DENDREON CORP - FORM 10-Q - November 3, 2010

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EXCEL - IDEA: XBRL DOCUMENT - DENDREON CORP	Financial_Report.xls
EX-32 - EX-32 - DENDREON CORP	v56542exv32.htm
EX-31.2 - EX-31.2 - DENDREON CORP	v56542exv31w2.htm
EX-31.1 - EX-31.1 - DENDREON CORP	v56542exv31w1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 000-30681

DENDREON CORPORATION

(Exact name of registrant as specified in its charter)


DELAWARE (State or other jurisdiction of incorporation or organization)		22-3203193 (IRS Employer Identification No.)

3005 FIRST AVENUE SEATTLE, WASHINGTON (Address of registrant’s principal executive offices)		98121 (Zip Code)

(206) 256-4545
(Registrant’s telephone number, including area code)

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 Web site, 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 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
(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): o Yes No þ

The number of shares of the registrant’s common stock, $.001 par value, outstanding as of October 29, 2010 was 144,329,146.

DENDREON CORPORATION

INDEX


	PAGE NO.
PART I. FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009		3
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)		4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (unaudited)		5
Notes to Consolidated Financial Statements (unaudited)		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		27
Item 4. Controls and Procedures		27
PART II. OTHER INFORMATION		28
Item 1. Legal Proceedings		28
Item 6. Exhibits		29
SIGNATURES		30
EXHIBIT INDEX		31
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DENDREON CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)


	September 30,			December 31,
	2010			2009
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	178,907		$	409,829
Short-term investments		196,106			167,116
Trade accounts receivable		12,028			—
Prepaid antigen costs		26,234			18,975
Inventory		11,954			1,882
Prepaid expenses and other current assets		18,266			6,684

Total current assets		443,495			604,486
Property and equipment, net		226,710			98,964
Long-term investments		17,711			29,441
Debt issuance costs and other assets		2,615			2,524

Total assets	$	690,531		$	735,415

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	10,988		$	2,257
Accrued liabilities		47,354			19,557
Accrued compensation		14,014			6,855
Warrant liability		—			132,953
Current portion of capital lease obligations		2,060			722
Current portion of facility lease obligations		917			592

Total current liabilities		75,333			162,936
Long-term accrued liabilities		3,221			1,554
Capital lease obligations, less current portion		1,452			706
Facility lease obligations, less current portion		19,797			14,120
Convertible senior subordinated notes		52,535			52,535
Commitments and contingencies (Note 10)
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, 142,170,703 and 131,125,690 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		140			131
Additional paid-in capital		1,669,038			1,286,891
Accumulated other comprehensive income (loss)		116			(4	)
Accumulated deficit		(1,131,101	)		(783,454	)

Total stockholders’ equity	$	538,193		$	503,564

Total liabilities and stockholders’ equity	$	690,531		$	735,415

See accompanying notes

DENDREON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Revenue	$	20,219		$	25		$	23,050		$	80
Cost of revenue		12,433			—			15,125			—

Gross profit		7,786			25			7,925			80
Operating expenses:
Research and development		13,541			16,494			63,698			41,613
Selling, general and administrative		74,135			9,301			150,050			22,126

Total operating expenses		87,676			25,795			213,748			63,739

Loss from operations		(79,890	)		(25,770	)		(205,823	)		(63,659	)
Other income (expense):
Interest income		369			196			947			725
Interest expense		(191	)		(606	)		(615	)		(1,930	)
Loss from valuation of warrant liability		—			(19,371	)		(142,567	)		(122,788	)

Net loss before income tax benefit		(79,712	)		(45,551	)		(348,058	)		(187,652	)
Income tax benefit		411			—			411			—

Net loss	$	(79,301	)	$	(45,551	)	$	(347,647	)	$	(187,652	)

Basic and diluted net loss per share	$	(0.56	)	$	(0.40	)	$	(2.54	)	$	(1.79	)

Shares used in computation of basic and diluted net loss per share		141,996			113,447			136,735			105,096

See accompanying notes

DENDREON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


	Nine Months Ended
	September 30,
	2010			2009
Operating Activities:
Net loss	$	(347,647	)	$	(187,652	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		8,961			3,267
Non-cash stock-based compensation expense		25,881			10,413
Loss on valuation of warrant liability		142,567			122,788
Amortization of securities discount and premium		965			(48	)
Changes in operating assets and liabilities:
Trade accounts receivable		(12,028	)		—
Prepaid antigen costs		(7,259	)		(18,975	)
Inventory		(10,072	)		(948	)
Prepaid expenses and other assets		(11,673	)		(821	)
Accounts payable		8,731			6,652
Accrued liabilities and compensation		34,956			12,583
Other long-term liabilities		(61	)		(61	)

Net cash used in operating activities		(166,679	)		(52,802	)

Investing Activities:
Maturities and sales of investments		243,903			38,972
Purchases of investments		(262,230	)		(81,324	)
Purchases of property and equipment		(125,094	)		(26,778	)

Net cash used in investing activities		(143,421	)		(69,130	)

Financing Activities:
Proceeds from exercise of warrant		71,360			—
Proceeds from common stock offering, net of financing costs		—			220,810
Proceeds from release of security deposit associated with debt		222			853
Payments on capital lease obligations		(1,338	)		(197	)
Payments on long-term debt		—			(2,048	)
Payments on facility lease obligations		(461	)		(159	)
Net proceeds from exercise of stock options and other		7,404			14,963
Issuance of common stock under Employee Stock Purchase Plan		1,991			672

Net cash provided by financing activities		79,178			234,894

Net (decrease) increase in cash and cash equivalents		(230,922	)		112,962
Cash and cash equivalents at beginning of year		409,829			59,523

Cash and cash equivalents at end of period	$	178,907		$	172,485

Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest	$	1,973		$	2,379
Assets acquired under facility and capital leases	$	9,885		$	8,458
Increase in asset retirement obligation	$	1,728		$	168
Exercise of warrants	$	275,520			—

See accompanying notes

DENDREON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BUSINESS, PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

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), an autologous cellular immunotherapy for the treatment of asymptomatic and 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.

