal and state sponsored government programs such as Medicare and Medicaid in the United States. In the event we seek approvals to market PROVENGE in non-U.S. territories, we will need to work with the government-sponsored healthcare systems in Europe and other foreign countries that are the primary payers of healthcare costs in those regions. Governments and private payers may regulate prices, reimbursement levels and/or access to PROVENGE and any other products we may market to control costs or to affect levels of use of our products. We cannot predict the availability or level of coverage and reimbursement for PROVENGE or our product candidates and a reduction in coverage and/or reimbursement for our products could have a material adverse effect on our product sales and results of operations.
 
The availability and amount of reimbursement for PROVENGE and our product candidates and the manner in which government and private payers may reimburse for our potential products is uncertain.
 
In many of the markets where we may do business in the future, the prices of pharmaceutical products are subject to direct price controls pursuant to applicable law or regulation and to drug reimbursement programs with varying price control mechanisms. We expect that many of the patients in the U.S. who seek treatment with PROVENGE or any other of our products that are approved for marketing will be eligible for Medicare benefits. Other patients may be covered by private health plans. The Medicare program is administered by the Centers for Medicare & Medicaid Services (“CMS”), and coverage and reimbursement for products and services under Medicare are determined pursuant to regulations promulgated by CMS and pursuant to CMS’s subregulatory coverage and reimbursement determinations. It is difficult to predict how CMS may apply those regulations and policy determinations to newly approved products, especially novel products such as ours, and those regulations and interpretive determinations are subject to change. Moreover, the procedures by which CMS makes coverage and reimbursement determinations is subject to change, particularly because of budgetary pressures facing the Medicare program.
 
On June 30, 2010, CMS initiated a national coverage analysis (“NCA”) for the treatment of metastatic prostate cancer with PROVENGE. As a part of the process, the Agency for Healthcare Research and Quality published a draft technology assessment on the outcomes of PROVENGE therapy on November 2, 2010 solely for the


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discussion and review by the Medicare Evidence Development & Coverage Advisory Committee (“MedCAC”) at its meeting on November 17, 2010. CMS expects to issue a proposed decision on or before March 30, 2011, and the final decision should be released on or before June 30, 2011. During the pendency of the NCA, CMS may engage in discussions with local Medicare contractors or make statements that could be interpreted negatively. which could create uncertainty among contractors and have a chilling effect on coverage determinations. We cannot predict at this time whether CMS will issue a national coverage determination (“NCD”), and if so, whether the NCD will be favorable to PROVENGE. In the event Medicare and private health plans do not provide for adequate levels of reimbursement support and coverage of PROVENGE, our ability to sell PROVENGE will be adversely affected. In addition, third-party payors may impose additional coverage criteria that may restrict the use of PROVENGE, including, for example, utilization parameters and limiting the sites of service and/or providers who may be reimbursed for certain services. This may adversely affect our ability to market or sell PROVENGE or our other potential products, if approved.
 
In addition, major health care legislation, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the “PPACA”), was passed in March 2010 and, absent changes to the new law, is expected to substantially impact the U.S. pharmaceutical industry and how health care is financed by both governmental and private insurers. Some of the specific key PPACA provisions, among other things:
 
  •  establish annual, non-deductible fees on any entity that manufactures or imports certain branded prescription drugs and biologics, beginning 2011;
 
  •  expand eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals beginning April 2010 and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the Federal Poverty Level beginning 2014, thereby potentially increasing manufacturers’ Medicaid rebate liability; and
 
  •  establish a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research.
 
Moreover, a number of state and federal legislative and regulatory proposals aimed at reforming the healthcare system in the United States continue to be proposed, the effect of which, if enacted, could adversely impact our product sales and results of operations.
 
In the European Union, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of such products to consumers. The approach taken varies from member state to member state. Some jurisdictions operate positive and/or negative list systems under which products may only be marketed once a reimbursement price has been agreed. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products, as exemplified by the role of the National Institute for Health and Clinical Excellence in the United Kingdom, which evaluates the data supporting new medicines and passes reimbursement recommendations to the government. All of these factors could adversely impact our ability to successfully commercialize product candidates in these jurisdictions.
 
 
In the United States, we are also subject to health care fraud and abuse regulation and enforcement by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:
 
  •  the federal health care programs’ Anti-Kickback Law, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation


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  of, any good or service for which payment may be made under federal health care programs such as the Medicare and Medicaid programs;
 
  •  federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent;
 
  •  federal “sunshine” laws that require transparency regarding financial arrangements with health care providers, such as the reporting and disclosure requirements imposed by PPACA on drug manufacturers regarding any “transfer of value” made or distributed to prescribers and other health care providers; and
 
  •  state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.
 
Some states, such as California, Massachusetts and Vermont, mandate implementation of commercial compliance programs to ensure compliance with these laws.
 
The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Moreover, recent health care reform legislation has strengthened these laws. For example, the recently enacted PPACA, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes; a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Moreover, we expect there will continue to be federal and state laws and/or regulations, proposed and implemented, that could impact our operations and business. The extent to which future legislation or regulations, if any, relating to health care fraud abuse laws and/or enforcement, may be enacted or what effect such legislation or regulation would have on our business remains uncertain. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from governmental health care programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results.
 
 
Our operations produce hazardous waste products, including chemicals and radioactive and biological materials. We are subject to a variety of federal, state and local laws and regulations relating to the use, handling, storage and disposal of these materials. Although we believe that our safety procedures for handling and disposing of these materials complies with the standards prescribed by state and federal laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. We generally contract with third parties for the disposal of such hazardous waste products and store our low level radioactive waste at our facilities in compliance with applicable environmental laws until the materials are no longer considered radioactive. We are also subject to regulation by the Occupational Safety and Health Administration (“OSHA”), and the Environmental Protection Agency (the “EPA”), and to regulation under the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other regulatory statutes, and may in the future be subject to other federal, state or local regulations. OSHA and/or the EPA may promulgate regulations that may affect our research and development programs. We may be required to incur further costs to comply with current or future environmental and safety laws and regulations. In addition, in the event of accidental contamination or injury from these materials, we could be held liable for any damages that result, including remediation, and any such liability could exceed our resources.


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Competition in the cancer therapeutics field is intense and is accentuated by the rapid pace of advancements in product development. We anticipate that we will face increased competition in the future as new companies enter our markets. Some competitors are pursuing product development strategies competitive with ours. In addition, we compete with other clinical-stage companies and institutions for clinical trial participants, which could reduce our ability to recruit participants for our clinical trials. Delay in recruiting clinical trial participants could adversely affect our ability to bring a product to market prior to our competitors. Further, research and discoveries by others may result in breakthroughs that render potential products obsolete before they generate revenue.
 
There are products currently under development by other companies and organizations that could compete with PROVENGE, and potentially other products that we are developing. Products such as androgen metabolism or androgen receptor antagonists, endothelin A receptor antagonists, antisense compounds, angiogenesis inhibitors and gene therapies for cancer are also under development by a number of companies and could potentially compete with PROVENGE and product candidates we may develop. Chemotherapeutic, taxane-based therapy has been available since 2004 for the therapeutic treatment of metastatic, androgen-independent prostate cancer. In addition, many universities and private and public research institutes may become active in cancer research, which may be in direct competition with us.
 
Some of our competitors in the cancer therapeutics field have substantially greater research and development capabilities and manufacturing, marketing, financial and managerial resources than we do. In addition, our competitors may obtain patent protection or FDA approval and commercialize products more rapidly than we do, which may impact future sales of our products. We expect that competition among products approved for sale will be based, among other things, on product efficacy, price, safety, reliability, availability, patent protection, and sales, marketing and distribution capabilities. Our profitability and financial position will suffer if our products receive regulatory approval, but cannot compete effectively in the marketplace.
 
We could face competition for PROVENGE or other approved products from biosimilar products which could impact our profitability.
 
We may face competition in Europe from biosimilar products, and we expect we may face competition from biosimilars in the future in the U.S. as well. Lawmakers in the United States have recently enacted healthcare reform legislation which included an abbreviated regulatory pathway for the approval of biosimilars. The E.U. has already created such a regulatory pathway. To the extent that governments adopt more permissive approval frameworks and competitors are able to obtain broader marketing approval for biosimilars, our products will become subject to increased competition. Expiration or successful challenge of applicable patent rights could trigger such competition, and we could face more litigation regarding the validity and/or scope of our patents.
 
In the E.U., the European Commission has granted marketing authorizations for several biosimilars pursuant to a set of general and product class-specific guidelines for biosimilar approvals issued over the past few years. We cannot predict to what extent the entry of biosimilar products or other competing products could impact our future potential sale of PROVENGE in the E.U. Our inability to compete effectively in non-U.S. territories would reduce global sales potential, which could have a material adverse effect on our results of operations.
 
On March 23, 2010, President Obama signed into law the PPACA which authorized the FDA to approve biosimilar products. The new law established a period of 12 years of data exclusivity for reference products in order to preserve incentives for future innovation and outlined statutory criteria for science-based biosimilar approval standards that take into account patient safety considerations. Under this framework, data exclusivity protects the data in the innovator’s regulatory application by prohibiting, for a period of 12 years, others from gaining FDA approval based in part on reliance or reference to the innovator’s data in their application to the FDA. The next phase of the process will be implementation of the biosimilars regulatory approval pathway by the FDA. The new law does not change the duration of patents granted on biologic products. While the FDA now has the authority to approve


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biosimilar products, the FDA has not announced whether they will first publish guidance or rules for biosimilar applicants before approving biosimilar products. With the likely introduction of a pathway for the approval of biosimilars in the United States, we may in the future face greater competition from biosimilar products and downward pressure on our product prices, sales and revenues, subject to our ability to enforce our patents. Further, biosimilar manufacturers with approved products in Europe may seek to quickly obtain U.S. approval now that the regulatory pathway for biosimilars has been enacted.
 
 
We depend, to a significant extent, on the efforts of our key employees, including senior management and senior scientific, clinical, regulatory, operational and other personnel. The development of new therapeutic products requires expertise from a number of different disciplines, some of which are not widely available.
 
We depend upon our scientific staff to discover new product candidates and to develop and conduct preclinical studies of those new potential products. Our clinical and regulatory staff is responsible for the design and execution of clinical trials in accordance with FDA requirements and for the advancement of our product candidates toward FDA approval and submission of data supporting approval. The quality and reputation of our scientific, clinical and regulatory staff, especially the senior staff, and their success in performing their responsibilities, may directly influence the success of our product development programs. As we pursue successful commercialization of PROVENGE, our sales and marketing, and operations executive management staff takes on increasing significance and influence upon our organizational success. In addition, our Chief Executive Officer and other executive officers are involved in a broad range of critical activities, including providing strategic and operational guidance. The loss of these individuals, or our inability to retain or recruit other key management and scientific, clinical, regulatory, medical, operational and other personnel, may delay or prevent us from achieving our business objectives. We face intense competition for personnel from other companies, universities, public and private research institutions, government entities and other organizations.
 
Risks Relating to Collaboration Arrangements and Reliance on Third Parties
 
We must rely at present on relationships with third-party suppliers to supply necessary components used in our products, which relationships are not easy to replace.
 
We rely upon contract manufacturers for components used in the manufacture and distribution of PROVENGE. Problems with any of our or our suppliers’ facilities or processes could result in failure to produce or a delay in production of adequate supplies of the antigen or other components we use in the manufacture of PROVENGE. This could delay or reduce commercial sales and materially harm our business. Any prolonged interruption in the operations of our suppliers’ facilities could result in cancellation of orders, loss of components in the process of being manufactured or a shortfall in availability of a necessary component. A number of factors could cause interruptions, including the inability of a supplier to provide raw materials, equipment malfunctions or failures, damage to a facility due to natural disasters, changes in FDA regulatory requirements or standards that require modifications to manufacturing processes, or action by us to implement process changes or other similar factors. Because manufacturing processes are highly complex and are subject to a lengthy FDA approval process, alternative qualified supply may not be available on a timely basis or at all. Difficulties or delays in our suppliers’ manufacturing and supply of components could delay our clinical trials, increase our costs, damage our reputation and, for PROVENGE, cause us to lose revenue or market share if we are unable to timely meet market demands.
 
We are dependent on our leukapheresis network for raw materials required for the manufacture of PROVENGE.
 
The manufacture of each patient-specific dose of PROVENGE first requires we obtain immune cells from the relevant patient, which is done through a leukapheresis process at a cell collection center with which we have contracted. We have entered into agreements with independent cell collection and blood centers, including the American Red Cross, to perform this process for us. However there are a finite number of centers with the requisite skill, training, staffing and equipment to perform the leukapheresis procedure for PROVENGE patients and we


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cannot be certain that as our manufacturing capacity expands the leukapheresis network presently available to us will be sufficient to service demand at full capacity. We anticipate that we will need to expand the leukapheresis network available to us prospectively through additional partnerships or other endeavors. There can be no assurances that we will be able to secure sufficient leukapheresis capacity to manufacture PROVENGE when and as desired. If we are unable to expand our access to these services as necessary, our revenues will suffer and our business could be harmed.
 
We rely on single source vendors for some key components for PROVENGE and our active immunotherapy product candidates, which could impair our ability to manufacture and supply our products.
 
We currently depend on single source vendors for components used in PROVENGE and other active immunotherapy candidates. We have a long-term contract with Diosynth RTP, Inc. for the production of the antigen used in the manufacturing of PROVENGE, and have recently entered into an agreement with GlaxoSmithKline LLC to establish an additional source of supply of the antigen. Any production shortfall on the part of Diosynth or, assuming successful completion of process implementation, GlaxoSmithKline, that impairs the supply of the antigen to us could have a material adverse effect on our business, financial condition and results of operations. In addition, we rely on single-source unaffiliated third-party suppliers for certain other raw materials, medical devices and components necessary for the formulation, fill and finish of our products. Certain of these raw materials, medical devices and components are the proprietary products of these unaffiliated third-party suppliers and are specifically cited in the drug application with regulatory agencies so that they must be obtained from that specific sole source and could not be obtained from another supplier unless and until the regulatory agency approved such supplier. An inability to continue to source product from any of these suppliers, which could be due to regulatory actions or requirements affecting the supplier, adverse financial or other strategic developments experienced by a supplier, labor disputes or shortages, unexpected demands or quality issues, could adversely affect our ability to satisfy demand for PROVENGE or other products, which could adversely affect our product sales and operating results materially or our ability to conduct clinical trials, either of which could significantly harm our business.
 
 
Product collaborations are complex and any potential discussions may not result in a definitive agreement for many reasons. For example, whether we reach a definitive agreement for a collaboration would depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration, and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the potential market for the product candidate, the costs and complexities of manufacturing and delivering the product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. If we were to determine that a collaboration for a particular product is necessary in order to commercialize it and were unable to enter into such a collaboration on acceptable terms, we might elect to delay or scale back the commercialization of a product in order to preserve our financial resources or to allow us adequate time to develop the required physical resources and systems and expertise ourselves.
 
If we enter into a collaboration agreement we consider acceptable, the collaboration may not proceed as quickly, smoothly or successfully as we plan. The risks in a collaboration agreement generally include:
 
  •  the collaborator may not apply the expected financial resources or required expertise in developing the physical resources and systems necessary to successfully commercialize a product;
 
  •  the collaborator may not invest in the development of a sales and marketing force and the related infrastructure at levels that ensure that sales of a product reach their full potential;
 
  •  disputes may arise between us and a collaborator that delay the commercialization of the product or adversely affect its sales or profitability; or


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  •  the collaborator may independently develop, or develop with third parties, products that could compete with the product.
 
