SEATTLE ( TheStreet) --The Dendreon ( DNDN) drama continues.

The latest wicked twist hit Wednesday night after the Centers for Medicare and Medicaid Services, or CMS, said it had begun an evaluation process to determine national coverage of Dendreon's prostate cancer therapy Provenge.

Investors were already worried about Provenge reimbursement in the early days of the product's launch, so when the CMS news hit the tape, investors freaked out. Dendreon shares tumbled as much as 23% to $25 in Wednesday's after-hours trading session from their $32.33 close.

In early Thursday trading, Dendreon shares are down 10% to $29.12.

If you thought the tempest over Dendreon and insurance coverage of Provenge was going to end soon, I suggest grabbing a comfy chair, ordering another drink (or three) and settling in for a longer-than-expected wait.

Meantime, I'll try to answer the most pressing questions arising from Wednesday's surprising development:

What the heck is a National Coverage Determination?

Medicare is a health care insurance program for seniors administered by the federal government, but in fact, nearly all coverage and reimbursement decisions for products and services are made at the local level by states or private contractors that administer Medicare programs.

Sometimes, however, CMS chooses to unify coverage on a nationwide basis -- essentially telling all the individual Medicare providers how to cover a certain product or service. This top-down process is known as a National Coverage Determination (NCD).

Why is CMS starting an NCD for Provenge?

CMS almost never issues NCDs for cancer drugs, which is why investors were so surprised Wednesday.

From what I can surmise, there have been only three NCDs ever issued for cancer drugs -- Avastin and Erbitux (both for off-label uses) and another for the radio-immunotherapy drugs Bexxar and Zevalin. One additional and commonly cited NCD in the cancer arena is for the red blood cell stimulating drugs Epogen, Aranesp and Procrit.

The reasons for CMS wanting to place Provenge under an NCD are not clear, but a couple of guesses. Local Medicare providers may have asked for it because they want guidance from CMS on how to cover Provenge. Second, Provenge is not a run-of-the-mill cancer drug -- it's a cellular immunotherapy which stimulates the patient's own immune system to target and destroy cancer cells. Given the uniqueness of Provenge, CMS may think it best to coordinate coverage nationally.

Clearly, the market took this development as bad news, but please explain why.

Two words: Risk and delay. The odds seems small given Provenge's clinical data, but yes, CMS could decide not to cover Provenge at all, or CMS could decide to place severe restrictions on the product's use. Either of these scenarios would be disastrous for Dendreon.

Now, again, I don't think this will happen but the risk is there, which adds another overhang to Dendreon in the early stages of the Provenge launch.

Second, the NCD process for Provenge is going to take a year! CMS plans on holding a meeting before the end of 2010 to review Provenge's clinical data, which will be followed by a proposed NCD being issued in March 2011. After more public comment, a final NCD will be announced in June 2011.

In other words, the Medicare reimbursement overhang is going to be around for quite some time.

Will this effect Dendreon's ability to sell Provenge today, or stop insurance carriers from reimbursing for Provenge?

We don't know. Last night, Dendreon said the NCD process does not impact existing coverage decisions. That's correct. Private insurers can continue to reimburse for Provenge as can local Medicare carriers. Nothing about CMS spending the next year on an NCD for Provenge changes that.

However, some local Medicare carriers may decide to hold off or delay making coverage decisions about Provenge pending the final NCD. If that happens, Provenge sales could be adversely affected.

This is crazy! Provenge prolongs the lives of prostate cancer patients? How could the government say no to that?

You're right. The Food and Drug Administration approved Provenge for the treatment of advanced prostate cancer based on data demonstrating a 4.1-month survival benefit for the therapy compared to the control group. No cancer drug with a proven survival benefit has ever been denied insurance coverage before, and I find it hard to see how Provenge becomes the first.

Haven't some insurance carriers already decided to cover Provenge?

Yes, which is another factor in Dendreon's favor as it makes the case for Provenge in front of CMS. Recently, Aetna ( AET) and Humana ( HUM) -- private insurers -- have announced positive coverage decisions of Provenge. Perhaps more importantly, one of the country's largest local Medicare contractors announced its intention to cover Provenge.

Treatment with Provenge has also received a strong endorsement from the National Comprehensive Cancer Network.

Do you think Provenge's high cost of $93,000 per treatment course has anything to do with all this?

Under CMS' own rules, the cost of therapy is not supposed to factor into coverage decisions. Do I think that rule is adhered to in all situations by CMS, especially with the red-hot focus lately on the high cost of cancer drugs and health care reform?

No, I don't.

Did the market over-react to the CMS announcement?

Ah, saving the tough question for the end. Let's not forget that Dendreon launched Provenge in May under manufacturing supply constraints and has already told us that only about 2,000 patients will be treated in the first year. It's hard to believe that Dendreon won't find 2,000 prostate cancer patients who want Provenge, especially given the reports of patient waiting lists.

By the time Dendreon expands Provenge manufacturing capacity in the middle of 2011, CMS will have already announced its tentative NCD decision. If the NCD is positive, then all the concerns about Provenge reimbursement will be put to bed and Dendreon is off to the races.

Aha! So, you're saying Dendreon in the mid-to-high $20s is a huge buying opportunity?

Objectively, I say yes, Dendreon looks very tempting down here, but…

But? Why does there have to be a but?

C'mon, you knew this was coming… The problem with going all-in on Dendreon today is that the stock doesn't trade on a cold, objective read of the fundamentals. You can't discount completely the possibility of CMS making an adverse coverage decision on Provenge. Fear matters. Risk matters. These overhangs may stick with Dendreon for a long time.

Investors don't like surprises. They like it when drug launches follow precedent. In Dendreon's case, unfortunately, CMS looks like it is breaking precedent. Now, this may turn out to be a great thing for Dendreon, but no one can predict the outcome with 100% accuracy.

And keep in mind, Dendreon doesn't trade in a vacuum. The volatility in the overall market -- more to the downside than up lately -- is also placing investors under enormous stress. Investors' appetite for risk, especially biotech-like risk around a first-of-its-kind drug launch, isn't at a high water mark these days.

I've talked to plenty of fund managers in the past weeks who really believe in the long-term blockbuster value of Provenge, but who nonetheless have no interest in owning Dendreon today because of the supply-constrained launch. Add in this new CMS coverage controversy and the stock looks even less appealing.

What a headache.

You got that right. The Dendreon drama never ends.

-- Reported by Adam Feuerstein in Boston.

Follow Adam Feuerstein on Twitter.

Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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