Principles of Consolidation

Effective in the quarter ended September 30, 2010, Dendreon UK Ltd (“Dendreon UK”) and Dendreon Manufacturing, LLC (“Dendreon Manufacturing”) were established. In addition, effective in the quarter ended March 31, 2010, Dendreon Holdings, LLC (“Dendreon Holdings”) and Dendreon Distribution, LLC (“Dendreon Distribution”) were established. 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 three and nine months ended September 30, 2010 include the accounts of Dendreon and its direct and indirect wholly-owned subsidiaries, Dendreon UK, Dendreon Holdings, Dendreon Distribution and Dendreon Manufacturing.

The financial statements for the nine months ended September 30, 2009 include the accounts of Dendreon and its wholly-owned subsidiary, Dendreon San Diego LLC (“Dendreon San Diego”) through February 2, 2009, the effective date of dissolution of the entity.

All intercompany transactions and balances have been eliminated in consolidation.

Basis of Presentation

The accompanying unaudited financial statements reflect, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of our financial position, results of operations and cash flows for each period presented in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted from the accompanying statements. These interim financial statements should be read in conjunction with the audited financial statements and related notes thereto, which are included in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”). The accompanying financial information as of December 31, 2009 has been derived from audited financial statements. Operating results for the three and nine month periods ended September 30, 2010 are not necessarily indicative of future results that may be expected for the year ending December 31, 2010 or any other future period.

Net Loss Per Share

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 4.75% Convertible Senior Subordinated Notes due 2014 (the “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 such securities are anti-dilutive to the computation of net loss per share. As of September 30, 2010 and 2009, shares excluded from the computation of net loss per share were 22,431,456 and 31,159,725, respectively.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

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 nine months ended September 30, 2010 we did not record 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.

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 be recoverable through the commercialization of the product. Such costs incurred prior to mid April 2009 had 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.

Prepaid Antigen Costs

The Company utilizes third party suppliers 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. As of September 30, 2010, there was $26.2 million of prepaid costs associated with the purchase of the antigen used in the manufacture of PROVENGE, which Diosynth RTP, Inc. (“Diosynth”) is obligated to manufacture. Delivery of antigen began in the quarter ended September 30, 2010.

Research and Development Expenses

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.

Accounting for Stock-Based Compensation

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; however, in 2006 and 2007 we granted restricted stock awards with certain performance conditions to all employees. At each reporting date, we were required to estimate the probability of achieving each acceleration provision. 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”).

At September 30, 2010 and December 31, 2009, we had equity-based employee incentive plans, which are described more fully in Note 9 in the 2009 Form 10-K, and in the Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders.

Stock compensation expense for the nine months ended September 30, 2010 and 2009 was as follows:


	Nine months ended
	September 30,
(in millions)	2010		2009
Cost of revenue	$	0.9	$	—
Research and development		6.5		4.9
Selling, general and administrative		18.5		5.5

	$	25.9	$	10.4

For the nine months ended September 30, 2010 and 2009, tax deductions related to stock compensation expense were not reported as a financing cash flow, versus an operating cash flow, because of the availability of net operating losses.

The fair value of stock options was estimated at the date of grant using the BSM option valuation model. The following weighted average assumptions were used to determine fair value of options granted and shares purchased under the employee stock purchase plan during the three and nine months ended September 30, 2010 and 2009:


	Employee Stock Options						Employee Stock Purchase Plan
	For the Three Months ended						For the Three Months ended
	September 30,						September 30,
	2010			2009			2010			2009
Weighted average estimated fair value	$	20.70		$	17.23		$	17.37		$	21.23
Weighted Average Assumptions:
Dividend yield (A)		0.0	%		0.0	%		0.0	%		0.0	%
Expected volatility (B)		75.4	%		93.5	%		67.2	%		137.0	%
Risk-free interest rate (C)		0.96	%		1.5	%		0.19	%		0.4	%
Expected term (D)	4.5 years			4.4 years			0.5 years			1.0 years


	Employee Stock Options						Employee Stock Purchase Plan
	For the Nine Months ended						For the Nine Months ended
	September 30,						September 30,
	2010			2009			2010			2009
Weighted average estimated fair value	$	22.10		$	17.23		$	17.36		$	10.71
Weighted Average Assumptions:
Dividend yield (A)		0.0	%		0.0	%		0.0	%		0.0	%
Expected volatility (B)		78.6	%		93.5	%		100.0	%		137.0	%
Risk-free interest rate (C)		1.6	%		1.5	%		0.27	%		0.6	%
Expected term (D)	4.5 years			4.4 years			0.6 years			1.3 years


(A)		We have not paid dividends in the past and do not plan to pay dividends in the near future.

(B)		The expected stock price volatility is based on the weighted average of the historical volatility of our stock and the volatilities of certain peer companies.


(C)		The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with a term equal to the expected life of the award on the date of grant.

(D)		The expected term of the options for the quarter and year ended September 30, 2010 represents the estimated period of time until exercise and is based on the weighted average of the historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior, and the expected terms of certain peer companies. The expected term of the options for the quarter and year ended September 30, 2009 represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. The expected term of awards under the employee stock purchase plan represents the weighted average purchase periods of each offering.

The following table summarizes our stock option activity during the nine months ended September 30, 2010:


	Shares			Weighted-Average		Weighted-Average
	Subject to			Exercise Price per		Remaining		Aggregate Intrinsic
	Options			Share		Contractual Life		Value
Outstanding, January 1, 2010		3,274,615		$	11.73
Granted		533,750			36.70
Exercised		(1,547,865	)		7.39
Forfeited		(44,585	)		24.67

Outstanding, September 30, 2010		2,215,915		$	20.51		7.88	$	47,338,198

Exercisable, September 30, 2010		699,709		$	9.35		5.72	$	22,284,101

As of September 30, 2010 we had approximately $13.4 million of unrecognized compensation expense related to our unvested stock options. We expect to recognize this compensation expense over a weighted average period of approximately 1.3 years.