With respect to a collaboration for any of our products or product candidates, we are dependent on the success of our collaborators in performing their respective responsibilities and the continued cooperation of our collaborators. Our collaborators may not cooperate with us to perform their obligations under our agreements with them. We cannot control the amount and timing of our collaborators’ resources that will be devoted to activities related to our collaborative agreements with them. Our collaborators may choose to pursue existing or alternative technologies in preference to those being developed in collaboration with us. A collaborator may have the right to terminate the collaboration at its discretion. Any termination may require us to seek a new collaborator, which we may not be able to do on a timely basis, if at all, or require us to delay or scale back the commercialization efforts. The occurrence of any of these events could adversely affect the commercialization of product candidates we may commercialize and materially harm our business and stock price by slowing the pace of growth of such sales, by reducing the profitability of the product or by adversely affecting the reputation of the product in the market.
 
 
 
We invent and develop technologies that are the basis for or incorporated in our potential products. We protect our technology through United States and foreign patent filings, trademarks and trade secrets. We have issued patents, and applications for United States and foreign patents in various stages of prosecution. We expect that we will continue to file and prosecute patent applications and that our success depends in part on our ability to establish and defend our proprietary rights in the technologies that are the subject of issued patents and patent applications.
 
The fact that we have filed a patent application or that a patent has issued, however, does not ensure that we will have meaningful protection from competition with regard to the underlying technology or product. Patents, if issued, may be challenged, invalidated, declared unenforceable or circumvented or may not cover all applications we may desire. Our pending patent applications as well as those we may file in the future may not result in issued patents. Patents may not provide us with adequate proprietary protection or advantages against competitors with, or who could develop, similar or competing technologies or who could design around our patents.
 
We also rely on trade secrets and know-how that we seek to protect, in part, through confidentiality agreements. Our policy is to require our officers, employees, consultants, contractors, manufacturers, outside scientific collaborators and sponsored researchers and other advisors to execute confidentiality agreements. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties except in specific limited circumstances. We also require signed confidentiality agreements from companies that receive our confidential data. For employees, consultants and contractors, we require confidentiality agreements providing that all inventions conceived while rendering services to us shall be assigned to us as our exclusive property. It is possible, however, that these parties may breach those agreements, and we may not have adequate remedies for any breach. It is also possible that our trade secrets or know-how will otherwise become known to or be independently developed by competitors.
 
We are also subject to the risk of claims, whether meritorious or not, that our products or immunotherapy candidates infringe or misappropriate third party intellectual property rights. If we are found to infringe or misappropriate third party intellectual property, we could be required to seek a license or discontinue our products or cease using certain technologies or delay commercialization of the affected product or products, and we could be required to pay substantial damages, which could materially harm our business.
 
 
Our business may bring us into conflict with our licensees, licensors or others with whom we have contractual or other business relationships, or with our competitors or others whose interests differ from ours. If we are unable to


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resolve those conflicts on terms that are satisfactory to all parties, we may become involved in litigation brought by or against us. That litigation is likely to be expensive and may require a significant amount of management’s time and attention, at the expense of other aspects of our business.
 
Litigation relating to the ownership and use of intellectual property is expensive, and our position as a relatively small company in an industry dominated by very large companies may cause us to be at a disadvantage in defending our intellectual property rights and in defending against claims that our immunotherapy candidates infringe or misappropriate third party intellectual property rights. Even if we are able to defend our position, the cost of doing so may adversely affect our profitability. We may in the future be subject to patent litigation and may not be able to protect our intellectual property at a reasonable cost if such litigation is initiated. The outcome of litigation is always uncertain, and in some cases could include judgments against us that require us to pay damages, enjoin us from certain activities or otherwise affect our legal or contractual rights, which could have a significant adverse effect on our business.
 
 
Our business exposes us to potential liability risks inherent in the research, development, manufacturing and marketing of drug candidates and products. If any of our drug candidates in clinical trials or our marketed products harm people or allegedly harm people, we may be subject to costly and damaging product liability claims. Most, if not all, of the patients who participate in our clinical trials are already seriously ill when they enter a trial. We have clinical trial insurance coverage, and commercial product liability insurance coverage. However, this insurance coverage may not be adequate to cover all claims against us. There is also a risk that adequate insurance coverage will not be available in the future on commercially reasonable terms, if at all. The successful assertion of an uninsured product liability or other claim against us could cause us to incur significant expenses to pay such a claim, could adversely affect our product development or product sales and could cause a decline in our product revenues. Even a successfully defended product liability claim could cause us to incur significant expenses to defend such a claim, could adversely affect our product development and could cause a decline in our product revenues.
 
Risks Relating to an Investment in Our Common Stock
 
Our business may be affected by legal proceedings.
 
We have been in the past, and may become in the future, involved in legal proceedings. You should carefully review and consider the various disclosures we make in our reports filed with the SEC regarding legal matters that may affect our business. Civil and criminal litigation is inherently unpredictable and outcomes can result in excessive verdicts, fines, penalties and/or injunctive relief that affect how we operate our business. Monitoring and defending against legal actions, whether or not meritorious, and considering stockholder demands, is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities. In addition, legal fees and costs incurred in connection with such activities may be significant. We cannot predict with certainty the outcome of any legal proceedings in which we become involved and it is difficult to estimate the possible costs to us stemming from these matters. Settlements and decisions adverse to our interests in legal actions could result in the payment of substantial amounts and could have a material adverse effect on our cash flow, results of operations and financial position.
 
 
The trading price for our common stock has been, and we expect it to continue to be, volatile. The price at which our common stock trades depends on a number of factors, including the following, many of which are beyond our control:
 
  •  the relative success of our commercialization efforts for PROVENGE;
 
  •  preclinical and clinical trial results and other product development activities;
 
  •  our historical and anticipated operating results, including fluctuations in our financial and operating results;


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  •  changes in government regulations affecting product approvals, reimbursement or other aspects of our or our competitors’ businesses;
 
  •  announcements of technological innovations or new commercial products by us or our competitors;
 
  •  developments concerning our key personnel;
 
  •  our ability to protect our intellectual property, including in the face of changing laws;
 
  •  announcements regarding significant collaborations or strategic alliances;
 
  •  publicity regarding actual or potential performance of products under development by us or our competitors;
 
  •  market perception of the prospects for biotechnology companies as an industry sector; and
 
  •  general market and economic conditions.
 
During periods of extreme stock market price volatility, share prices of many biotechnology companies have often fluctuated in a manner not necessarily related to their individual operating performance. Accordingly, our common stock may be subject to greater price volatility than the stock market as a whole.
 
 
Provisions of our amended and restated certificate of incorporation, as amended (“certification of incorporation”) and amended and restated bylaws (“bylaws”) will make it more difficult for a third party to acquire us on terms not approved by our board of directors and may have the effect of deterring hostile takeover attempts. Our certificate of incorporation authorizes our board of directors to issue up to 10,000,000 shares of preferred stock, of which 1,000,000 shares have been designated as “Series A Junior Participating Preferred Stock,” and to fix the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of our common stock will be subject to, and may be junior to the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could reduce the voting power of the holders of our common stock and the likelihood that common stockholders will receive payments upon liquidation.
 
In addition, our certificate of incorporation divides our board of directors into three classes having staggered terms. This may delay any attempt to replace our board of directors. We have also implemented a stockholders’ rights plan, also called a poison pill, which would substantially reduce or eliminate the expected economic benefit to an acquirer from acquiring us in a manner or on terms not approved by our board of directors. These and other impediments to a third party acquisition or change of control could limit the price investors are willing to pay in the future for shares of our common stock. Our executive officers have employment agreements that include change of control provisions providing severance benefits in the event that their employment terminates involuntarily without cause or for good reason within twelve months after a change of control of us. These agreements could affect the consummation of and the terms of a third party acquisition.
 
We are also subject to provisions of Delaware law that could have the effect of delaying, deferring or preventing a change in control of our company. One of these provisions prevents us from engaging in a business combination with any interested stockholder for a period of three years from the date the person becomes an interested stockholder, unless specified conditions are satisfied.
 
 
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to fund the development and growth of our business and do not currently anticipate paying any cash dividends in the foreseeable future. Accordingly, our shareholders will not realize a return on their investment unless they sell shares after the trading price of our shares appreciates.


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The fundamental change repurchase feature of our convertible notes may delay or prevent a takeover attempt of our company that would otherwise be beneficial to investors.
 
The indenture governing each of our 2014 Notes and 2016 Notes will require us to repurchase the notes for cash upon the occurrence of a fundamental change and, in certain circumstances, to increase the conversion rate for a holder that converts its notes in connection with a fundamental change. A takeover of our company may trigger the requirement that we repurchase the notes and increase the conversion rate, which could make it more costly for a potential acquirer to engage in a combinatory transaction with us. Such additional costs may have the effect of delaying or preventing a takeover of our company that would otherwise be beneficial to investors.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.   PROPERTIES
 
Our principal research, development and administrative facilities are located in Seattle, Washington and consist of approximately 143,000 square feet under three leases. The first lease approximates 71,000 square feet and expires in December 2011. The second lease for 24,000 square feet, as amended, also expires in December 2011. In April 2010, we leased an additional 11,500 square feet in this building, with a term commencing in May 2010 and ending December 31, 2011. The third lease for the remaining 37,000 square feet expires in April 2011. In February 2011, we entered into a lease with Northwest Mutual Insurance Company for office space of 179,656 rentable square feet in Seattle, Washington. The initial lease term is for five and a half years, with one renewal term of three years. Also in February 2011, we entered into a sublease with Zymogenetics, Inc. for laboratory and office space of 97,365 rentable square feet in Seattle, Washington. The initial lease term is for seven and a half years.
 
We lease approximately 2,400 square feet of office space in Morrisville, North Carolina under a lease expiring in October 2014. We lease approximately 158,000 square feet of manufacturing space in Morris Plains, New Jersey under a lease expiring in October 2012. This lease may be extended at our option for two ten-year periods and one five-year period. In July 2009, we entered into a lease with Majestic Realty Co. for a building to be constructed in Atlanta, Georgia consisting of approximately 160,000 rentable square feet. The facility is intended for use by us as a manufacturing facility following construction and build-out, which was substantially completed in 2010. The initial lease term is for ten and a half years expiring in August 2020, with two renewal terms of five years each. The lease includes a one-time purchase option exercisable prior to March 2011, and a ten-year expansion option for up to an additional 47,000 square feet. In August 2009, we entered into a lease with Knickerbocker Properties, Inc. XLVI for existing space totaling approximately 184,000 rentable square feet in Orange County, California for use by us as a manufacturing facility following build-out, which was substantially completed in 2010. The initial lease term is for ten and a half years expiring in December 2019, with two renewal terms of five years each. The lease includes a one-time purchase option exercisable during the first three years of the lease term. We believe that our existing properties are in good condition and suitable for the conduct of our business.
 
To support our commercialization efforts, we have made significant investments in manufacturing facilities and related operations. We have pursued a plan to outfit our New Jersey Facility in phases to meet the anticipated manufacturing needs for PROVENGE. The initial build-out of our New Jersey Facility was completed in July 2006. In February 2007, we started to manufacture PROVENGE for clinical use in the New Jersey Facility. As of December 31, 2010, approximately 25% of the capacity at our New Jersey Facility had been approved by the FDA for commercial manufacturing. We have completed validation activities necessary to support FDA licensure of the additional capacity. Subject to license by the FDA, we expect the additional capacity to be available in the first quarter of 2011.
 
We also intend to use our Atlanta Facility and Orange County Facility for commercial manufacturing. We commenced occupation of the Atlanta Facility and Orange County Facility during the third quarter of 2010 and have commenced validation activities for these facilities. These facilities will be available for commercial manufacture of PROVENGE after review and license by the FDA, which we anticipate to occur mid-year 2011.


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ITEM 3.   LEGAL PROCEEDINGS
 
On October 4, 2007, the United States District Court for the Western District of Washington consolidated four proposed securities class actions under the caption McGuire v. Dendreon Corporation, et al., Case No. C07-800-MJP, and designated a lead plaintiff. This action was purportedly brought on behalf of a class of persons and entities who purchased Dendreon common stock between March 1, 2007, and May 8, 2007, inclusive. Lead plaintiff filed an amended complaint on June 2, 2008, a second amended complaint on January 5, 2009, and a third amended complaint on June 8, 2009. The third amended complaint named Dendreon, Chief Executive Officer Mitchell Gold, and Senior Vice President and Chief Scientific Officer David Urdal as defendants, and alleged that defendants made false or misleading statements. It also included a claim for insider trading against Dr. Gold.
 
On September 16, 2010, the parties agreed to settle McGuire v. Dendreon for a payment of $16.5 million to the class, with no admission of wrongdoing on the part of defendants. A ruling on defendants’ motion for partial summary judgment was pending at the time the parties notified the Court that they had arrived at a settlement. On October 25, 2010, lead plaintiff filed a motion for preliminary approval of the settlement, and a settlement hearing was held on December 17, 2010. On December 20, 2010, the Court filed orders granting lead plaintiff’s motions for approval of the settlement and for approval of attorneys’ fees and expenses. On February 17, 2011, the Court entered final judgment and dismissed the class action with prejudice.
 
On March 31, 2009, a securities action was filed against the Company and certain of its officers and directors in the United States District Court for the Western District of Washington under the caption Mountanos v. Dendreon Corporation, et al., Case No. C09-426 RAJ. The complaint in Mountanos makes similar factual and legal allegations as the third amended complaint filed in McGuire v. Dendreon, but Mountanos was not a class action and the named plaintiffs allegedly purchased options rather than the Company’s common stock. On September 27, 2010, the Court dismissed the action with prejudice, after the parties notified the Court that they had reached a settlement. A ruling on defendants’ motion for partial summary judgment was pending at the time the parties notified the Court that they had arrived at a settlement.
 
On January 7, 2011, a complaint was filed in the United States District Court for the Western District of Washington by a party that had opted out of the settlement made on behalf of the class in McGuire v. Dendreon. The complaint is captioned ORG Lluch Salvado, S.A. v. Dendreon Corporation, et al., and names the Company, Dr. Urdal, and Dr. Gold as defendants. Plaintiff is a Spanish company that purportedly purchased shares of Dendreon common stock between March 29, 2007 and May 8, 2007. The complaint makes similar factual and legal contentions as the third amended complaint in McGuire v. Dendreon. Defendants have not yet answered this complaint and no briefing schedule has been set.
 
Management believes that final resolution of these matters, individually or in aggregate, will not have a material adverse effect on our financial position, our results of operations, or our cash flows. However, these matters are subject to inherent uncertainties and the actual cost, as well as the distraction from the conduct of our business, will depend upon many unknown factors and management’s view of these may change in the future.


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EXECUTIVE OFFICERS OF THE REGISTRANT
 
Our executive officers and their ages as of February 23, 2011 were as follows:
 
             
Name   Age   Position
 
Mitchell H. Gold, M.D. 
    43     President and Chief Executive Officer
Hans E. Bishop
    46     Executive Vice President and Chief Operating Officer
Mark W. Frohlich, M.D. 
    49     Executive Vice President for Clinical Affairs and Chief Medical Officer
Richard F. Hamm, Jr. 
    51     Executive Vice President, Corporate Development, General Counsel and Secretary
Richard J. Ranieri
    59     Executive Vice President, Human Resources
Gregory T. Schiffman
    53     Executive Vice President, Chief Financial Officer and Treasurer
David L. Urdal, Ph.D. 
    61     Executive Vice President and Chief Scientific Officer
 
Mitchell H. Gold, M.D. has served as our Chief Executive Officer since January 1, 2003, and as a director since May 2002. Dr. Gold also served as our Vice President of Business Development from June 2001 to May 2002, and as our Chief Business Officer from May 2002 through December 2002. From April 2000 to May 2001, Dr. Gold served as Vice President of Business Development and Vice President of Sales and Marketing for Data Critical Corporation, a company engaged in wireless transmission of critical healthcare data, now a division of GE Medical. From 1995 to April 2000, Dr. Gold was the President and Chief Executive Officer, and a co-founder of Elixis Corporation, a medical information systems company. From 1993 to 1998, Dr. Gold was a resident physician in the Department of Urology at the University of Washington. Dr. Gold currently serves on the boards of the University of Washington/Fred Hutchinson Cancer Research Center Prostate Cancer Institute, the Washington Biotechnology and BioMedical Association and the Biotechnology Industry Organizations Emerging Company Section Governing Board. Dr. Gold received a B.S. from the University of Wisconsin-Madison and an M.D. from Rush Medical College.
 
Hans E. Bishop has served as our Executive Vice President and Chief Operating Officer since January 4, 2010. Mr. Bishop had previously served since 2008 as President of the specialty medicine at Bayer and previously served as President of its hematology/cardiovascular division since 2007. Prior to his position with Bayer, from 2004 to 2007, Mr. Bishop served as Senior Vice President of global commercial operations at Chiron Corporation, as well as its Vice President and General Manager of European biopharmaceuticals. Mr. Bishop previously held various positions at Glaxo Wellcome and SmithKlineBeecham. In addition, he served as Executive Vice President of operations with a global telecom service company. Mr. Bishop received a B.S. in chemistry from Brunel University in London.
 
Mark W. Frohlich, M.D. has served as our Executive Vice President for Clinical Affairs and Chief Medical Officer since December 2010. Previously, Mr. Frohlich became our Senior Vice President for Clinical Affairs and Chief Medical Officer on January 1, 2008. Dr. Frohlich served as our Vice President of Clinical Affairs from April 2006 and from August 2005 served as our Senior Medical Director. Prior to joining Dendreon, Dr. Frohlich was Vice President and Medical Director at Xcyte Therapies, Inc., a biotechnology company, from October 2001 to July 2005. From 1998 to 2001, Dr. Frohlich was a member of the faculty of the University of California at San Francisco where he served as an assistant professor in the Division of Hematology/Oncology. Dr. Frohlich received a B.S. in electrical engineering and economics from Yale University and an M.D. from Harvard Medical School.
 
Richard F. Hamm, Jr. has served as our Executive Vice President, General Counsel and Secretary since December 2010. He previously served as our Senior Vice President, Corporate Development since December 2005, in addition to his positions as our Senior Vice President, General Counsel and Secretary, in which capacities he has served us since November 2004. Mr. Hamm also served as our principal financial officer from January to December 2006. From April 2002 to November 2004, Mr. Hamm was the Vice President and Deputy General Counsel of Medtronic, Inc., a leading medical technology company. Mr. Hamm is a director of EMCOR Group, Inc., an electrical and mechanical construction and facilities services company. From August 2000 until September 2009,


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Mr. Hamm was a director of Axsys Technologies, Inc., a manufacturer of precision optical components and systems for aerospace, defense and other high technology markets. Mr. Hamm received a B.S. in Business Administration from Arizona State University, a J.D. from Harvard Law School and an M.B.A. from the Wharton School at the University of Pennsylvania.
 
Richard J. Ranieri has served as our Executive Vice President, Human Resources since December 2010. Mr. Ranieri joined us in April 2010 as our Senior Vice President, Human Resources. Mr. Ranieri joined Dendreon from Sepracor, Inc., where he served as the Executive Vice President of Human Resources and Administration. Mr. Ranieri previously served as the Senior Vice President of Human Resources and Chief Administrative Officer at Neurocrine Biosciences, where he was responsible for managing and directing the human resources, corporate communications, operations and purchasing functions of the company. Mr. Ranieri also has held positions at Genencor International and SmithKline Beecham. Mr. Ranieri received a M.S. from Rider College and a B.A. from Villanova University.
 
Gregory T. Schiffman has served as our Executive Vice President, Chief Financial Officer and Treasurer since December 2010. Mr. Schiffman joined us in December 2006 as Senior Vice President, Chief Financial Officer and Treasurer. Prior to that time, Mr. Schiffman was the Executive Vice President and Chief Financial Officer of Affymetrix, Inc., a manufacturer of genetic analysis products. He served as Affymetrix’s Vice President of Finance from March 2001 and was appointed Vice President and Chief Financial Officer in August 2001. At Affymetrix, Mr. Schiffman was promoted to Senior Vice President in October 2002 and to Executive Vice President in February 2005. Prior to joining Affymetrix, Mr. Schiffman was Vice President, Controller of Applied Biosystems, Inc. from October 1998. From 1987 through 1998, Mr. Schiffman held various managerial and financial positions at Hewlett Packard Company. Mr. Schiffman served as a director of Vnus Technologies, Inc., a medical device company from April 2006 until July 2009, Xenogen Corporation, a life sciences tools company from January 2005 until August 2006, and Impac Software Medical Systems, Inc., an information systems company making products for managing radiation and medical oncology practices from February 2003 until April 2005. Mr. Schiffman received a B.S. from De Paul University and an M.B.A. from the Kellogg School at Northwestern University.
 
David L. Urdal, Ph.D. has served as our Executive Vice President and Chief Scientific Officer since December 2010. Previously, he served as our Senior Vice President and Chief Scientific Officer since June 2004. In January 2006, Dr. Urdal assumed oversight of manufacturing operations for the Company. Prior to June 2004, he served as Vice Chairman of the Company’s Board of Directors and Chief Scientific Officer since joining the Company in July 1995. He served as the Company’s President from January 2001 to December 2003, and he served as the Company’s Executive Vice President from January 1999 through December 2000. From 1982 until July 1995, Dr. Urdal held various positions with Immunex Corporation, a biotechnology company, including President of Immunex Manufacturing Corporation, Vice President and Director of Development, and head of the departments of biochemistry and membrane biochemistry. Dr. Urdal serves as a director of VLST, a biotechnology company and previously served as a director of ORE Pharmaceuticals, Inc., a pharmaceutical drug repositioning and development company, from 2007 until 2010. Dr. Urdal received a B.S. in zoology, an M.S. in Public Health and a Ph.D. in Biochemical Oncology from the University of Washington.


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ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock trades on the Nasdaq Global Market under the symbol “DNDN.” The following table sets forth, for the periods indicated, the high and low reported intraday sale prices of our common stock as reported on the Nasdaq Global Market:
 
                 
    High     Low  
 
Year ended December 31, 2010
               
First quarter
  $ 38.12     $ 26.25  
Second quarter
    57.67       32.10  
Third quarter
    43.90       25.78  
Fourth quarter
    41.63       33.60  
Year ended December 31, 2009
               
First quarter
  $ 4.80     $ 2.55  
Second quarter
    27.40       4.02  
Third quarter
    30.42       21.25  
Fourth quarter
    30.42       24.79  
 
On February 23, 2011, the last reported sale price of our common stock on the NASDAQ Global Select Market was $32.86 per share.
 
Recordholders.  As of February 23, 2011, there were 301 holders of record of our common stock.
 
Dividends.  We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to fund the development and growth of our business and do not currently anticipate paying any cash dividends in the foreseeable future. Future dividends, if any, will be determined by our board of directors and will depend upon our financial condition, results of operations, capital requirements and other factors.
 
Share Repurchases.  The following table sets forth information with respect to purchases of shares of our common stock made during the three months ended December 31, 2010 by or on behalf of the Company or any “affiliated purchaser,” as defined by Rule 10b-18 of the Securities Exchange Act of 1934:
 
                                 
                Total
       
                Number of
    Maximum
 
                Shares
    Number of
 
                Purchased as
    Shares that
 
                Part of
    May Yet be
 
    Total
          Publicly
    Purchased
 
    Number of
    Average
    Announced
    Under the
 
    Shares
    Price Paid
    Plans or
    Plans or
 
Period   Purchased(1)     per Share     Programs     Programs  
 
October 1 — October 31, 2010
    12,987     $ 37.81              
November 1 — November 30, 2010
                       
December 1 — December 31, 2010
    4,556       36.64              
                                 
Total
    17,543     $ 37.51              
                                 
 
 
(1) Represents shares withheld from vested restricted stock to satisfy the minimum withholding requirement for federal and state taxes.


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The following graph shows the total stockholder return of an investment of $100 in cash in our common stock or in each of the following indices on December 31, 2005: (i) the Nasdaq Composite Index and (ii) the Nasdaq Biotechnology Index. All values assume reinvestment of the full amount of all dividends and are calculated as of December 31, 2010.
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Dendreon Corporation, The NASDAQ Composite Index
And The NASDAQ Biotechnology Index
 
(PERFORMANCE GRAPH)
 
 
* $100 invested on 12/31/05 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.


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ITEM 6.   SELECTED FINANCIAL DATA
 
You should read the selected financial data set forth below in conjunction with the information in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and the related notes thereto appearing elsewhere in this annual report.
 
                                         
    Year Ended December 31,  
    2010     2009     2008     2007     2006  
    (In thousands, except per share amounts)  
 
Consolidated Statement of Operations Data:
                                       
Revenue
  $ 48,057     $ 101     $ 111     $ 743     $ 273  
Cost of revenue
    28,520                          
Operating expenses
    311,701       100,142       70,589       102,362       97,629  
                                         
Loss from operations
    (292,164 )     (100,041 )     (70,478 )     (101,619 )     (97,356 )
Interest income (expense)
    (444 )     (1,357 )     (1,537 )     2,355       5,714  
(Loss) gain from valuation of warrant liability
    (142,567 )     (118,763 )     371              
Loss on debt conversion
    (4,716 )                        
Income tax benefit
    411                          
                                         
Net loss
  $ (439,480 )   $ (220,161 )   $ (71,644 )   $ (99,264 )   $ (91,642 )
                                         
Basic and diluted net loss per share
  $ (3.18 )   $ (2.04 )   $ (0.79 )   $ (1.20 )   $ (1.27 )
                                         
Shares used in computation of basic and diluted net loss per share
    138,206       108,050       90,357       82,531       72,366  
                                         
 
                                         
    As of December 31,  
    2010     2009     2008     2007     2006  
 
Consolidated Balance Sheet Data:
                                       
Cash, cash equivalents, short- and long-term investments
  $ 277,296     $ 606,386     $ 110,577     $ 120,575     $ 121,283  
Working capital
    280,315       441,550       84,485       81,656       89,557  
Total assets
    603,953       735,415       147,204       161,662       163,643  
Warrant liability
          132,953       14,190              
Long-term liabilities and obligations, less current portion
    61,100       68,915       93,802       95,647       17,027  
Total stockholders’ equity
    492,774       503,564       27,006       40,377       125,717  
 
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
We are a biotechnology company focused on the discovery, development and commercialization of novel therapeutics that may significantly improve cancer treatment options for patients. Our product portfolio includes active cellular immunotherapy and small molecule product candidates to treat a wide range of cancers.
 
On April 29, 2010, the U.S. Food and Drug Administration (“FDA”) licensed PROVENGE® (sipuleucel-T), our first in class autologous cellular immunotherapy for the treatment of asymptomatic or minimally symptomatic, metastatic, castrate-resistant (hormone-refractory) prostate cancer. Commercial sale of PROVENGE began in May 2010. In January 2011, we announced plans to seek marketing authorization for the sale of PROVENGE in Europe. Prostate cancer is the most common non-skin cancer among men in the United States, with over one million men currently diagnosed with the disease, and the second leading cause of cancer deaths in men in the United States. We own worldwide rights for PROVENGE.


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We have incurred significant losses since our inception. As of December 31, 2010, our accumulated deficit was $1.2 billion, of which $261.0 million relates to the value of the warrant liability described below. We have incurred net losses as a result of research and development expenses, clinical trial expenses, contract manufacturing and facility expenses, costs associated with the commercial launch of PROVENGE and general and administrative expenses in support of our operations and research efforts. We anticipate that near term we will continue to fund our ongoing research, development and general operations from available cash, including proceeds from our January 2011 convertible notes offering, and revenue generated from commercial sales of PROVENGE. Our available cash will allow us to continue to expand our operations including our manufacturing capabilities, continue our clinical trials, apply for regulatory approvals and build commercial infrastructure outside the U.S. and invest in research and product development. The majority of our resources continue to be used in support of the commercialization of PROVENGE. Even if we are able to successfully realize our commercialization goals for PROVENGE, because of the numerous risks and uncertainties associated with commercialization of a biologic, we are unable to predict when we will become profitable, if at all. Even if we do produce revenues and achieve profitability, we may not be able to maintain or increase profitability.
 
In 2010, we achieved revenue from PROVENGE of $48.0 million. During 2010, we supported commercial sale of PROVENGE from the available capacity at our manufacturing facility in Morris Plains, New Jersey (“New Jersey Facility”). We anticipate our manufacturing capabilities will significantly increase during 2011 with the licensure by the FDA of additional capacity at our New Jersey Facility in the first quarter of 2011, and licensure of our new facilities in Orange County, California (“Orange County Facility”) and Atlanta, Georgia (“Atlanta Facility”), which we anticipate to occur mid-year 2011. On February 28, 2011, we submitted our request to the FDA for licensure of the Orange County facility to manufacture PROVENGE. We expect to establish relationships with and support approximately 450 infusion sites by the end of 2011.
 
Soon after PROVENGE was approved by the FDA, the National Comprehensive Cancer Network (“NCCN”) listed PROVENGE in the NCCN Clinical Practice Guidelines in Oncology for Prostate Cancer and NCCN Drugs & Biologics Compendium as a category 1 treatment recommendation for patients with castrate-resistant prostate cancer. A category 1 recommendation means that “the recommendation is based on high level evidence (e.g., randomized controlled trials) and there is uniform NCCN consensus.” With respect to reimbursement, all of the regional Medicare Administrative Contractors (“MACs”) have established coverage guidelines for on-label use of PROVENGE or have stated that they will process PROVENGE claims. In addition, a significant number of private payers including Aetna, Emblem Health, Humana, Kaiser, CIGNA, HealthNet, Regence of Washington, United Healthcare and WellPoint established local or national coverage. On June 30, 2010, the Centers for Medicare and Medicaid Services (“CMS”) opened a national coverage analysis for PROVENGE. The agency is expected to issue a proposed decision memorandum by March 30, 2011 with an analysis completion date of June 30, 2011. In the event CMS were to impose restrictions or additional requirements on coverage of PROVENGE by Medicare contractors it could have a significant adverse impact on PROVENGE sales. CMS met in November 2010 to consider and review commentary on the currently available evidence regarding the impact of labeled and unlabeled use of autologous cellular immunotherapy treatment on health outcomes of patients with metastatic prostate cancer.
 
Data from the pivotal Phase 3 IMPACT study for PROVENGE was published in the July 29, 2010 issue of the New England Journal of Medicine, showing that PROVENGE demonstrated a statistically significant improvement in overall survival compared to control in men with asymptomatic or minimally symptomatic metastatic castration resistant prostate cancer.
 
Following a number of pre-submission meetings with European Union (“E.U.”) National Agencies, we expect that data from our Phase 3 D9902B IMPACT (IMmunotherapy for Prostate AdenoCarcinoma Treatment) study, supported by data from our D9901 and D9902A studies, will be sufficient to seek regulatory approval for PROVENGE in the E.U. We plan to use the clinical data described in our U.S. Biologics License Application to file our marketing authorization application (“MAA”) to the European Medicines Agency (“EMA”) in late 2011 or early 2012. To accelerate the regulatory timeline, initially PROVENGE will be manufactured through a contract manufacturing organization while we concurrently build an immunotherapy manufacturing facility in Europe. We anticipate a regulatory decision from the E.U. in the first half of 2013.
 
As of December 31, 2010, our manufacturing operations employed approximately 750 individuals and our commercial team included approximately 87 individuals employed in sales, marketing, and government affairs.