Restricted Stock Awards

Restricted stock awards generally vest over a four-year period; however, in 2006 we granted restricted stock awards with performance conditions to executive employees and restricted stock awards with time-vesting and performance conditions to non-executive employees. On January 12, 2007, vesting for 40 percent of these shares accelerated upon acceptance of our Biologics License Application by the FDA. The balance vested for non-executive employees upon the earlier of the dates that the requisite service periods were rendered or the approval of PROVENGE for commercialization by the FDA on the Approval Date. On June 20, 2007, we granted restricted stock awards with performance conditions to executive employees and restricted stock awards with time-vesting and performance conditions to non-executive employees. Awards granted to executive employees vested 100% upon the Approval Date. Awards granted to non-executive employees vested 50% in June 2008 and the balance vested upon the Approval Date. Each of these awards required the relevant executive or non-executive employee to be employed by us on the date of achievement of the performance condition in order for the shares to vest. Compensation expense was recorded based upon management’s estimate of the completion of the performance conditions. The remaining performance conditions related to these restricted stock awards were considered completed upon the Approval Date; all expense related to these performance-based stock awards has accordingly been recorded.

The following table summarizes our restricted stock award activity during the nine months ended September 30, 2010 and 2009:


	2010					2009
				Weighted					Weighted
				Average					Average
				Grant					Grant
	Stock			Date		Stock			Date
	Awards			Fair Value		Awards			Fair Value
Outstanding at beginning of period		2,360,138		$	7.71		1,462,936		$	6.13
Granted		1,105,994			33.82		1,405,115			7.01
Vested		(1,248,946	)		6.95		(426,308	)		5.55
Forfeited or expired		(100,480	)		15.83		(114,938	)		5.74

Outstanding at end of period		2,116,706		$	21.41		2,326,805		$	6.79

As of September 30, 2010 we had approximately $26.3 million in total unrecognized compensation expense related to our restricted stock awards that is to be recognized over a weighted average period of approximately 1.4 years.

Fair Value

We currently measure and report at fair value our cash equivalents and investment securities. 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 Accounting Standards Codification (“ASC”) 360-10, “Property, Plant and Equipment,” and asset retirement obligations initially measured under ASC 410-20, “Asset Retirement and Environmental Obligations.”

Warrant Liability

On April 3, 2008, we issued 8.0 million shares (the “Shares”) of our common stock, and warrants to purchase up to 8.0 million shares of common stock (the “Warrants”) 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 were adjusted to fair value and reclassified from liabilities to stockholders’ equity. The fair value of the Warrants was estimated using the BSM option pricing model. The fair value of the Warrants on the Exercise Date was $275.5 million of which $142.6 million was recognized as a loss from valuation of warrant liability during the nine months ended September 30, 2010 and of which $122.8 million was recognized as a loss during the nine months ended September 30, 2009.

Income Taxes

We recognized $0.4 million in income tax benefit for the three months and nine months ended September 30, 2010 relating to refundable credits, compared with no income tax expense or benefit for the same periods of 2009.

3. RECENT ACCOUNTING PRONOUNCEMENTS

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”, 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.

4. FAIR VALUE MEASUREMENTS

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.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009 (in thousands):


			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	September 30, 2010		(Level 1)		(Level 2)		(Level 3)
*Assets:*
Money market	$	152,621	$	152,621	$	—	$	—
Commercial paper		19,993		—		19,993		—
Corporate debt securities		91,312		—		91,312		—
Government-sponsored enterprises		82,268		—		82,268		—
U.S. Treasury Note		34,005		—		34,005		—

Total financial assets	$	380,199	$	152,621	$	227,578	$	—


			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	December 31, 2009		(Level 1)		(Level 2)		(Level 3)
*Assets:*
Money market	$	378,663	$	378,663	$	—	$	—
Commercial paper		32,543		—		32,543		—
Corporate debt securities		92,273		—		92,273		—
Government-sponsored enterprises		33,022		—		33,022		—
U.S. Treasury Note		64,918		—		64,918		—

Total financial assets	$	601,419	$	378,663	$	222,756	$	—

*Liabilities:*
Warrants	$	132,953	$	—	$	—	$	132,953

Total financial liabilities	$	132,953	$	—	$	—	$	132,953

Our fixed income investment securities are valued using the market approach. The fair value of the Warrants was determined using the BSM model with volatility derived from the weighted average current volatility and implied volatilities of traded options.

The following table is a roll forward of the fair value of the Warrants, as to which fair value is determined by Level 3 inputs (in thousands):


	Nine Months			Year
	Ended			Ended
Description	September 30, 2010			December 31, 2009
Beginning balance	$	132,953		$	14,190
Purchases, issuances, and settlements		—			—
Total loss included in net loss (1)		142,567			118,763
Exercise and conversion into common stock		(275,520	)		—

Ending balance	$	—		$	132,953


(1)		The loss for the nine months ended September 30, 2010 relates to the revaluation of the Warrant liability from December 31, 2009 through May 18, 2010, the date of exercise. The loss is reflected in our consolidated statements of operations as a component of other expense.

The fair value of the convertible senior subordinated notes (the “Notes”) at September 30, 2010, was approximately $198.1 million, based on the last trading price in September. Such amounts are determined based on quoted prices in active markets for similar instruments (a “Level 2” input).

The carrying amounts reflected in the consolidated balance sheets for cash, prepaid expenses, other current assets, accounts payable, accrued expenses and other liabilities approximate fair value due to their short term nature. In addition, our capital lease and debt obligations approximate fair value based on current interest rates, which contain an element of default risk.

5. INVESTMENTS

Securities available-for-sale at cost or amortized cost and fair market value by contractual maturity were as follows:


	Cost or		Fair
	Amortized		Market
	Cost		Value
	(In thousands)
September 30, 2010
Due in one year or less	$	195,995	$	196,106
Due after one year through two years		17,706		17,711

	$	213,701	$	213,817

December 31, 2009
Due in one year or less	$	167,131	$	167,116
Due after one year through two years		29,430		29,441

	$	196,561	$	196,557

Our gross realized gains or losses on sales of available-for-sale securities were not material for the three and nine months ended September 30, 2010 and 2009.

Securities available-for-sale, short-term and long-term, consisted of the following:


	Cost or		Gross		Gross			Fair
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
	(In thousands)
September 30, 2010
Demand deposit	$	6,232	$	—	$	—		$	6,232
Corporate debt securities		91,277		45		(10	)		91,312
Government-sponsored enterprises		82,202		69		(3	)		82,268
U.S. Treasury Note		33,990		15		—			34,005

	$	213,701	$	129	$	(13	)	$	213,817

December 31, 2009
Demand deposit	$	6,344	$	—	$	—		$	6,344
Corporate debt securities		92,263		19		(9	)		92,273
Government-sponsored enterprises		33,015		15		(8	)		33,022
U.S. Treasury Note		64,939		7		(28	)		64,918

	$	196,561	$	41	$	(45	)	$	196,557

None of our securities have been in a continuous unrealized loss position for more than 12 months at September 30, 2010.

We have classified our entire investment portfolio as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in comprehensive income (loss). Amortization of discounts or premiums is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income or expense. The decline in fair value of certain of our investments is judged by us, on an individual basis, to be temporary. We do not intend to sell an impaired security, and it is unlikely that we will be required to sell a security before the recovery of its amortized cost basis. See Footnote 4 — Fair Value Measurements for further discussion.

We had $6.2 million and $6.3 million in secured deposits for various letters of credit as of September 30, 2010 and December 31, 2009, respectively, which are classified as long-term investments.

6. INVENTORY

Inventories stated at the lower of cost or market consisted of the following:


(in thousands)	September 30, 2010		December 31, 2009
Raw materials	$	11,627	$	1,882
Work in process		1		—
Finished goods		326		—

Total inventories	$	11,954	$	1,882

7. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:


	September 30,			December 31,
(in thousands)	2010			2009
Furniture and office equipment	$	4,783		$	1,473
Laboratory and manufacturing equipment		14,549			12,313
Computer equipment and software		30,703			22,485
Leasehold improvements		77,068			16,157
Buildings		12,285			1,730
Construction in progress		127,427			76,235

		266,815			130,393
Less accumulated depreciation and amortization		(40,105	)		(31,429	)

	$	226,710		$	98,964

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 “New Jersey Facility”). 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 initial phase (Phase I) of the build-out of the New Jersey Facility was completed in July 2006. In February 2007, we started to manufacture PROVENGE for clinical use in the New Jersey Facility. In June 2009, we entered into a construction agreement for the build-out of Phases II and III of the New Jersey Facility. Phase II of the facility build-out was substantially complete in January 2010, and Phase III of the facility was substantially complete in May 2010. We have completed validation activities for the expansion space and are seeking licensure by the FDA.

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 (the “Orange County Facility”) 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. As we are responsible for the construction costs, we are deemed to be the owner of the Orange County Facility for accounting purposes during the construction period. Upon taking possession of the facility and subsequently beginning construction, we capitalized approximately $6.7 million in property and equipment to record the estimated fair value of the building with a related lease obligation at September 30, 2010 of approximately $6.4 million, which was reflected in the accompanying balance sheet as a facility lease obligation. The facility build-out was substantially complete in August 2010 and we have commenced validation activities.

In July 2009, we entered into a lease with Majestic Realty Co. for building space totaling approximately 160,000 square feet in Atlanta, Georgia (the “Atlanta Facility”) 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. As we are responsible for the construction costs, we are deemed to be the owner of the facility for accounting purposes during the construction period. Upon taking possession of the facility and beginning construction, we capitalized approximately $6.4 million in property and equipment to record the estimated fair value of the building with a related lease obligation of approximately $6.4 million at September 30, 2010, which was reflected in the accompanying balance sheet as a facility lease obligation. The related lease payments have been allocated to the building and the land based on their estimated relative fair values. The portion of the lease related to land is treated as an operating lease and the balance of the lease payment is applied to the facility lease obligation. We have substantially completed the build-out of the facility and received a final certificate of occupancy on October 21, 2010. We have commenced validation activities for the facility.

At September 30, 2010, the $127.4 million in construction in progress included $25.7 million related to the New Jersey Facility expansion, $39.8 million related to the build-out of the Orange County Facility, $39.8 million related to the build-out of the Atlanta Facility, $14.3 million of capitalized facility leases and $7.8 million in software and other. For the nine months ended September 30, 2010, we have capitalized $2.4 million of interest.

8. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:


	September 30,		December 31,
(in thousands)	2010		2009
Clinical trial costs	$	1,383	$	1,243
Deferred rent		1,246		1,334
Accrued property and equipment		13,190		9,443
Accrued legal costs		281		318
Settlement liability		18,290		—
Other accrued liabilities		12,964		7,219

	$	47,354	$	19,557

9. CONVERTIBLE SENIOR SUBORDINATED NOTES

In June and July 2007, an aggregate of $85.3 million of the Notes were sold in a private placement to qualified institutional buyers. Proceeds from the offering, after deducting placement fees and our estimated expenses, were approximately $82.3 million. The 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 Notes are each June 1st and December 1st. In certain circumstances, additional amounts may become due on the Notes 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 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 Notes to receive additional interest on the Notes at an annual rate equal to 1% of the outstanding principal amount of the Notes. We recorded interest expense, including the amortization of debt issuance costs related to the Notes, of $2.2 million and $2.1 million during the nine months ended September 30, 2010 and 2009, respectively.

The 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 Notes, subject to adjustment. There may be an increase in the conversion rate of the 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 Notes. A holder that converts 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 Notes may require us to repurchase all or a portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the 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 Notes were converted by holders of the Notes, resulting in the issuance of approximately 1.1 million shares of common stock. In May 2009, we exchanged an aggregate of 2,137,411 shares of our common stock for $21.2 million in aggregate principal face amount of the Notes held by holders of the Notes.

We have identified embedded derivatives associated with the Notes and are accounting for these embedded derivatives accordingly. These embedded derivatives meet certain criteria and are therefore not required to be accounted for separately from the Notes.

10. COMMITMENTS AND CONTINGENCIES

We have a supply agreement with Diosynth covering the commercial production of the recombinant antigen used in the manufacture of PROVENGE. We currently have a commitment with Diosynth to purchase antigen through the second quarter of 2011 for a total of $78.7 million related to two orders. As of September 30, 2010, we have paid $21.5 million towards our first order and began receiving shipments of the order in the third quarter 2010. We have a remaining obligation related to the first order of approximately $18.0 million as of September 30, 2010. In May 2010, we placed a second order with Diosynth for shipment of antigen to commence delivery in mid 2011. We prepaid $9.3 million to Diosynth in May 2010 related to this order and have a remaining commitment of $29.9 million. 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.