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During the second half of 2010, our field based teams were primarily focused on training infusion sites and customer education in addition to sales activity for PROVENGE.
 
Other potential product candidates we have under development include our investigational active cellular immunotherapy, DN24-02, directed against HER2/neu for the treatment of patients with bladder, breast, ovarian and other solid tumors expressing HER2/neu. In December 2010 we filed an Investigational New Drug application with the FDA for DN24-02 for the treatment of invasive bladder cancer. Active cellular immunotherapies directed at carbonic anhydrase 9 (“CA-9”), an antigen highly expressed in renal cell carcinoma, and carcinoembryonic antigen (“CEA”), an antigen expressed in colorectal cancer, are in preclinical development. We are also developing an orally-available small molecule targeting TRPM8 that could be applicable to multiple types of cancer in advanced cancer patients. We commenced our Phase 1 clinical trial to evaluate TRPM8 in 2009 and the trial is ongoing.
 
 
We make judgmental decisions and estimates with underlying assumptions when applying accounting principles to prepare our consolidated financial statements. Certain critical accounting policies requiring significant judgments, estimates, and assumptions are detailed below. We consider an accounting estimate to be critical if (1) it requires assumptions to be made that are uncertain at the time the estimate is made and (2) changes to the estimate or different estimates that could have reasonably been used would have materially changed our consolidated financial statements. The development and selection of these critical accounting policies have been reviewed with the Audit Committee of our Board of Directors.
 
We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, should our actual experience differ from these assumptions and other considerations used in estimating these amounts, the impact of these differences could have a material impact on our consolidated financial statements.
 
 
We recognize revenue primarily from the sale of PROVENGE and collaborative research agreements. Revenue from the sale of PROVENGE is recorded net of product returns and estimated healthcare provider contractual chargebacks. Revenues from sales of PROVENGE are recognized upon our confirmed product delivery to and issuance of the product release form to the physician site. As we executed a drop shipment agreement with a credit worthy third party wholesaler (“wholesaler”) to sell PROVENGE, the wholesaler assumes all bad debt risk from the physician, and no allowance for bad debt is recorded. Due to the limited usable life of our product, actual returns are credited against sales in the month they are incurred. Healthcare provider contractual chargebacks are the result of contractual commitments by us to provide products to healthcare providers at specified prices or discounts such as pursuant to mandatory federal programs. Chargebacks occur when a contracted healthcare provider purchases our products through the wholesaler at fixed contract prices that are lower than the price we charge the wholesaler. The wholesaler, in turn, charges us back for the difference between the price initially paid by the wholesaler and the contract price paid to the wholesaler by the healthcare providers. These chargebacks will be recognized in the same period that the related revenue is recognized, resulting in a reduction in product sales revenue and are recorded as other accrued liabilities. For the year ended December 31, 2010 we did not have any chargebacks.
 
We recognize collaborative research revenue from up-front payments, milestone payments, and personnel-supported research funding. The payments received under these research collaboration agreements are generally contractually not refundable even if the research effort is not successful. Performance under our collaborative agreements is measured by scientific progress, as mutually agreed upon by us and our collaborators. Such revenue was insignificant for the years ended December 31, 2010, 2009 and 2008.
 
Inventory
 
Inventories are determined at the lower of cost or market value with cost determined under the specific identification method. Inventories consist of raw materials, work in process and finished goods. We began capitalizing raw material inventory in mid-April 2009 in preparation for our PROVENGE product launch when the product was considered to have a high probability of regulatory approval and the related costs were expected to


43


 

be recoverable through the commercialization of the product. Costs incurred prior to mid-April 2009 have been recorded as research and development expense in our statement of operations. As a result, inventory balances and cost of revenue for the next few quarters will reflect a lower average per unit cost of materials.
 
 
We consider investments in highly liquid instruments purchased with an original maturity at purchase of 90 days or less to be cash equivalents. The amounts are recorded at cost, which approximates fair value. Our cash equivalents and short-term and long-term investments consist principally of commercial paper, money market securities, treasury notes, agency bonds, corporate bonds/notes and certificates of deposit.
 
We have classified our entire investment portfolio as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity and included in accumulated other comprehensive income (loss). The amortized cost of investments is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. Interest earned on securities is included in interest income. Gains are recognized when realized in our consolidated statements of operations. Losses are recognized when realized and when we have determined that an other-than-temporary decline in fair value has occurred.
 
We periodically evaluate whether declines in fair values of our investments below their cost are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as our ability and intent to hold the investment until a forecasted recovery occurs. Additionally, we assess whether it is more likely than not we will be required to sell any investment before recovery of its amortized cost basis.
 
We consider an investment with a maturity greater than twelve months from the balance sheet date as long-term and a maturity less than twelve months as short-term at the balance sheet date. The cost of securities sold is based on the specific identification method.
 
 
We currently measure and report at fair value our cash equivalents and investment securities. We also measured and reported at fair value our warrant liability, prior to exercise of the warrants in the second quarter of 2010. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
 
Assets and liabilities typically recorded at fair value on a non-recurring basis include long-lived assets measured at fair value due to an impairment assessment under ASC 360-10, “Property, Plant and Equipment,” and asset retirement obligations initially measured under ASC 410-20, “Asset Retirement and Environmental Obligations.”
 
 
Stock-based compensation cost is estimated at the grant date based on the award’s fair value and is recognized on the accelerated method as expense over the requisite service period. Compensation cost for all stock-based awards is measured at fair value as of the grant date. The fair value of our stock options is calculated using the Black-Scholes-Merton (“BSM”) option pricing model. The BSM model requires various highly judgmental assumptions including volatility, forfeiture rates and expected option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense for new awards may differ materially in the future from that recorded in the current period.
 
We also grant restricted stock awards that generally vest over a four year period and restricted stock awards with performance conditions. In December 2010 we granted restricted stock awards with certain performance conditions to certain executive officers. At each reporting date, we are required to evaluate whether achievement of the performance condition is probable. Compensation expense is recorded based upon our assessment of


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accomplishing each performance provision, over the appropriate service period. For the year ended December 31, 2010, no expense was recognized related to these awards.
 
We determine the fair value of awards under our Employee Stock Purchase Plan using the BSM model.
 
For additional information about stock-based compensation, see Note 11 to the Consolidated Financial Statements.
 
 
Effective during the quarter ended March 31, 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2010-09, “Subsequent Events” (“ASU 2010-09”), amending ASC 855, “Subsequent Events,” to state that an entity that is a SEC filer is required to evaluate subsequent events through the date that the financial statements are issued, but is not required to disclose the date. The amendment was effective commencing with the quarter ended March 31, 2010. The adoption of ASU 2010-09 did not have a significant impact on our financial statements.
 
During the quarter ended March 31, 2010, we adopted ASU 2010-06, “Fair Value Measurements and Disclosures” (“ASU 2010-6”), which updated ASC 820, “Fair Value Measurements and Disclosures.” ASU 2010-06 requires disclosure as to the amounts and purpose of significant asset transfers between Level 1 and 2 fair value measurements. ASU 2010-06 also requires separate disclosure of Level 3 fair value measurement activity as it relates to purchases, sales, issuances and settlements. The disclosure requirements related to Level 1 and Level 2 fair value measurements were effective commencing with the quarter ended March 31, 2010. The disclosure requirements related to the Level 3 fair value measurements are effective commencing with the quarter ending March 31, 2011. The adoption of ASU 2010-06 did not have a material impact on our financial statements.
 
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
 
 
                         
    Year Ended December 31,  
    2010     2009     2008  
    (In thousands)  
 
Product revenue
  $ 47,957     $     $  
Collaborative revenue
    100       101       111  
                         
Total revenue
  $ 48,057     $ 101     $ 111  
                         
 
Product revenue of $48.0 million in 2010 resulted from commercial sale of PROVENGE following FDA approval on April 29, 2010. Product revenue for 2010 reflects approximately eight months of product sales activity. We recognize product revenues from the sale of PROVENGE upon our confirmed product delivery to the prescribing site and issuance of the product release form to the physician site. We expect product revenue to increase in 2011 as additional manufacturing capacity becomes available and we increase our commercialization efforts.
 
Collaborative revenue includes the recognition of deferred revenue related to a license agreement and royalty revenue.
 
Cost of Revenue
 
Cost of revenue was $28.5 million for the year ended December 31, 2010. The cost of revenue includes the costs of manufacturing and distributing PROVENGE, including overhead and excess manufacturing costs due to under utilization of our New Jersey Facility plant capacity during 2010. Although commercial manufacture of PROVENGE began in May 2010 after FDA approval, substantial production of PROVENGE for commercial sale did not commence until the third quarter of 2010. During April and May 2010, the New Jersey Facility primarily manufactured PROVENGE for clinical patients who were enrolled in existing clinical trials prior to FDA approval. The costs related to clinical manufacture are classified as research and development expense.


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Gross margins on new product introductions generally increase over the life of the product as utilization of capacity increases and manufacturing efforts on product cost reduction are successful. As we expand our product distribution, we anticipate cost of revenue as a percentage of product revenue will decline in future years.
 
We incurred substantial costs associated with the portion of the New Jersey Facility that was not operational during the year. These costs were classified as selling, general and administrative expense. We expect that these expenses will continue to increase as we add additional headcount in anticipation of being licensed by the FDA during the first quarter of 2011 to produce PROVENGE for commercial sale in the expanded capacity of our New Jersey Facility, as well as hiring for our Orange County Facility and Atlanta Facility.
 
We began capitalizing raw material inventory in mid-April 2009, in preparation for our PROVENGE product launch, when the product was considered to have a high probability of regulatory approval and the related costs were expected to be recoverable through the commercialization of the product. Such costs incurred prior to mid-April 2009 were recorded as research and development expense in our statement of operations. As a result, cost of revenues will reflect a lower average per unit cost of materials offset by higher per unit manufacturing overhead due to under utilization of plant capacity for the next few quarters.
 
 
Research and development expenses were $75.9 million in 2010, $61.6 million in 2009 and $50.1 million in 2008. The increase in research and development expense for the year ended 2010 is the result of increased employee-related expenses, including stock-based compensation expense, clinical trial costs in connection with sipuleucel-T trials, as well as expenses incurred in securing second source suppliers and expanding product pipeline development. We also manufactured PROVENGE for clinical patients who were enrolled in existing clinical trials prior to the approval date. The increase in research and development expense for the year ended 2009 as compared to 2008 is the result of increased wages, payroll taxes and other employee-related expenses, including stock-based compensation expense, as well as product development costs in connection with PROVENGE.
 
Financial data related to our research and development activities is categorized as either costs associated with clinical programs, discovery research or developing second source suppliers. Our research and development expenses for the years ended December 31, 2010, 2009 and 2008 were as follows:
 
                         
    Year Ended December 31,  
    2010     2009     2008  
    (In millions)  
 
Clinical programs:
                       
Direct costs
  $ 10.5     $ 5.0     $ 9.0  
Indirect costs
    47.4       51.7       37.7  
                         
Total clinical programs
    57.9       56.7       46.7  
Second source contract manufacturing expenses
    9.9              
Discovery research
    8.1       4.9       3.4  
                         
Total research and development expense
  $ 75.9     $ 61.6     $ 50.1  
                         
 
Direct research and development costs associated with our clinical programs include clinical trial site costs, clinical manufacturing costs, costs incurred for consultants and other outside services, such as data management and statistical analysis support, and materials and supplies used in support of the clinical programs. Indirect costs of our clinical programs include wages, payroll taxes and other employee-related expenses, including stock-based compensation, rent, utilities and other facilities-related maintenance costs. Costs attributable to second source contract manufacturing expenses include technology transfer and process development costs related to developing second source suppliers. Costs attributable to our discovery research programs represent our efforts to develop and expand our product pipeline. The costs in each category may change in the future and new categories may be added.


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While we believe our clinical programs are promising, we do not know whether any commercially viable products in addition to PROVENGE will result from our research and development efforts. Due to the unpredictable nature of scientific research and product development, we cannot reasonably estimate:
 
  •  the timeframe over which our product development programs are likely to be completed;
 
  •  whether they will be completed;
 
  •  if they are completed, whether they will provide therapeutic benefit or be approved for commercialization by the necessary regulatory agencies; or
 
  •  whether, if approved, they will be scalable to meet commercial demand.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses were $235.8 million in 2010, $38.6 million in 2009 and $20.5 million in 2008. Selling, general and administrative expenses primarily consisted of salaries and wages, stock-based compensation, consulting fees, sales and marketing fees and administrative costs to support our operations. In addition, as mentioned above, selling, general and administrative expenses include the expenses associated with the portion of our New Jersey Facility which was not commercially operational during 2010 and related costs of personnel in training. The significant increase in selling, general and administrative expenses in 2010 as compared to 2009 was primarily attributable to higher payroll costs from increased headcount and commercial product launch preparation activities, including non-operational manufacturing capacity.
 
We incurred substantial costs associated with the portion of the New Jersey Facility which was not operational during 2010. We have also begun incurring pre-operational costs at the Atlanta Facility and Orange County Facility, both of which have been substantially completed and are undergoing validation activities. These costs include facility-related expenditures, additional headcount to support the build-out as well as to prepare for commercial production of PROVENGE in anticipation of licensure of the facilities mid-year 2011 by the FDA. The cost related to these activities in 2010 was approximately $105 million, and represents ongoing expenses at all three of the manufacturing facilities that will be classified as cost of revenue when the related commercial operations commence, as well as one-time start up costs required to support the manufacturing launch of PROVENGE. We expect that these types of expenditures will continue to increase until the facilities become fully operational.
 
The increase in selling, general and administrative expenses in 2009 compared with 2008 was primarily attributable to increased payroll and outside costs related to pre-commercialization efforts for PROVENGE.
 
 
Interest income was $1.1 million in 2010, $964,000 in 2009 and $3.6 million in 2008. The slight increase in interest income in 2010 was primarily due to higher average investment balances during 2010, as compared to 2009. The decrease in 2009 compared to 2008 was due to lower average interest rates.
 
 
Interest expense was $1.6 million in 2010, $2.3 million in 2009 and $5.2 million in 2008. The decrease in interest expense in 2010 compared to 2009 was primarily due to increased capitalized interest expense in 2010 related to the construction of our manufacturing facilities. The decrease in interest expense in 2009 compared to 2008 was the result of lower average debt balances and an increase in capitalized interest related to the construction of our manufacturing facilities and our product tracking and scheduling system.
 
 
In April 2008, we issued 8.0 million shares of our common stock, and warrants to purchase up to 8.0 million shares of common stock to an institutional investor, as further discussed in the Liquidity and Capital Resources: Financings from the Sale of Securities and Issuance of Convertible Notes section. The warrants contained a “fundamental change” provision, as defined in the warrants, which may in certain circumstances allow the warrants to be redeemed for cash in an amount equal to the Black-Scholes Value.


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The warrants were recorded at fair value at issuance and were adjusted to fair value at each reporting period until exercised in the second quarter of 2010. Any change in fair value between reporting periods was recorded as other income (expense). The warrants continued to be reported as a liability until they were exercised, at which time the warrants were adjusted to fair value and reclassified from liabilities to stockholders’ equity. The fair value of the Warrants was estimated using the BSM model.
 
The fair value of the warrants on the Exercise Date was $275.5 million, compared with $133.0 million at December 31, 2009. Non-operating loss associated with the increase in warrant liability for the year ended December 31, 2010 was $142.6 million, as compared to a non-operating loss of $118.8 million for the year ended December 31, 2009 and a non-operating gain of $371,000 for the year ended December 31, 2008. The warrant agreement was amended and immediately exercised in May 2010 and therefore the fair value of the warrants will have no further impact on our results of operations in the future.
 