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 September 30, 2010, we have a remaining payment obligation for the transfer of the antigen production process aggregating $19.9 million payable through August 2011. Upon execution of the agreement, we placed an initial order for approximately $8.3 million, with delivery to commence in the second half of 2011.

In June 2009, we entered into a construction agreement with The Henderson Corporation of PA, Inc. (“Henderson”) to retain Henderson to perform construction related services and to arrange for, monitor, supervise, administer and contract for the construction of Phase II and Phase III of our New Jersey Facility. The guaranteed maximum price for the completion of all work under the construction agreement is approximately $51.1 million, of which $49.8 million has been paid through September 30, 2010.

In December 2009 and January 2010, we entered into construction agreements with Turner Construction Company (“Turner”) to retain Turner to perform construction related services and to arrange for, monitor, supervise, administer and contract for the construction of the build-out of the Atlanta Facility and Orange County Facility, for a maximum total cost of approximately $87.7 million of which $71.0 million has been paid through September 30, 2010. The agreements include incentives for the completion of work prior to milestone dates and penalties for failing to meet such deadlines.

Beginning on May 24, 2007, four proposed securities class action suits were filed in the United States District Court for the Western District of Washington, on behalf of purchasers of the Company’s common stock, purporting to state claims for securities law violations stemming from our disclosures related to PROVENGE and the FDA’s actions regarding our BLA for PROVENGE. The complaints seek compensatory damages, attorney’s fees and expenses. On October 4, 2007, the Court consolidated these actions under the caption McGuire v. Dendreon Corporation, et al., and designated a lead plaintiff. The lead plaintiff designated the complaint filed June 6, 2007 in McGuire, et al. v. Dendreon Corporation, et al., as the operative complaint. Between December 2007 and January 2009, Dendreon and the individual defendants filed motions to dismiss the original complaint, the amended complaint, and the second amended complaint. The Court granted these motions in part, and denied them in part, allowing lead plaintiff leave to amend the complaint each time. Lead plaintiff filed a third amended complaint on June 8, 2009. The third amended complaint includes claims against Dendreon, our chief executive officer, and a senior vice president, challenging disclosures related to the FDA’s actions regarding our BLA for PROVENGE, and the sale of Dendreon stock by our chief executive officer. On June 29, 2009, defendants filed an answer to the third amended complaint. Discovery was completed on June 22, 2010, and trial had been set for October 18, 2010. On September 16, 2010, the parties agreed to settle the class action 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 pending a settlement hearing, a stipulation of settlement, and other settlement documentation. A date for the settlement hearing has not been set. The Company has insurance that is expected to cover a significant portion of the settlement and is in the process of actively pursuing reimbursement.

On March 31, 2009, a complaint captioned Mountanos v. Dendreon Corporation, et al., was filed in the United States District Court for the Western District of Washington, naming Dendreon, our chief executive officer, and a senior vice president as defendants. The complaint in Mountanos makes similar factual and legal allegations as the second amended complaint filed in the McGuire action described above, but Mountanos is not a class action and the named plaintiffs allegedly purchased options rather than the Company’s common stock. It seeks compensatory damages, attorney’s fees and expenses. On July 2, 2009, plaintiffs filed an amended complaint, which the defendants answered on August 3, 2009. Discovery was completed on June 22, 2010, and trial had been set for October 18, 2010, to take place concurrently with the trial in McGuire v. Dendreon Corporation. 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.

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. Thus, these matters could result in a material adverse effect on our business, financial condition and results of operations.

11. EQUITY

Equity Line of Credit

On October 11, 2007, we entered into an equity line of credit arrangement with Azimuth Opportunity Ltd. (“Azimuth”) pursuant to the 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 to Azimuth and received net proceeds of approximately $19.8 million. The Common Stock Purchase Agreement expired during October 2010.

12. COMPREHENSIVE LOSS

Comprehensive loss includes charges and credits to stockholders’ equity that are not the result of transactions with stockholders. Our comprehensive loss consisted of net loss plus changes in unrealized gain or loss on investments as follows:


	Three months ended						Nine months ended
	September 30,						September 30,
(in thousands)	2010			2009			2010			2009
Net loss	$	(79,301	)	$	(45,551	)	$	(347,647	)	$	(187,652	)
Net unrealized gain (loss) on securities		90			(4	)		120			10

Comprehensive loss	$	(79,211	)	$	(45,555	)	$	(347,527	)	$	(187,642	)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This quarterly report contains forward-looking statements concerning matters that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Words such as “believes,” “expects,” “likely,” “may” and “plans” are intended to identify forward-looking statements, although not all forward-looking statements contain these words.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no duty to update any of the forward-looking statements after the date hereof to conform such statements to actual results or to changes in our expectations.

The following discussion should be read in conjunction with the financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q. In addition, readers are urged to carefully review and consider the various disclosures made by us regarding the factors that affect our business, including without limitation the disclosures set forth in our quarterly report for the quarter ended June 30, 2010 under the caption, “Risk Factors” and also in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”), including the audited financial statements and the notes thereto and disclosures made under the caption, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

OVERVIEW

We are a biotechnology company focused on the discovery, development and commercialization of novel therapeutics that can significantly improve cancer treatment options for patients. Our 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), an autologous cellular immunotherapy for the treatment of asymptomatic and minimally symptomatic, metastatic, castrate-resistant, hormone-refractory prostate cancer. Commercial sale of PROVENGE began in May 2010.

We have incurred significant losses since our inception. As of September 30, 2010, our accumulated deficit was $1,131.1 million. 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 operations from revenue generated from the commercial sale of PROVENGE, available cash on hand, and access to the capital markets as we continue to develop the infrastructure to support the commercialization of PROVENGE, including our manufacturing capacity, expand our clinical trial programs, apply for regulatory approvals and invest in research and product development. The majority of our resources continue to be used in support of the commercialization of PROVENGE. We own worldwide rights for PROVENGE.

Following receipt of positive clinical data from our IMPACT (IMmunotherapy for Prostate AdenoCarcinoma Treatment) study for PROVENGE in April 2009, we focused on

	(i)		the amendment to our Biologics License Application (our “BLA”), submitted in October 2009,

	(ii)		expanding our manufacturing operations, and

	(iii)		developing our commercial infrastructure.

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 castration-recurrent 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.” NCCN is a not-for-profit alliance of 21 of the world’s leading cancer centers.

Approximately 25% of the capacity at our Morris Plains, New Jersey manufacturing facility (the “New Jersey Facility”) has been approved by the FDA for commercial manufacturing. We began the expansion of the remaining 75% capacity of the New Jersey Facility in July 2009 to bring that facility to full capacity. 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 half 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 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.

As of September 30, 2010, our commercial team included approximately 70 individuals employed in sales, marketing, and government affairs. During the third quarter, our field based teams were primarily focused on training infusion sites and customer education in addition to sales activity for PROVENGE.

With respect to reimbursement, since the quarter ended June 30, 2010, one additional Medicare Administrative Contractor (“MAC”) has established coverage guidelines for PROVENGE, bringing the total to ten of the fifteen regional MAC territories having to date established coverage guidelines for on-label use of PROVENGE. Of the remainder, four have stated that they will process PROVENGE claims. One MAC region, covering Arkansas, Louisiana and Mississippi, has indicated it will establish a policy of non-coverage, however we continue to work with them to ensure patients have access to PROVENGE in that region. Also during the quarter, additional private payers such as CIGNA, HealthNet, Regence of Washington, United Healthcare and WellPoint established local or national coverage.

The Centers for Medicare and Medicaid Services (CMS) initiated a National Coverage Assessment (NCA) of PROVENGE on June 30, 2010. NCAs do not impact existing coverage decisions, nor do they restrict local Medicare contractors from covering PROVENGE. Medicare beneficiaries are still able to access PROVENGE where it is covered by the local contractor. The NCA does not affect coverage of PROVENGE by private payers. CMS has scheduled a meeting for November 17, 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.

On July 28, 2010, we announced the publication of data from the pivotal Phase 3 IMPACT study for PROVENGE 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.

Other potential product candidates we have under development include our investigational active cellular immunotherapy directed against HER2/neu for the treatment of patients with bladder, breast, ovarian and other solid tumors expressing HER2/neu. Active cellular immunotherapies directed at CA-9, an antigen highly expressed in renal cell carcinoma, and 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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 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 financial statements.

Revenue Recognition

Fair Value

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.”

Warrant Liability

On April 3, 2008, we issued 8.0 million shares (the “Shares”) of our common stock, and warrants to purchase up to 8.0 million shares of common stock (the “Warrants”) to an institutional investor (the “Investor”). 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, 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 of $71.4 million.

The Warrants were recorded at their fair values at issuance and were adjusted to fair value at each subsequent balance sheet date. Any change in fair value between reporting periods was recorded as other income (expense) each reporting period. The Warrants were 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 Black-Scholes-Merton (“BSM”) option valuation model. As of May 18, 2010 (the “Exercise Date”) and December 31, 2009, the fair value of the Warrants was determined to be $275.5 million; accordingly, we recorded approximately $142.6 million in other loss for the nine months ended September 30, 2010 related to the change in the fair value of the Warrants.

Recent Accounting Pronouncements

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 Accounting Standards Codification (“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 Level 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 for the quarter ended March 31, 2010. The disclosure requirements related to the Level 3 fair value measurements are effective commencing with the quarter ended March 31, 2011. The adoption of ASU 2010-06 did not have a material impact on our financial statements.

RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

Revenue


	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009
Product revenue	$	20,181	$	—	$	22,971	$	—
Collaborative revenue		38		25		79		80

Total revenue	$	20,219	$	25	$	23,050	$	80

Product revenue of $20.2 million and $23.0 million during the three and nine months ended September 30, 2010, respectively, resulted from commercial sale of PROVENGE following FDA approval on April 29, 2010. The nine months ended September 30, 2010 reflects approximately five 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.

Collaborative revenue includes the recognition of deferred revenue related to a license agreement amounting to $38,000 and $25,000 for the three months ended September 30, 2010 and 2009, respectively, and $79,000 and $80,000 for the nine months ended September 30, 2010 and 2009, respectively.

Cost of Revenue

Cost of revenue was $12.4 million and $15.1 million for the three months and nine months ended September 30, 2010, respectively. The cost of revenue includes the costs of manufacturing and distributing PROVENGE and excess manufacturing overhead due to under utilization of our Morris Plains, NJ manufacturing facility (the “New Jersey Facility”) plant capacity. Although commercial manufacture of PROVENGE began in May 2010 after FDA approval, substantial production of PROVENGE for commercial sale did not commence until third quarter 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.

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.

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 to produce PROVENGE for commercial sale in the expanded capacity of our New Jersey Facility, as well as hiring for our Orange County, California and Atlanta, Georgia facilities.

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

Research and development expenses decreased to $13.5 million for the three months ended September 30, 2010, from $16.5 million for the three months ended September 30, 2009. Research and development expenses increased to $63.7 million for the nine months ended September 30, 2010, from $41.6 million for the nine months ended September 30, 2009. The increase in research and development expense for the nine months ended September 30, 2010 is the result of increased employee related expenses, including stock compensation, 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.