 
We recognized $0.4 million in income tax benefit in 2010 relating to refundable credits, compared with no income tax expense or benefit in 2009 or 2008.
 
As of December 31, 2010, we had federal and state net operating loss carryforwards (“NOLs”) of approximately $843 million and $252 million, respectively. We also had federal and state research and development credit carryforwards (“R&D Credits”) of approximately $20.7 million and $2.6 million, respectively. The NOLs and R&D Credits expire at various dates, beginning in 2011 through 2030, if not utilized. Utilization of the NOLs and R&D Credits may be subject to annual limitations due to the ownership change limitations provided by the Internal Revenue Code of 1986. The annual limitations may result in the expiration of NOLs and R&D Credits before utilization.
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets include net operating loss carryforwards, research credits and stock-based compensation. Our net deferred tax asset of $353.6 million and $240.6 million at December 31, 2010 and 2009, respectively, has been fully offset by a valuation allowance.
 
Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain. Accordingly, the deferred tax assets have been offset by a valuation allowance. The valuation allowance relates primarily to net deferred tax assets from operating losses. Excess tax benefits associated with stock option exercises are recorded directly to stockholders’ equity only when realized. As a result, the excess tax benefits included in net operating loss carryforwards, but not reflected in deferred tax assets, for fiscal year 2010 and 2009 are $146.7 million and $46.2 million, respectively.
 
 
We recorded stock-based compensation expense in the consolidated statements of operations for 2010, 2009 and 2008 as follows:
 
                         
    Year Ended December 31,  
    2010     2009     2008  
    (In millions)  
 
Cost of revenue
  $ 1.5     $     $  
Research and development
    8.4       8.2       2.9  
Selling, general and administrative
    30.4       9.0       3.0  
                         
    $ 40.3     $ 17.2     $ 5.9  
                         
 
Total stock-based compensation expense recognized in the consolidated statement of operations for 2010, 2009 and 2008 increased our net loss per share by $0.29, $0.16 and $0.06, respectively. The increase in stock-based compensation expense in 2010 was primarily related to increased headcount and the increased valuation of stock options and restricted stock awards as a result of our increased stock price.


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As of December 31, 2010, we had approximately $277.3 million in cash, cash equivalents, short-term and long-term investments. To date, we have financed our operations primarily through proceeds from the sale of equity, debt and convertible securities, cash receipts from collaborative agreements, interest income, and most recently sales of PROVENGE.
 
Net cash used in operating activities for the years ended December 31, 2010, 2009 and 2008 was $267.5 million, $85.5 million and $67.3 million, respectively. Expenditures related to operating activities in these periods were a result of costs associated with the commercial launch of PROVENGE in 2010, and research and development expenses, clinical trial costs, contract manufacturing costs and selling, general and administrative expenses in support of our operations in each of these years. The increase in net cash used in operating activities in 2010 resulted from expenses associated with the commercial launch of PROVENGE in 2010, including working capital needs to support increased inventory, increased selling, general and administrative expense, primarily as a result of an increase in personnel from 414 as of December 31, 2009 to 1,316 as of December 31, 2010, and pre-launch expenditures. The increase in net cash used in operating activities in 2009, as compared to 2008, was due to expenses incurred related to the prospective commercial launch of PROVENGE in 2010.
 
Since our inception, investing activities, other than purchases and maturities of short-term and long-term investments, consisted primarily of purchases of property and equipment. Purchases of property and equipment increased to $140.8 million in 2010 compared to $65.9 million in 2009 and $6.8 million in 2008, primarily related to facilities expenditures for the three manufacturing facility build-outs.
 
Net cash provided by financing activities was $80.7 million in 2010, compared with $647.9 million in 2009 and $60.9 million in 2008. The decrease in net cash provided by financing activities in 2010 is primarily due to the absence of any public offerings in 2010, while cash provided from common stock issuances in May 2009 and December 2009, resulted in net proceeds of $630.3 million. This decrease was partially offset by an increase in cash provided by financing activities related to the exercise of warrants in 2010, which resulted in net cash provided of $71.4 million.
 
We believe that our current cash on hand as of December 31, 2010, the net proceeds from the January 2011 convertible notes offering of approximately $607.3 million and revenue generated from commercial sales of PROVENGE, will be sufficient to meet our anticipated expenditures for at least the next 12 months as we expand our operations, including our manufacturing capabilities, continue our clinical trials, apply for regulatory approvals and build commercial infrastructure outside the U.S. and invest in research and product development. The majority of our resources continue to be used in support of the commercialization of PROVENGE. We expect revenue from PROVENGE product sales could be a significant source of cash. However, we may need to raise additional funds to meet potential additional long term liquidity needs for uses including:
 
  •  the development of marketing, manufacturing, information technology and other infrastructure and activities related to the commercialization of PROVENGE,
 
  •  working capital needs,
 
  •  increased personnel needs,
 
  •  continuing and expanding our internal research and development programs, and
 
  •  engaging in clinical trials outside of the U.S., commercial infrastructure development and other investment in order to support the commercialization of PROVENGE in territories outside the United States.
 
Leases and Other Commitments
 
Office Leases
 
We lease our principal research, development and administrative facilities in Seattle, Washington that consist of approximately 143,000 square feet under three leases. The first lease approximates 71,000 square feet under an


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operating lease through December 31, 2011. The annual base rent for the extended lease term is approximately $2.7 million.
 
The second lease for 24,000 square feet with Selig Holdings Company, LLC, as amended, also expires in December 2011. In April 2010, we leased an additional 11,500 square feet in this building, with a term commencing in May 2010 and ending December 31, 2011.
 
In July 2009, we entered into a sublease agreement with Hearst Newspapers, LLC (the sublandlord to Legacy Partners II, the landlord) for office space in Seattle, Washington, comprising approximately 37,000 square feet. The term of the sublease is through April 2011.
 
In February 2011, we entered into a lease with Northwest Mutual Insurance Company for office space of 179,656 rentable square feet in Seattle, Washington. The initial lease term is for five and a half years, with one renewal term of three years. The aggregate rent payable under the initial lease term is approximately $25 million.
 
Also in February 2011, we entered into a sublease with Zymogenetics, Inc. for laboratory and office space of 97,365 rentable square feet in Seattle, Washington. The initial lease term is for seven and a half years. The aggregate rent payable under the initial lease term is approximately $25 million.
 
Manufacturing Facilities Leases
 
Facilities related expenses, including equipment expenditures, increased significantly during 2010 as we executed on our plan for commercial launch of PROVENGE.
 
In August 2005, we entered into an agreement to lease approximately 158,000 square feet of commercial manufacturing space in Morris Plains, New Jersey. The lease term is seven years, and we have the option to extend the lease for two ten-year periods and one five-year period, with the same terms and conditions except for rent, which adjusts upon renewal to market rate. The aggregate rent payable under the initial lease term is $7.2 million.
 
The New Jersey lease required us to provide the landlord with a letter of credit in the initial amount of $3.1 million as a security deposit. We provided Wells Fargo, the bank that issued the letter of credit on our behalf, a security deposit of $3.1 million to guarantee the letter of credit. The deposit was later reduced to $1.9 million in 2008 and is recorded as a long-term investment as of December 31, 2010 and 2009 on our consolidated balance sheets. As part of an agreement with the Township of Hanover relating to the permitting of the expansion of our New Jersey Facility, we also have $1.9 million in long-term investments being held as a security deposit to ensure completion of certain improvements at the property.
 
In August 2009, we entered into a lease with Knickerbocker Properties, Inc. XLVI for existing building space totaling approximately 184,000 rentable square feet in Orange County, California for use by us as a manufacturing facility following build-out. The initial lease term is ten and a half years, with two renewal terms of five years each. The lease includes a one-time purchase option exercisable during the first three years of the lease term. The aggregate rent payable under the initial lease term is $13.6 million.
 
In July 2009, we entered into a lease with Majestic Realty Co. for a building space totaling approximately 160,000 square feet in Atlanta, Georgia for use by us as a manufacturing facility following build-out. The lease commenced when we took possession of the building upon substantial completion of construction of the building shell in March 2010. The initial lease term is ten and a half years, with five renewal terms of five years each. The lease includes a one-time purchase option exercisable prior to March 2011. The aggregate rent payable for the Atlanta Facility under the initial lease term is $6.7 million.
 
The Orange County Facility and Atlanta Facility leases required us to provide the landlords with letters of credit in the total amount of $2.4 million as security deposits. The Atlanta Facility letter of credit totaling $222,000 was returned to us in May 2010. The Orange County Facility letter of credit was $2.2 million as of December 31, 2010, and is secured by a deposit of $2.2 million. This deposit was recorded as a long-term investment on our consolidated balance sheet as of December 31, 2010.


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The three manufacturing facility leases each have a provision requiring that we restore the building to its original condition upon lease termination. Accordingly, we have accrued the estimated costs of dismantlement and restoration as these obligations accumulate.
 
 
We have a supply agreement with Diosynth RTP, Inc. (“Diosynth”) covering the commercial production of the recombinant antigen used in the manufacture PROVENGE. On May 12, 2010, we entered into a Second Amendment to the supply agreement to extend the term of the agreement through December 31, 2018, and unless terminated, the agreement will renew automatically thereafter for additional 5-year terms. The agreement may be terminated upon written notice by us or Diosynth at least 24 months before the end of the initial term or a renewal term or by either party in the event of an uncured material breach or default by the other party.
 
We currently have a commitment with Diosynth to purchase antigen through 2011 for a total of $77.6 million related to two orders. As of December 31, 2010, we have paid $38.4 million toward the orders and have a remaining obligation of approximately $39.2 million. We began receiving shipments of the first order in the third quarter 2010 and expect delivery of the second order to commence in mid-2011. In addition, in 2010 we entered into commitments with Diosynth to purchase antigen in 2012 for a total of $41.5 million and in 2013 for a total of $43.8 million. In February 2011, we paid $9.9 million toward the 2012 order.
 
In September 2010, we entered into a development and supply agreement with GlaxoSmithKline LLC. This agreement is intended to provide a second source for the commercial production and supply of the recombinant antigen used in the manufacture of PROVENGE. The term of the agreement is through December 31, 2015, unless earlier terminated pursuant to the terms of the agreement, and provides for one or more two-year extensions to the then expiring term. As of December 31, 2010, we have a remaining payment obligation for the transfer of the antigen production process aggregating $14.6 million payable through September 2011. Upon execution of the agreement, we placed an initial order for approximately $8.3 million, with delivery of commercial orders to commence in 2012.
 
Software and Equipment Financing
 
During 2009 and 2010, we entered into various lease agreements for the lease of software licenses and equipment. The leases have been treated as capital leases. The capital leases, with an aggregate original principal amount totaling $13.3 million and lease terms from 15 to 60 months, bear interest at rates ranging from 2.9% to 11.9% per year.
 
Financings from the Sale of Securities and Issuance of Convertible Notes
 
 
In December 2009, we received net proceeds of $409.5 million after deducting underwriting commissions and estimated offering expenses from our issuance of 17,250,000 shares of common stock at the public offering price of $24.75 per share.
 
In May 2009, we received net proceeds of $220.8 million after deducting underwriting commissions and estimated offering expenses from our issuance of 11,979,166 shares of common stock at the public offering price of $19.20 per share.
 
In April 2008, we issued 8.0 million shares of our common stock, and warrants to purchase up to 8.0 million shares of common stock to an institutional investor. We received net proceeds of $46.0 million from our issuance of the shares and the warrants to the investor. The investor purchased the shares and warrants for a negotiated price of $5.92 per share of common stock purchased. The warrants were exercisable at any time prior to October 8, 2015, with an original exercise price of $20.00 per share of common stock and included a net exercise feature. On May 18, 2010 (the “Exercise Date”), we entered into an amendment (the “Amendment”) to the warrant agreement. Pursuant to the terms of the Amendment, the exercise price of the warrants was amended from $20.00 to $8.92 per share, and the investor concurrently exercised the warrants for 8,000,000 shares of common stock, resulting in aggregate cash proceeds to the Company of $71.4 million.


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On October 11, 2007, we entered into an equity line of credit arrangement with Azimuth Opportunity Ltd. (“Azimuth”) pursuant to a Common Stock Purchase Agreement, which we amended in October 2008 and February 2009. As amended, the Common Stock Purchase Agreement provided that, upon the terms and subject to the conditions set forth therein, Azimuth was committed to purchase up to $130.0 million of our common stock over the approximate 36-month term of the Common Stock Purchase Agreement. Pursuant to a single draw down notice, on October 10, 2008, we sold 3,610,760 shares of our common stock at a price of $5.80 per share to Azimuth for net proceeds of approximately $19.8 million. The Common Stock Purchase Agreement expired in October 2010.
 
 
In 2007, an aggregate of $85.3 million of the 4.75% Notes due 2014 (the “2014 Notes”) were sold in a private placement to qualified institutional buyers. Proceeds from the offering, after deducting placement agent fees and our estimated expenses, were approximately $82.3 million. The 2014 Notes were issued at face principal amount and pay interest semi-annually in arrears on June 15 and December 15 of each year. Record dates for payment of interest on the 2014 Notes are each June 1st and December 1st. In certain circumstances, additional amounts may become due as additional interest. We can elect that the sole remedy for an event of default for our failure to comply with the “reporting obligations” provisions of the indenture under which the 2014 Notes were issued (the “Indenture”), for the first 180 days after the occurrence of such event of default would be for the holders of the 2014 Notes to receive additional interest on the 2014 Notes at an annual rate equal to 1% of the outstanding principal amount of the 2014 Notes. We recorded interest expense, including the amortization of debt issuance costs related to the 2014 Notes, of $3.9 million, $2.9 million and $4.5 million during 2010, 2009 and 2008, respectively.
 
The 2014 Notes are convertible into our common stock, initially at the conversion price of $10.28 per share, equal to a conversion rate of approximately 97.2644 shares per $1,000 principal amount of the 2014 Notes, subject to adjustment. There may be an increase in the conversion rate of the 2014 Notes under certain circumstances described in the Indenture; however, the number of shares of common stock issued will not exceed 114.2857 per $1,000 principal amount of the 2014 Notes. A holder that converts 2014 Notes in connection with a “fundamental change,” as defined in the Indenture, may in some circumstances be entitled to an increased conversion rate (i.e., a lower per share conversion price) as a make whole premium. If a fundamental change occurs, holders of the 2014 Notes may require us to repurchase all or a portion of their 2014 Notes for cash at a repurchase price equal to 100% of the principal amount of the 2014 Notes to be repurchased, plus any accrued and unpaid interest and other amounts due thereon. The Indenture contains customary covenants.
 
In April 2009, $11.5 million in principal amount of the 2014 Notes were converted by holders of the 2014 Notes, resulting in the issuance of approximately 1.1 million shares of common stock. In May 2009, we exchanged approximately 2.1 million shares of our common stock for $21.2 million principal face amount of the 2014 Notes. In December 2010, we exchanged approximately 2.5 million shares of common stock for $24.9 million principal face amount of the 2014 Notes, which included a premium of approximately 129,000 shares of common stock. The premium is recorded as a loss on debt conversion of $4.7 million, in other expense in the consolidated statements of operations for 2010.
 
As of December 31, 2010 and 2009, the aggregate principal amount of the 2014 Notes outstanding was $27.7 million and $52.5 million, respectively. The fair value of the 2014 Notes at December 31, 2010 and December 31, 2009, based on the average trading prices of similar instruments near each respective year-end, was approximately $98.0 million and $141.8 million, respectively.
 