Financial data related to our research and development activities is categorized as either costs associated with clinical programs or discovery research. Our research and development expenses for the three and nine months ended September 30, 2010 and 2009 were as follows (in millions):


	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009
Clinical programs:
Direct costs	$	3.7	$	1.2	$	7.8	$	3.7
Indirect costs		8.0		14.8		50.0		36.5

Total clinical programs		11.7		16.0		57.8		40.2
Discovery research		1.8		0.5		5.9		1.4

Total research and development expense	$	13.5	$	16.5	$	63.7	$	41.6

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 clinical programs. Indirect costs of our clinical program include wages, payroll taxes and other employee-related expenses, stock-based compensation, rent, utilities and other facilities-related maintenance. The costs in each category may change in the future and new categories may be added. Costs attributable to our discovery research programs represent our efforts to develop and expand our product pipeline.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $74.1 million for the three months ended September 30, 2010, compared to $9.3 million for the three months ended September 30, 2009. Selling, general and administrative expenses increased to $150.1 million for the nine months ended September 30, 2010, compared to $22.1 million for the nine months ended September 30, 2009. 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 costs include the expenses associated with the portion of our New Jersey Facility which was not commercially

operational during the quarter and related costs of personnel in training. Further, the three months ended September 30, 2010 included a $13.3 million charge for settlement of litigation, as discussed in Note 10, for which we are actively pursuing reimbursement for a significant portion from our insurers. The significant increase in selling, general and administrative expenses for the three and nine months ended September 30, 2010 compared to 2009 was primarily attributable to increased 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 the year. We have also begun incurring pre-operational costs at the Atlanta and Orange County manufacturing facilities (“Atlanta Facility” and “Orange County Facility”) both of which have been substantially completed and are undergoing validation activities. These costs include the facility related expenditures, additional headcount to support the build-out as well as prepare for commercial production of PROVENGE in anticipation of licensure of the facilities for manufacture of PROVENGE by the FDA. The costs related to these activities for the three months ended June 30 and September 30, 2010 were approximately $17.7 million and $33.4 million, respectively, and represent ongoing expenses 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 launch of PROVENGE and new facility start-up. We expect that these types of expenditures will continue to increase until the facilities become fully operational.

Interest Income

Interest income increased to $0.4 million for the three months ended September 30, 2010 from $0.2 million for the three months ended September 30, 2009. Interest income increased to $0.9 million for the nine months ended September 30, 2010, from $0.7 million for the nine months ended September 30, 2009. The increases in interest income for the three and nine months ended September 30, 2010 compared to 2009 was primarily due to increased holdings of cash and investments.

Interest Expense

Interest expense decreased to $0.2 million for the three months ended September 30, 2010, compared to $0.6 million for the three months ended September 30, 2009. Interest expense decreased to $0.6 million for the nine months ended September 30, 2010, compared to $1.9 million for the nine months ended September 30, 2009. The decreases in interest expense for the three and nine months ended September 30, 2010 compared to 2009 was primarily due to a lower outstanding debt balance associated with the conversion in April 2009 and the exchange in May 2009 of $32.7 million in aggregate principal amount of the 4.75% Convertible Senior Subordinated Notes due 2014 (the “Notes”) to equity. In addition, we capitalized interest expense of $2.4 million for the nine months ended September 30, 2010.

Warrant Liability

Non-operating loss associated with the increase in warrant liability for the nine months ended September 30, 2010 was $142.6 million, as compared to non-operating loss of $122.8 million for the nine months ended September 30, 2009. The fair value was calculated using the BSM option valuation model and was revalued at each reporting period and finally at the date of exercise. 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.

LIQUIDITY AND CAPITAL RESOURCES

Cash Uses and Proceeds

As of September 30, 2010, we had approximately $392.7 million in cash, cash equivalents and 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 and interest income.

Net cash used in operating activities for the nine months ended September 30, 2010 and 2009 was $166.7 million and $52.8 million, respectively. Expenditures related to operating activities in these periods were a result of costs associated with the commercial launch of PROVENGE, research and development expenses, clinical trial costs, contract manufacturing costs and selling, general and administrative expenses in support of our operations. 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 311 as of September 30, 2009 to 1,047 as of September 30, 2010, and pre-launch expenditures.

Net cash used in investing activities for the nine months ended September 30, 2010 and 2009, was $143.4 million and $69.1 million, respectively. Expenditures related to investing activities for the nine months ended September 30, 2010, consisted primarily of purchases of investments of $262.2 million and purchases of property and equipment, primarily facilities related expenditures, of $125.1 million, offset by maturities and sales of investments of $243.9 million.

We believe that our current cash on hand as of September 30, 2010 together with our access to the capital markets, is sufficient to meet our anticipated expenditures for at least the next 12 months as we execute on our commercialization plan for 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

	•		potentially 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.

Office Leases

In March 2009, we entered into the second amendment to our office lease agreement with Selig Holdings Company, LLC. The amendment extends the term on our headquarters to December 31, 2011. In April 2010, we leased an additional 11,500 square feet in the headquarters building, with a term commencing in May 2010 and ending December 31, 2011.

We lease our principal research, development and administrative facilities in Seattle, Washington that consist of approximately 71,000 square feet, under an operating lease through December 31, 2011, with the option to extend the term for an additional five years. The annual base rent for the extended lease term is approximately $2.7 million, which is to be increased annually between three to six percent, approximating the Seattle area consumer price index.

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.

Manufacturing Facilities Leases and Construction Agreements

We anticipate facilities related expenses, including equipment expenditures, to increase significantly during 2010 as we execute on our plan for commercial launch of PROVENGE.

On August 18, 2005, we entered into an agreement to lease approximately 158,000 square feet of commercial manufacturing space in Morris Plains, New Jersey (the “New Jersey Facility”). 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 initial phase (Phase I) of the build-out of the New Jersey Facility was completed in July 2006. In February 2007, we started to manufacture PROVENGE for clinical use in the New Jersey Facility. In June 2009, we entered into a construction agreement for the build-out of Phases II and III of the New Jersey Facility, described below. Phase II of the facility build-out was substantially completed in January 2010, and Phase III of the facility was substantially complete in May 2010. We have completed validation activities for the expansion space and are seeking licensure by the FDA. The 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. The $1.9 million security deposit was recorded as long-term investment on our consolidated balance sheet as of September 30, 2010.

In June 2009, we entered into a construction agreement with The Henderson Corporation of PA, Inc. (“Henderson”) to retain Henderson to perform construction related services and to arrange for, monitor, supervise, administer and contract for the construction of Phase II and Phase III of our New Jersey Facility. The guaranteed maximum price for the completion of all work under the agreement is approximately $51.1 million of which $49.8 million has been paid through September 30, 2010.