On January 14, 2011, we entered into an underwriting agreement with J.P. Morgan Securities LLC (the “Underwriter”) relating to the offer and sale of $540 million aggregate principal amount of our 2.875% Convertible Senior Notes due 2016 (the “2016 Notes”). Under the terms of the underwriting agreement, we granted the Underwriter an option, exercisable within 30 days of the date of the agreement, to purchase up to an additional $80 million aggregate principal amount of 2016 Notes to cover overallotments. We issued $540 million in aggregate principal amount of the 2016 Notes upon the closing of the offering on January 20, 2011. Net proceeds to us, after payment of underwriting fees and estimated expenses, were approximately $528.8 million. On January 31, 2011, the Underwriter exercised the overallotment option in full, and we closed on the sale of the additional $80 million in


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principal amount of the 2016 Notes on February 3, 2011. Net proceeds to us from the exercise of the overallotment option, after deducting underwriting fees, were approximately $78.5 million.
 
On January 20, 2011, we entered into the First Supplemental Indenture (the “Supplemental Indenture”), dated as of January 20, 2011, with The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”), to our existing Base Indenture (the “Base Indenture” and, together with the Supplemental Indenture, the “2016 Indenture”), dated as of March 16, 2007, with the Trustee. The 2016 Indenture sets forth the rights and provisions governing the 2016 Notes. Interest is payable on the 2016 Notes semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2011. Record dates for payment of interest on the 2016 Notes are each January 1 and July 1.
 
The 2016 Notes are convertible at the option of the holder, and we may choose to satisfy in cash, shares of our common stock, or a combination of cash and shares of our common stock, based on a conversion rate initially equal to 19.5160 shares of our common stock per $1,000 principal amount of the 2016 Notes, which is equivalent to an initial conversion price of approximately $51.24 per share. The conversion rate will be increased under certain circumstances described in the 2016 Indenture; however, the number of shares of common stock issued upon conversion of a 2016 Note will not exceed 27.3224 per $1,000 principal amount of 2016 Notes, subject to adjustment in accordance with the 2016 Indenture.
 
The offering of the 2016 Notes was made pursuant to our effective shelf registration statement on Form S-3 (Registration No. 333-163573), as amended by a post-effective amendment, including the related prospectus dated January 13, 2011 and the prospectus supplement dated January 14, 2011, each as filed with the Securities and Exchange Commission.
 
 
The following are contractual commitments at December 31, 2010 associated with supply agreements, construction contracts, debt and lease obligations, including interest and unconditional purchase obligations (in thousands):
 
                                         
    Total     1 Year     2-3 Years     4-5 Years     Thereafter  
    (In thousands)  
 
Contractual Commitments(a):
                                       
Convertible senior subordinated notes
(2014 Notes) (including interest)(b)
  $ 32,288     $ 1,315     $ 2,630     $ 28,343        
Facility lease obligations (including interest)(c)
    27,266       1,817       3,759       3,900       17,790  
Contractual commitments(d)
    165,879       70,344       93,409       2,126        
Operating leases(e)
    24,388       5,991       3,231       2,646       12,520  
Unconditional purchase obligations
    3,104       3,104                    
                                         
    $ 252,925     $ 82,571     $ 103,029     $ 37,015     $ 30,310  
                                         
 
 
(a) The Contractual Commitments table above does not include obligations related to construction management contracts for the Orange County Facility and the Atlanta Facility, of which approximately $3.1 million remained payable under these contracts at December 31, 2010.
 
(b) See Note 9 to our Consolidated Financial Statements for additional information related to the 2014 Notes.
 
(c) See Note 8 to our Consolidated Financial Statements for additional information related to our facility lease obligations. Our facility lease obligation commitment reflects the initial term of the Lease and a renewal period.
 
(d) See Note 14 to our Consolidated Financial Statements for additional information related to our contractual commitments with Diosynth and GlaxoSmithKline LLC, and related to product support under capital leases included in our operating lease disclosure. See Note 8 to our Consolidated Financial Statements for additional information related to our capital lease obligations.
 
(e) See Note 14 to our Consolidated Financial Statements for additional information related to our operating lease contractual commitments.


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The above table of contractual commitments excludes commitments from 2011 to 2016 related to the sale in January 2011 of $620 million aggregate principal amount of our 2016 Notes. Interest is payable on the 2016 Notes semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2011. Record dates for payment of interest on the 2016 Notes are each January 1 and July 1.
 
The above table of contractual commitments also excludes commitments from two leases entered into in February 2011, with Northwest Mutual Insurance Company and Zymogenetics, Inc. The initial lease terms are five and a half years, with one renewal term of three years, and seven and a half years, respectively. The aggregate rent payable for the buildings under the initial lease terms is approximately $25 million and $25 million, respectively.
 
OFF-BALANCE SHEET ARRANGEMENTS
 
We have no material off-balance sheet arrangements.
 
 
Some of the statements contained in this annual report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements largely on our expectations and projections about future events and financial trends affecting the financial condition and/or operating results of our business. Forward-looking statements involve risks and uncertainties, particularly those risks and uncertainties inherent in the process of discovering, developing and commercializing drugs that are safe and effective for use as human therapeutics. There are important factors that could cause actual results to be substantially different from the results expressed or implied by these forward-looking statements, including, among other things:
 
  •  whether we have adequate financial resources and access to capital to fund commercialization of PROVENGE and that of other potential product candidates we may develop;
 
  •  our ability to successfully manufacture PROVENGE and other product candidates in necessary quantities with required quality;
 
  •  our ability to successfully obtain regulatory approvals and commercialize our products that are under development and develop the infrastructure necessary to support commercialization if regulatory approvals are received;
 
  •  our ability to complete and achieve positive results in ongoing and new clinical trials;
 
  •  our dependence on single-source vendors for some of the components used in our product candidates;
 
  •  the extent to which the costs of any products that we are able to commercialize will be reimbursable by third-party payors;
 
  •  the extent to which any products that we are able to commercialize will be accepted by the market;
 
  •  our dependence on our intellectual property and ability to protect our proprietary rights and operate our business without conflicting with the rights of others;
 
  •  the effect that any intellectual property litigation, or product liability claims may have on our business and operating and financial performance;
 
  •  our expectations and estimates concerning our future operating and financial performance;
 
  •  the impact of competition and regulatory requirements and technological change on our business;
 
  •  our ability to recruit and retain key personnel;
 
  •  our ability to enter into future collaboration agreements;
 
  •  anticipated trends in our business and the biotechnology industry generally; and
 
  •  other factors described under Item 1A, “Risk Factors”.


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In addition, in this annual report the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “plan,” “expect,” “potential,” or “opportunity,” the negative of these words or similar expressions, as they relate to us, our business, future financial or operating performance or our management, are intended to identify forward-looking statements. We do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Past financial or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends.
 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Our investment portfolio is maintained in accordance with our investment policy, which specifies credit quality standards, limits our credit exposure to any single issuer and defines allowable investments. Pursuant to our policy, auction rate or asset-backed securities without a guarantee by the U.S. government are not permitted to be purchased. The fair value of our cash equivalents and marketable securities is subject to change as a result of changes in market interest rates and investment risk related to the issuers’ credit worthiness.
 
As of December 31, 2010 and 2009, we had short-term investments of $121.8 million and $167.1 million, respectively, and long-term investments of $22.5 million and $29.4 million, respectively. Our short-term and long-term investments are subject to interest rate risk and will decline in value if market interest rates increase. The estimated fair value of our short-term and long-term investments at December 31, 2010, assuming a 100 basis point increase in market interest rates, would decrease by $0.6 million, which would not materially impact our results of operations, cash flows or financial position. While changes in interest rates may affect the fair value of our investment portfolio, any gains or losses will not be recognized in our statement of operations until the investment is sold or if the reduction in fair value was determined to be an other than temporary impairment.
 
We proactively monitor and manage our portfolio. If necessary, we believe we are able to liquidate our investments within the next year without significant loss. We currently believe these securities are not significantly impaired, primarily due to the government and major corporate guarantees of the underlying securities; however, it could take until the final maturity of the underlying notes to realize our investments’ recorded values. Based on our expected operating cash flows, and our other sources of cash, we do not anticipate the potential lack of liquidity on these investments will affect our ability to execute our current business plan.
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Our financial statements, together with related notes, are listed in Item 15(a) and included herein beginning on page F-1.
 
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
ITEM 9A.   CONTROLS AND PROCEDURES
 
 
We carried out an evaluation required by the Exchange Act, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of December 31, 2010. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2010, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.


55


 

 
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2010 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this assessment, management concluded that, as of December 31, 2010, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Ernst & Young LLP has independently assessed the effectiveness of our internal control over financial reporting and its report is included below.
 
 
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
 
The effectiveness of our internal control over financial reporting as of December 31, 2010, was audited by our independent registered public accounting firm, Ernst & Young LLP, as stated in its report, which is included below.


56


 

 
The Board of Directors and Stockholders
Dendreon Corporation
 
We have audited Dendreon Corporation’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Dendreon Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Dendreon Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Dendreon Corporation as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010 and our report dated March 1, 2011 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
Seattle, Washington
March 1, 2011


57


 

 
ITEM 9B.   OTHER INFORMATION
 
None.
 
 
ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The information required by this item concerning our directors and nominees is incorporated by reference to our definitive Proxy Statement for our 2011 Annual Meeting of Stockholders (the “2011 Proxy Statement”) under the caption “Election of Directors.” Information on our nominating committee process, and on our audit committee members including our audit committee financial expert(s) is incorporated by reference to the headings “Governance Committee” and “Audit Committee” in our 2011 Proxy Statement. Information regarding Section 16(a) beneficial ownership reporting compliance is incorporated by reference to the material under the heading “Security Ownership of Certain Beneficial Owners and Management” in our 2011 Proxy Statement. Information relating to our executive officers is contained under the caption “Executive Officers of the Registrant” in Part I of this annual report.
 
Our Board of Directors has adopted a Code of Business Conduct applicable to our directors and all of our officers and employees. The Code of Business Conduct is available, free of charge, through the investor relations section of our website at http://investor.dendreon.com/governance.cfm. We intend to disclose any amendment to, or waiver from, the Code of Business Conduct by posting such amendment or waiver, as applicable, on our website.
 
ITEM 11.   EXECUTIVE COMPENSATION
 
The information required by this item is incorporated by reference to the 2011 Proxy Statement under the captions “Executive Compensation” and “Director Compensation.”
 
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
Information regarding security ownership is incorporated by reference to the 2011 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management.”
 
Securities Authorized for Issuance Under Equity Compensation Plans.  We maintain the 2002 Broad Based Equity Incentive Plan (the “2002 Plan”), the 2009 Equity Incentive Plan (the “2009 Plan”) and the Employee Stock Purchase Plan (the “ESPP”), pursuant to which we may grant equity awards to eligible persons. The 2000 Equity Incentive Plan (the “2000 Plan”) expired by its terms during 2010, however it still governs outstanding awards originally issued under that plan. The following table provides information as of December 31, 2010, regarding the 2000 Plan, the 2002 Plan, the 2009 Plan and the ESPP:
 
                         
                (c)
 
                Number of Securities
 
    (a)
    (b)
    Remaining Available for
 
    Number of Securities
    Weighted-Average
    Future Issuance
 
    to be Issued Upon
    Exercise Price of
    Under Equity
 
    Exercise of
    Outstanding
    Compensation Plans
 
    Outstanding Options,
    Options, Warrants
    (Excluding Securities
 
Plan Category   Warrants and Rights     and Rights     Reflected in Column (a))  
 
Equity compensation plans approved by stockholders(1)
    2,250,013     $ 23.81 (3)     11,274,521 (4)
Equity compensation plans not approved by stockholders(2)
    422,959     $ 23.64       25,335  
                         
Total
    2,672,972     $ 23.78       11,299,856  
 
 
(1) These plans are the 2000 Plan, the 2009 Plan and the ESPP.
 
(2) This plan is the 2002 Plan. See Note 11 to our Consolidated Financial Statements for a description of the material terms of the 2002 Plan.


58


 

 
(3) Includes information relating solely to options to purchase common stock under the 2000 and 2009 Plan.
 
(4) Of these shares, 1,547,729 remained available for purchase under the ESPP as of December 31, 2010.
 
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
The information required by this item is incorporated by reference to the 2011 Proxy Statement under the captions “Management and Certain Security Holders of Dendreon — Certain Transactions” and “Director Independence.”
 
ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The information required by this item is incorporated by reference to the 2011 Proxy Statement under the caption “Information Regarding Our Independent Registered Public Accounting Firm.”
 
 
ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a) The following documents are filed as part of this report:
 
(1) Financial Statements and Report of Independent Auditors.
 
The financial statements required by this item are submitted in a separate section beginning on page F-1 of this annual report.
 
         
    Page
 
Index to Consolidated Financial Statements
    F-1  
Report of Independent Registered Public Accounting Firm
    F-2  
Consolidated Balance Sheets
    F-3  
Consolidated Statements of Operations
    F-4  
Consolidated Statements of Stockholders’ Equity
    F-5  
Consolidated Statements of Cash Flows
    F-6  
Notes to Consolidated Financial Statements
    F-7  
 
(2) Financial Statement Schedules.
 
None required.
 
(3) Exhibits.
 
                                 
            Incorporated by Reference
Exhibit
      Filed
      Period
       
Number   Exhibit Description   Herewith   Form   Ending   Exhibit   Filing Date
 
  3 .1   Amended and Restated Certificate of Incorporation.       10-Q   3/31/2002     3 .1   5/14/2002
  3 .2   Certificate of Amendment to Amended and Restated Certificate of Incorporation.       8-K         3 .1   6/13/2005
  3 .3   Certificate of Amendment to Amended and Restated Certificate of Incorporation of Dendreon Corporation       8-K         3 .1   6/16/2009
  3 .4   Amended and Restated Bylaws.       10-Q   6/30/2004     3 .2   8/5/2004
  3 .5   Amended and Restated Bylaws.       8-K         3 .2   12/8/2008
  4 .1   Specimen Common Stock certificate.       S-1/A         4 .1   5/22/2000


59


 

                                 
            Incorporated by Reference
Exhibit
      Filed
      Period
       
Number   Exhibit Description   Herewith   Form   Ending   Exhibit   Filing Date
 
  4 .2   Certificate of Designation of Series A Junior Participating Preferred Stock.       8-K         4 .1   9/25/2002
  4 .3   Rights Agreement between the registrant and Mellon Investor Services LLC, as Rights Agent, dated September 18, 2002.       8-K         99 .2   9/25/2002
  4 .4   Form of Right Certificate.       8-K         99 .3   9/25/2002
  4 .5   Indenture, dated as of June 11, 2007, between Dendreon Corporation and The Bank of New York Trust Company, N.A.       8-K         10 .1   6/12/2007
  4 .6   Amendment to Common Stock Purchase Warrant dated May 18, 2010.       8-K         4 .1   5/19/2010
  4 .7   First Supplemental Indenture, dated as of January 20, 2011, by and between the Company and The Bank of New York Mellon Trust Company, N.A.       8-K         10 .01   1/20/2011
  10 .1   Form of Amended Executive Employment Agreement with certain named executive officers.*       8-K         99 .1   1/4/2007
  10 .2   Indemnity Agreement between the registrant and each of its directors and certain of its officers.       S-1         10 .1   10/11/2000
  10 .3   Amended and Restated 2000 Broad Based Equity Incentive Plan.*       10-K   12/31/2006     10 .3   3/14/2007
  10 .4   Amended and Restated 2002 Broad Based Equity Incentive Plan.*       10-K   12/31/2006     10 .4   3/14/2007
  10 .5   2000 Employee Stock Purchase Plan.*       S-1         10 .3   10/11/2000
  10 .6   2009 Offering under the Amended and Restated 2000 Employee Stock Purchase Plan.*       10-K   12/31/2008     10 .6   3/12/2009
  10 .7   Form of Stock Option Agreement under 2000 Equity Incentive Plan.*       8-K         10 .33   6/13/2005
  10 .8   Form of Stock Option Agreement under 2002 Broad Based Equity Incentive Plan.*       8-K         10 .34   6/13/2005
  10 .9   Form of Stock Option Agreement (Nonstatutory Stock Options) under 2009 Equity Incentive Plan.*       10-Q   3/31/2010     10 .1   5/10/2010
  10 .10   Form of Incentive Stock Option Agreement under 2009 Equity Incentive Plan.*       10-Q   3/31/2010     10 .2   5/10/2010
  10 .11   Form of Restricted Stock Award Agreement.*       8-K         10 .46   1/24/2006
  10 .12   Form of Restricted Stock Agreement under 2009 Equity Incentive Plan.*       10-Q   3/31/2010     10 .3   5/10/2010
  10 .13   Dendreon Corporation Incentive Plan.*       8-K         10 .31   6/13/2005
  10 .14†   Supply Agreement, dated as of December 22, 2005, by and between Dendreon Corporation and Diosynth RTP.       8-K         10 .41   12/28/2005

60


 

                                 
            Incorporated by Reference
Exhibit
      Filed
      Period
       
Number   Exhibit Description   Herewith   Form   Ending   Exhibit   Filing Date
 
  10 .15†   Settlement Agreement and Amendment to the Supply Agreement, dated as of October 24, 2008, by and between Dendreon Corporation and Diosynth RTP, Inc.       10-Q   9/30/2008     10 .1   11/10/2008
  10 .16   Second Amendment to Supply Agreement, dated as of May 6, 2010, by and between Dendreon Corporation and Diosynth RTP Inc.       8-K         10 .1   5/13/2010
  10 .17   Lease Agreement between First Industrial, L.P. and Dendreon Corporation, dated August 17, 2005.       8-K         10 .36   8/18/2005
  10 .18   Office Lease between Selig Real Estate Holdings Fourteen and Dendreon Corporation, dated September 2, 2005.       10-Q   9/30/2005     10 .37   11/8/2005
  10 .19   Second Amendment to Office Lease Agreement between Selig Real Estate Holdings Fourteen and Dendreon Corporation, dated March 9, 2009       10-K   12/31/2008     10 .15   3/12/2009
  10 .20   Lease Agreement, dated July 31, 1998, between the Registrant and ARE-3005 First Avenue, LLC.       S-1         10 .11   3/8/2000
  10 .21   Third Amendment to Lease Agreement, dated August 22, 2007 between Dendreon Corporation and ARE-3005 First Avenue, LLC.       8-K         10 .1   8/23/2007
  10 .22   Common Stock Purchase Agreement, dated October 11, 2007, between Dendreon Corporation and Azimuth Opportunity, Inc.       8-K         10 .1   10/12/2007
  10 .23   Amendment No. 1 to Common Stock Purchase Agreement, dated October 8, 2008.*       8-K         10 .2   10/10/2008
  10 .24   Amendment No. 2 to Common Stock Purchase Agreement, dated February 9, 2009.*       8-K         10 .3   2/11/2009
  10 .25   Dendreon Corporation 2009 Equity Incentive Plan.       DEF 14A         Appendix A     4/30/2009
  10 .26   Construction Agreement between The Henderson Corporation of PA, Inc. and Dendreon Corporation dated June 16, 2009.       8-K         99 .1   6/22/2009
  10 .27   Industrial Real Estate Lease between Majestic Realty Co. as Landlord and Dendreon Corporation as Tenant.       10-Q   6/30/2009     10 .1   8/10/2009
  10 .28   Industrial Real Estate Lease between Knickerbocker Properties, Inc. XLVI, as Landlord and Dendreon Corporation as Tenant.       10-Q   6/30/2009     10 .2   8/10/2009

61


 

                                 
            Incorporated by Reference
Exhibit
      Filed
      Period
       
Number   Exhibit Description   Herewith   Form   Ending   Exhibit   Filing Date
 
  10 .29   Leukapheresis Services Agreement with the American Red Cross, dated September 24, 2009.       8-K         99 .2   9/29/2009
  10 .30   Executive Employment Agreement dated January 4, 2010, between Hans Bishop and the Company.*       8-K         10 .1   1/8/2010
  10 .31   Form of Executive Employment Agreement*       10-Q   3/31/2010     10 .4   5/10/2010
  10 .32   Construction Management Agreement between Turner Construction Company and Dendreon Corporation dated December 9, 2009.       10-K   12/31/2009     10 .27   2/22/2010
  10 .33   Construction Management Agreement between Turner Construction Company and Dendreon Corporation dated January 6, 2010.       10-K   12/31/2009     10 .28   2/22/2010
  10 .34†   Development and Supply Agreement, dated as of September 15, 2010, by and between Dendreon Corporation and GlaxoSmithKline LLC.       8-K         10 .1   9/21/2010
  10 .35   Underwriting Agreement, dated as of January 14, 2011, by and between the Company and J.P. Morgan Securities LLC.       8-K         1 .01   1/20/2011
  10 .36†   Office Lease, dated as of February 25, 2011, by and between The Northwestern Mutual Life Insurance Company and Dendreon Corporation   X                    
  10 .37   Sublease, dated as of February 28, 2011, by and between Zymogenetics, Inc. and Dendreon Corporation   X                    
  12     Computation of Ratio of Earnings to Fixed Charges.   X                    
  21 .1   Dendreon Corporation List of Subsidiaries   X                    
  23 .1   Consent of Independent Registered Public Accounting Firm.   X                    
  24 .1   Power of Attorney (contained on signature page).   X                    
  31 .1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   X                    
  31 .2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   X                    
  32     Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   X                    

62


 

                                 
            Incorporated by Reference
Exhibit
      Filed
      Period
       
Number   Exhibit Description   Herewith   Form   Ending   Exhibit   Filing Date
 
  101     Instance Document                        
  101     Schema Document                        
  101     Calculation Linkbase Document                        
  101     Labels Linkbase Document                        
  101     Presentation Linkbase Document                        
 
 
†  Confidential treatment granted as to certain portions of this Exhibit.
 
Management compensatory plans and arrangements required to be filed as exhibits to this Report.

63


 

 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 1st day of March, 2011.
 
DENDREON CORPORATION
 
  By: 
/s/  Mitchell H. Gold, M.D.
Mitchell H. Gold, M.D.
President and Chief Executive Officer
 
  By: 
/s/  Gregory T. Schiffman
Gregory T. Schiffman
Executive Vice President, Chief Financial Officer
and Treasurer (Principal Financial Officer)
 
  By: 
/s/  Gregory R. Cox
Gregory R. Cox
Vice President, Finance
(Principal Accounting Officer)
 


64


 

 
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Mitchell H. Gold, M.D. and Richard F. Hamm, Jr., his or her true and lawful attorneys-in-fact each acting alone, with full power of substitution and re-substitution, for him or her and in his or her name, place and stead in any and all capacities to sign any or all amendments to this report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or their substitutes, each acting alone, may lawfully do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
 
             
Signature   Title   Date
 
         
/s/  Mitchell H. Gold,

Mitchell H. Gold, M.D.
  President, Chief Executive Officer and Director (Principal Executive Officer)   March 1, 2011
         
/s/  Gregory T. Schiffman

Gregory T. Schiffman
  Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
  March 1, 2011
         
/s/  Gregory R. Cox

Gregory R. Cox
  Vice President, Finance
(Principal Accounting Officer)
  March 1, 2011
         
    

Richard B. Brewer
  Chairman of the Board of Directors   March 1, 2011
         
    

Susan B. Bayh
  Director   March 1, 2011
         
    

Gerardo Canet
  Director   March 1, 2011
         
/s/  Bogdan Dziurzynski, D.P.A.

Bogdan Dziurzynski, D.P.A.
  Director   March 1, 2011
         
/s/  Pedro P. Granadillo

Pedro P. Granadillo
  Director   March 1, 2011
         
/s/  David C. Stump

David C. Stump
  Director   March 1, 2011
         
/s/  David L. Urdal, Ph.D.

David L. Urdal, Ph.D.
  Director   March 1, 2011
         
/s/  Douglas G. Watson

Douglas G. Watson
  Director   March 1, 2011


65


 


 

 
 
The Board of Directors and Stockholders
Dendreon Corporation
 
We have audited the accompanying consolidated balance sheets of Dendreon Corporation as of December 31, 2010 and 2009, and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dendreon Corporation at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Dendreon Corporation’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2011 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
Seattle, Washington
March 1, 2011


F-2


 

DENDREON CORPORATION
 
 
                 
    December 31,  
    2010     2009  
    (In thousands, except share data)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 132,995     $ 409,829  
Short-term investments
    121,796       167,116  
Trade accounts receivable
    12,679        
Inventory
    30,928       1,882  
Prepaid antigen costs
    17,656       18,975  
Prepaid expenses and other current assets
    14,340       6,684  
                 
Total current assets
    330,394       604,486  
Property and equipment, net
    246,889       98,964  
Long-term investments
    22,505       29,441  
Debt issuance costs and other assets
    4,165       2,524  
                 
Total assets
  $ 603,953     $ 735,415  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 7,847     $ 2,257  
Accrued liabilities
    19,842       19,557  
Accrued compensation
    17,410       6,855  
Warrant liability
          132,953  
Current portion of capital lease obligations
    4,045       722  
Current portion of facility lease obligations
    935       592  
                 
Total current liabilities
    50,079       162,936  
Long-term accrued liabilities
    6,760       1,554  
Capital lease obligations, less current portion
    7,099       706  
Facility lease obligations, less current portion
    19,556       14,120  
Convertible senior subordinated notes
    27,685       52,535  
Commitments and contingencies (Note 14)
               
Stockholders’ equity:
               
Preferred stock, $0.001 par value; 10,000,000 shares authorized, no shares issued or outstanding
           
Common stock, $0.001 par value; 250,000,000 shares authorized, 145,233,948 and 131,125,690 shares issued and outstanding at December 31, 2010 and 2009, respectively
    145       131  
Additional paid-in capital
    1,715,522       1,286,891  
Accumulated other comprehensive income (loss)
    41       (4 )
Accumulated deficit
    (1,222,934 )     (783,454 )
                 
Total stockholders’ equity
    492,774       503,564  
                 
Total liabilities and stockholders’ equity
  $ 603,953     $ 735,415  
                 
 
See accompanying notes.


F-3


 

DENDREON CORPORATION
 
 
                         
    Year Ended December 31,  
    2010     2009     2008  
    (In thousands, except per share amounts)  
 
Revenue
  $ 48,057     $ 101     $ 111  
Cost of revenue
    28,520              
                         
Gross profit
    19,537       101       111  
Operating expenses:
                       
Research and development
    75,941       61,586       50,086  
Selling, general and administrative
    235,760       38,556       20,503  
                         
Total operating expenses
    311,701       100,142       70,589  
                         
Loss from operations
    (292,164 )     (100,041 )     (70,478 )
Other income (expense):
                       
Interest income
    1,144       964       3,619  
Interest expense
    (1,588 )     (2,321 )     (5,156 )
Loss on debt conversion
    (4,716 )            
(Loss) gain from valuation of warrant liability
    (142,567 )     (118,763 )     371  
                         
Net loss before income tax benefit
    (439,891 )     (220,161 )     (71,644 )
Income tax benefit
    411              
                         
Net loss
  $ (439,480 )   $ (220,161 )   $ (71,644 )
                         
Basic and diluted net loss per share
  $ (3.18 )   $ (2.04 )   $ (0.79 )
                         
Shares used in computation of basic and diluted net loss per share
    138,206       108,050       90,357  
                         
 
See accompanying notes.


F-4


 

DENDREON CORPORATION
 
 
                                                 
                Additional
    Other
          Total
 
    Common Stock     Paid-in
    Comprehensive
    Accumulated
    Stockholders’
 
    Shares     Amount     Capital     Income (Loss)     Deficit     Equity  
    (In thousands, except per share amounts)  
 
Balance, January 1, 2008
    83,258,210     $ 83     $ 531,891     $ 52     $ (491,649 )   $ 40,377  
Exercise of stock options for cash
    131,133             496                   496  
Issuance of common stock under the Employee Stock Purchase Plan
    204,731             721                   721  
Issuance of common stock (net of issuance cost of $2,550)
    11,610,760       12       51,179                   51,191  
Non-cash stock-based compensation expense
                5,872                   5,872  
Issuance of restricted stock grants
    372,830                                
Net loss
                            (71,644 )     (71,644 )
Net unrealized loss on securities available-for-sale
                      (7 )           (7 )
                                                 
Comprehensive loss
                                            (71,651 )
                                                 
Balance, December 31, 2008
    95,577,664     $ 95     $ 590,159     $ 45     $ (563,293 )   $ 27,006  
                                                 
Exercise of stock options for cash
    2,229,953       2       14,934                   14,936  
Issuance of common stock under the Employee Stock Purchase Plan
    386,125       1       1,599                   1,600  
Issuance of common stock (net of issuance cost of $26,663)
    29,229,166       30       630,275                   630,305  
Conversion of convertible debt
    3,255,947       3       32,712                   32,715  
Non-cash stock-based compensation expense
                17,212                   17,212  
Issuance of restricted stock grants
    446,835                                
Net loss
                            (220,161 )     (220,161 )
Net unrealized loss on securities available-for-sale
                      (49 )           (49 )
                                                 
Comprehensive loss
                                            (220,210 )
                                                 
Balance, December 31, 2009
    131,125,690     $ 131     $ 1,286,891     $ (4 )   $ (783,454 )   $ 503,564  
                                                 
Exercise of stock options for cash and other
    1,596,258       2       7,509                   7,511  
Issuance of common stock under the Employee Stock Purchase Plan
    636,369       1       4,406                   4,407  
Conversion of convertible debt
    2,546,232       3       29,582                   29,585  
Non-cash stock-based compensation expense
                40,262                   40,262  
Issuance of restricted stock grants
    1,329,399                                
Exercise of warrants
    8,000,000       8       346,872                   346,880  
Net loss
                            (439,480 )     (439,480 )
Net unrealized gain on securities available-for-sale
                      45             45  
                                                 
Comprehensive loss
                                            (439,435 )
                                                 
Balance, December 31, 2010
    145,233,948     $ 145     $ 1,715,522     $ 41     $ (1,222,934 )   $ 492,774  
                                                 
 
See accompanying notes.