As part of an agreement with the Township of Hanover relating to the permitting of the expansion of our New Jersey Facility, we have $1.9 million in long-term investments being held as a security deposit to ensure completion of certain improvements at the property.

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 square feet (the “Atlanta Facility”). The facility was substantially complete in the third quarter and a final certificate of occupancy was issued on October 21, 2010. The initial lease term, which commenced in March 2010 upon substantial completion of the facility, is for ten and a half years, 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. We commenced occupation of the facility in September 2010. The aggregate rent payable for the building shell under the initial lease term is $6.7 million.

In August 2009, we entered into a lease with Knickerbocker Properties, Inc. XLVI for existing building space totaling approximately 184,000 square feet in Orange County, California (the “Orange County Facility”). The build-out of the facility was substantially complete in August 2010. The initial lease term is for 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. We commenced occupation of the facility in July 2010. The aggregate rent payable for the existing warehouse property under the initial lease term is $13.6 million.

The Georgia and California leases required us to provide the landlords with letters of credit in the total amount of $2.4 million as security deposits. The Georgia letter of credit totaling $222,000 was returned to us in May 2010. The California letter of credit was $2.2 million as of September 30, 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 September 30, 2010.

During the third quarter 2009, we engaged LifeTek Solutions, Inc., to provide consulting design and commissioning services for the build-out of the Atlanta Facility and the Orange County Facility as well as Phase II and Phase III of the New Jersey Facility, for a maximum total cost of approximately $6.0 million.

In December 2009 and January 2010, we entered into construction agreements with Turner Construction Company (“Turner”) to retain Turner to perform construction related services and to arrange for, monitor, supervise, administer and contract for the construction of the build-outs of the Atlanta Facility and Orange County Facility, for a maximum total cost of approximately $87.7 million of which $71.0 million has been paid through September 30, 2010. The agreements include incentives for the completion of work prior to milestone dates and penalties for failing to meet such deadlines.

Production and Supply Expenses

In May 2009, we placed an order for $39.5 million with Diosynth under our agreement dated December 22, 2005, as amended, which covers the commercial production of the recombinant antigen used in the manufacture of PROVENGE. We began receiving shipments in the third quarter of 2010. As of September 30, 2010, our remaining obligation related to this first order is to pay Diosynth $18.0 million upon the delivery of antigen. In May 2010, we placed an order with Diosynth for shipment of antigen to commence delivery in mid 2011. The commitment for this order is $39.2 million of which approximately $9.3 million was prepaid to Diosynth in the second quarter of 2010. On May 12, 2010, we entered into a Second Amendment to the agreement with Diosynth 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.

On September 15, 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 September 30, 2010, we have a remaining payment obligation for the transfer of the antigen production process aggregating $19.9 million payable through August 2011. Upon execution of the agreement, we placed an initial order for approximately $8.3 million, with delivery to commence in the second half of 2011.

Financings from the Sale of Securities and Issuance of Convertible Notes

Equity Offering Proceeds

In December 2009, we received net proceeds of $409.5 million, after deducting underwriting commissions and estimated offering expenses, from the 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 the issuance of 11,979,166 shares of common stock at the public offering price of $19.20 per share.

In April 2008, we received net proceeds of $46.0 million from the 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 exercise price of $20.00 per share of common stock and included a net exercise feature. 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 BSM Value, as defined in the Warrants. The Warrants were recorded as a liability and then marked to market each period through earnings in other income (expense). 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 fair value of the Warrants at the exercise date and December 31, 2009 was approximately $275.5 million and $133.0 million, respectively. As a result of this increase, we recorded $142.6 million in non-operating loss for the nine months ended September 30, 2010.

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 with Azimuth (the “Common Stock Purchase Agreement”), which we amended in October 2008 and February 2009. 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 to Azimuth and received net proceeds of approximately $19.8 million. The Common Stock Purchase Agreement expired during October 2010.

Convertible Notes

In June and July 2007, an aggregate of $85.3 million of the Notes were sold in a private placement to qualified institutional buyers. Proceeds from the offering, after deducting placement fees and our estimated expenses, were approximately $82.3 million. The 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 Notes are each June 1st and December 1st. In certain circumstances, additional amounts may become due on the Notes 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 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 Notes to receive additional interest on the Notes at an annual rate equal to 1% of the outstanding principal amount of the Notes. We recorded interest expense, including the amortization of debt issuance costs related to the Notes, of $2.2 million and $2.1 million for the nine months ended September 30, 2010 and 2009, respectively.

“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 Notes may require us to repurchase all or a portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest and other amounts due thereon. The Indenture contains customary covenants.

As of September 30, 2010, $52.5 million in aggregate principal amount of the Notes was outstanding. The fair value of the Notes at September 30, 2010 and December 31, 2009 was approximately $198.1 million and $141.8 million, respectively, based on the last trading prices in September and December, respectively. Such amounts are determined based on quoted prices in active markets for similar instruments.

ITEM 3. 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 September 30, 2010 and December 31, 2009, we had short-term investments of $196.1 million and $167.1 million, respectively, and long-term investments of $17.7 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 September 30, 2010, assuming a 100 basis point increase in market interest rates, would decrease by approximately $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 4. CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures.

Our chief executive officer and our chief financial officer, based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that our disclosure controls and procedures are effective for ensuring 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 SEC’s rules and forms.

(b) Changes in internal control over financial reporting.

During the quarter ended September 30, 2010, we have added additional controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) related to inventory costing that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 6. EXHIBITS


Exhibit
Number		Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
101		INSTANCE DOCUMENT
101		SCHEMA DOCUMENT
101		CALCULATION LINKBASE DOCUMENT
101		LABELS LINKBASE DOCUMENT
101		PRESENTATION LINKBASE DOCUMENT

SIGNATURES

Pursuant to the requirements 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.

Date: November 3, 2010


	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
		Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)



	By:	/s/ GREGORY R. COX
		Gregory R. Cox
		(Principal Accounting Officer)

EXHIBIT INDEX


Exhibit
Number		Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
101		INSTANCE DOCUMENT
101		SCHEMA DOCUMENT
101		CALCULATION LINKBASE DOCUMENT
101		LABELS LINKBASE DOCUMENT
101		PRESENTATION LINKBASE DOCUMENT

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