F-5


 

DENDREON CORPORATION
 
 
                         
    Year Ended December 31,  
    2010     2009     2008  
    (In thousands)  
 
Operating Activities:
                       
Net loss
  $ (439,480 )   $ (220,161 )   $ (71,644 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Depreciation and amortization expense
    16,084       4,662       5,716  
Non-cash stock-based compensation expense
    40,262       17,212       5,872  
Loss (gain) on valuation of warrant liability
    142,567       118,763       (371 )
Amortization of securities discount and premium
    1,540       648       56  
Loss on conversion of debt
    4,716              
Other
    1,623             413  
Changes in operating assets and liabilities:
                       
Trade accounts receivable
    (12,679 )            
Inventory
    (17,054 )     (1,882 )      
Prepaid antigen costs
    (10,673 )     (18,975 )      
Prepaid expenses and other assets
    (10,722 )     (4,584 )     1,168  
Accounts payable
    5,590       2,020       (1,984 )
Accrued liabilities and compensation
    10,840       16,856       (6,473 )
Other long term liabilities
    (82 )     (82 )     (83 )
                         
Net cash used in operating activities
    (267,468 )     (85,523 )     (67,330 )
Investing Activities:
                       
Maturities and sales of investments
    362,713       69,894       52,545  
Purchases of investments
    (312,064 )     (216,094 )     (55,520 )
Purchases of property and equipment
    (140,761 )     (65,912 )     (6,805 )
                         
Net cash used in investing activities
    (90,112 )     (212,112 )     (9,780 )
Financing Activities:
                       
Proceeds from exercise of warrant
    71,360              
Proceeds from common stock offering, net of issuance costs
          630,305       51,191  
Proceeds from issuance of warrants
                14,561  
Net proceeds from release of security deposits associated with debt
    112       3,853       700  
Payments on long-term debt
          (2,194 )     (5,732 )
Payments on facility lease obligations
    (685 )     (194 )     (172 )
Payments on capital lease obligations
    (1,959 )     (365 )     (853 )
Net proceeds from exercise of stock options and other
    7,511       14,936       496  
Issuance of common stock under the Employee Stock Purchase Plan
    4,407       1,600       721  
                         
Net cash provided by financing activities
    80,746       647,941       60,912  
                         
Net increase (decrease) in cash and cash equivalents
    (276,834 )     350,306       (16,198 )
Cash and cash equivalents at beginning of year
    409,829       59,523       75,721  
                         
Cash and cash equivalents at end of year
  $ 132,995     $ 409,829     $ 59,523  
                         
Supplemental Disclosure of Cash Flow Information:
                       
Cash paid during the period for interest
  $ 3,569     $ 3,299     $ 5,187  
Conversion of debt into common stock
    24,850       32,715        
Assets acquired under facility and capital leases
    18,031       8,458        
Increase in asset retirement obligation
    5,157       1,106       20  
Exercise of warrant
    275,520              
 
See accompanying notes.


F-6


 

DENDREON CORPORATION
 
 
1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 
Dendreon Corporation (“Dendreon”, the “Company”, “we”, “us”, or “our”), a Delaware corporation, is a biotechnology company focused on the discovery, development and commercialization of novel therapeutics that may significantly improve cancer treatment options for patients. Our product portfolio includes active cellular immunotherapy and small molecule product candidates to treat a wide range of cancers.
 
On April 29, 2010, the U.S. Food and Drug Administration (“FDA”) licensed PROVENGE® (sipuleucel-T), our first in class autologous cellular immunotherapy for the treatment of asymptomatic or minimally symptomatic, metastatic, castrate-resistant (hormone-refractory) prostate cancer. Commercial sale of PROVENGE began in May 2010. Prostate cancer is the most common non-skin cancer among men in the United States, with over one million men currently diagnosed with the disease, and the second leading cause of cancer deaths in men in the United States. We own worldwide rights for PROVENGE.
 
 
During 2010, we established four new entities, Dendreon UK Ltd (“Dendreon UK”), Dendreon Manufacturing, LLC (“Dendreon Manufacturing”), Dendreon Holdings, LLC (“Dendreon Holdings”) and Dendreon Distribution, LLC (“Dendreon Distribution”). Dendreon UK and Dendreon Holdings are wholly-owned subsidiaries of the Company, and Dendreon Distribution and Dendreon Manufacturing are wholly-owned subsidiaries of Dendreon Holdings. The consolidated financial statements for the year ended December 31, 2010 include the accounts of Dendreon and its direct and indirect wholly-owned subsidiaries, Dendreon UK, Dendreon Holdings, Dendreon Distribution and Dendreon Manufacturing. The consolidated financial statements for the years ended December 31, 2009 and 2008 include the accounts of Dendreon and its wholly-owned subsidiary, Dendreon San Diego, LLC, through February 2, 2009, the effective date of dissolution of the entity.
 
All intercompany transactions and balances have been eliminated in consolidation.
 
 
Certain prior period balances have been reclassified in order to conform to the current period presentation.
 
 
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments in certain circumstances that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, investments, fair values of acquired assets, income taxes, financing activities, long-term service contracts, clinical trial accruals and other contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.
 
 
We recognize revenue primarily from the sale of PROVENGE and collaborative research agreements. Revenue from the sale of PROVENGE is recorded net of product returns and estimated healthcare provider contractual chargebacks. Revenue from sales of PROVENGE is recognized upon our confirmed product delivery to and issuance of the product release form to the physician site. As we executed a drop shipment agreement with a credit


F-7


 

DENDREON CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
worthy third party wholesaler (“Wholesaler”) to sell PROVENGE, the Wholesaler assumes all bad debt risk from the physician, and no allowance for bad debt is recorded. Due to the limited usable life of our product, actual returns are credited against sales in the month they are incurred. Healthcare provider contractual chargebacks are the result of contractual commitments by us to provide products to healthcare providers at specified prices or discounts such as pursuant to mandatory federal programs. Chargebacks occur when a contracted healthcare provider purchases our products through the Wholesaler at fixed contract prices that are lower than the price we charge the Wholesaler. The Wholesaler, in turn, charges us back for the difference between the price initially paid by the Wholesaler and the contract price paid to the Wholesaler by the healthcare providers. These chargebacks will be recognized in the same period that the related revenue is recognized, resulting in a reduction in product sales revenue, and will be recorded as other accrued liabilities. For the year ended December 31, 2010, we did not have any chargebacks.
 
We recognize collaborative research revenue from up-front payments, milestone payments, and personnel-supported research funding. We also recognize license revenue from intellectual property and technology agreements. The payments received under these research collaboration agreements are generally contractually not refundable even if the research effort is not successful. Performance under our collaborative agreements is measured by scientific progress, as mutually agreed upon by us and our collaborators. Such revenue was insignificant for the years ended December 31, 2010, 2009 and 2008.
 
Inventory
 
Inventories are determined at the lower of cost or market value with cost determined under the specific identification method. Inventories consisted of raw materials at December 31, 2010 and 2009, but we may also have work in process and finished goods at any given time. We began capitalizing raw material inventory in mid-April 2009 in preparation for our PROVENGE product launch when the product was considered to have a high probability of regulatory approval and the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to mid-April 2009 have been recorded as research and development expense in our statement of operations. As a result, inventory balances and cost of revenue for the next few quarters will reflect a lower average per unit cost of materials.
 
Prepaid Antigen Costs
 
The Company utilizes a third party supplier to manufacture and package the recombinant antigen used in the manufacture of PROVENGE. The Company takes title to this material when accepted from the third party supplier and stores it as raw material inventory for manufacturing and eventual sale. Upon successful manufacturing of the antigen, the prepaid costs of these materials are capitalized and transferred to inventory as antigen is received.
 
 
Nonrefundable prepayments for research and development goods and services are deferred and recognized as the services are rendered. Research and development expenses include, but are not limited to, payroll and personnel expenses, lab expenses, clinical trial and related clinical manufacturing costs, facilities and related overhead costs.
 
 
Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, which range from two to sixteen years. Included in fixed assets is the cost of internally developed software. We expense all costs related to internally developed software, other than those incurred during the application development stage. Costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software. Estimated useful lives of furniture and fixtures and laboratory and manufacturing equipment are seven years, office equipment is five years, buildings are sixteen years and computers and software are three years. Computers and equipment financed under capital leases are amortized over the shorter of the useful lives of the related assets or the lease term. Leasehold improvements are stated at cost


F-8


 

DENDREON CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
and amortized using the straight-line method over the remaining life of the lease or ten years, whichever is shorter. Construction in progress is reclassified to the appropriate fixed asset classifications and depreciated accordingly when related assets are deemed ready for their intended use and placed in service. We capitalize interest on borrowings during the construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the related assets.
 
 
Losses from impairment of long-lived assets used in operations are recognized when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. We periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances indicate that the carrying amount of an asset may not be recovered.
 
 
We consider investments in highly liquid instruments purchased with an original maturity at purchase of 90 days or less to be cash equivalents. The amounts are recorded at cost, which approximates fair value. Our cash equivalents and short-term and long-term investments consist principally of commercial paper, money market securities, treasury notes, agency bonds, corporate bonds/notes and certificates of deposit.
 
We have classified our entire investment portfolio as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity and included in accumulated other comprehensive income (loss). The amortized cost of investments is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. Interest earned on securities is included in interest income. Gains are recognized when realized in our consolidated statements of operations. Losses are recognized when realized or when we have determined that an other-than-temporary decline in fair value has occurred.
 
We periodically evaluate whether declines in fair values of our investments below their cost are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as our ability and intent to hold the investment until a forecasted recovery occurs. Additionally, we assess whether it is more likely than not we will be required to sell any investment before recovery of its amortized cost basis.
 
We consider an investment with a maturity greater than twelve months from the balance sheet date as long-term and a maturity less than twelve months as short-term at the balance sheet date. The cost of securities sold is based on the specific identification method.
 
 
On April 3, 2008, we issued 8.0 million shares (the “Shares”) of our common stock, and warrants (the “Warrants”) to purchase up to 8.0 million shares of common stock to an institutional investor (the “Investor”). The Investor purchased the Shares and Warrants for a negotiated price of $5.92 per share of common stock purchased. The Warrants were exercisable at any time prior to October 8, 2015, with an original exercise price of $20.00 per share of common stock and included a net exercise feature. On May 18, 2010 (the “Exercise Date”), we entered into an amendment (the “Amendment”) to the warrant agreement. Pursuant to the terms of the Amendment, the exercise price of the Warrants was amended from $20.00 to $8.92 per share, and the Investor concurrently exercised the warrant for 8,000,000 shares of common stock, resulting in aggregate cash proceeds to the Company of $71.4 million.
 
The Warrants were recorded at fair value at issuance and were adjusted to fair value at each reporting period until the Exercise Date. Any change in fair value between reporting periods was recorded as other income (expense). The Warrants continued to be reported as a liability until they were exercised, at which time the Warrants


F-9


 

DENDREON CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
were adjusted to fair value and reclassified from liabilities to stockholders’ equity. The fair value of the Warrants was estimated using the Black-Scholes-Merton (“BSM”) option pricing model. The fair value of the Warrants on the Exercise Date was $275.5 million, compared with $133.0 million at December 31, 2009. During the years ended December 31, 2010 and 2009, losses of $142.6 million and $118.8 million, respectively, were recognized from valuation of the warrant liability. During the year ended December 31, 2008, we recorded a gain of $371,000 from valuation of the warrant liability.
 
 
We measure and report at fair value our cash equivalents and investment securities. We also measured and reported at fair value our warrant liability, prior to exercise of the Warrants in the second quarter of 2010. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy of fair value measurements is described below:
 
  Level 1 — Observable inputs for identical assets or liabilities such as quoted prices in active markets;
 
  Level 2 — Inputs other than quoted prices in active markets that are either directly or indirectly observable; and
 
  Level 3 — Unobservable inputs in which little or no market data exists, therefore determined using estimates and assumptions developed by us, which reflect those that a market participant would use.
 
 
Debt issuance costs of approximately $3.0 million related to our 4.75% Convertible Senior Subordinated Notes due 2014 (the “2014 Notes”) issued in June and July of 2007 are amortized over the life of the 2014 Notes. Amortization expense, including amounts expensed due to the conversion of the notes into equity, was approximately $1.4 million, $428,000 and $428,000 for the years ended December 31, 2010, 2009 and 2008, respectively, and is reported as interest expense.
 
 
Stock-based compensation cost is estimated at the grant date based on the award’s fair value and is recognized on the accelerated method as expense over the requisite service period. Compensation cost for all stock-based awards is measured at fair value as of the grant date. The fair value of our stock options is calculated using the BSM model. The BSM model requires various highly judgmental assumptions including volatility, forfeiture rates and expected option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense for new awards may differ materially in the future from that recorded in the current period.
 
We also grant restricted stock awards that generally vest over a four year period; however in 2006 and 2007, we granted restricted stock awards with certain performance conditions to all employees. The restricted stock awards granted in 2006 and 2007 with remaining performance conditions all vested upon marketing approval for PROVENGE by the FDA on April 29, 2010 (the “Approval Date”). In addition, in December 2010 we granted restricted stock awards with certain performance conditions to certain executive officers. At each reporting date, we are required to evaluate whether achievement of the performance condition is probable. Compensation expense is recorded based upon our assessment of accomplishing each performance provision, over the appropriate service period. For the year ended December 31, 2010, no expense was recognized related to these awards.
 
We determine the fair value of awards under our Employee Stock Purchase Plan using the BSM model.


F-10


 

DENDREON CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
Basic net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding. Because we report a net loss, diluted net loss per share is the same as basic net loss per share. We have excluded all outstanding stock options, Warrants and unvested restricted stock, as well as shares issuable in connection with the conversion of the 2014 Notes and our Common Stock Purchase Agreement with Azimuth Opportunity Ltd. (the “Common Stock Purchase Agreement”) that expired during October 2010, from the calculation of diluted net loss per common share because all such securities are anti-dilutive to the computation of net loss per share. Shares excluded from the computation of net loss per share were 7.6 million, 31.7 million and 35.6 million for the years ended December 31, 2010, 2009 and 2008, respectively.
 
 
Deferred taxes are measured using enacted tax rates expected to be in effect in a year in which the basis difference is expected to reverse. We continue to record a valuation allowance for the full amount of deferred tax assets, which would otherwise be recorded for tax benefits relating to operating loss and tax credit carryforwards, as realization of such deferred tax assets cannot be determined to be more likely than not.
 
 
We are subject to concentration of risk from our investments and single-source vendors for some components necessary for PROVENGE and our active cellular immunotherapy product candidates.
 
Our investment portfolio is maintained in accordance with our investment policy, which specifies credit quality standards, limits our credit exposure to any single issuer and defines allowable investments. Pursuant to our policy, auction rate or asset-backed securities without a guarantee by the U.S. government are not permitted to be purchased. The fair value of our cash equivalents and marketable securities is subject to change as a result of changes in market interest rates and investment risk related to the issuers’ credit worthiness.
 
We proactively monitor and manage our portfolio. If necessary, we believe we are able to liquidate our investments within the next year without significant loss. We currently believe these securities are not significantly impaired, primarily due to the government and major corporate guarantees of the underlying securities; however, it could take until the final maturity of the underlying notes to realize our investments’ recorded values. Based on our expected operating cash flows, and our other sources of cash, we do not anticipate the potential lack of liquidity on these investments will affect our ability to execute our current business plan.
 
Our risk for single-source vendors is managed by maintaining a certain level of existing stock of components and a continued effort to establish additional suppliers.
 
 
Effective during the quarter ended March 31, 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2010-09, “Subsequent Events” (“ASU 2010-09”), amending ASC 855, “Subsequent Events,” to state that an entity that is a SEC filer is required to evaluate subsequent events through the date that the financial statements are issued, but is not required to disclose the date. The amendment was effective commencing with the quarter ended March 31, 2010. The adoption of ASU 2010-09 did not have a significant impact on our financial statements.
 
During the quarter ended March 31, 2010, we adopted ASU 2010-06, “Fair Value Measurements and Disclosures” (“ASU 2010-06”), which updated ASC 820, “Fair Value Measurements and Disclosures.” ASU 2010-06 requires disclosure as to the amounts and purpose of significant asset transfers between Level 1 and 2 fair value measurements. ASU 2010-06 also requires separate disclosure of Level 3 fair value measurement activity as it relates to purchases, sales, issuances and settlements. The disclosure requirements related to Level 1 and Level 2


F-11


 

DENDREON CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
fair value measurements were effective commencing with the quarter ended March 31, 2010. The disclosure requirements related to the Level 3 fair value measurements are effective commencing with the quarter ending March 31, 2011. The adoption of ASU 2010-06 did not have a material impact on our financial statements.
 
2.   INVESTMENTS
 
Securities available-for-sale at cost or amortized cost and fair market value by contractual maturity were as follows:
 
                 
          Fair
 
    Cost or
    Market
 
    Amortized     Value  
    (In thousands)  
 
December 31, 2010
               
Due in one year or less
  $ 121,756     $ 121,796  
Due after one year through two years
    22,504       22,505