Doomed Dendreon? Some Speculators Shocked By Sales Again

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By Brian Wilson, Contributor   
Thursday, 02 August 2012 00:00
icon_newsnotesDendreon (DNDN) has been a disastrous holding for many investors who may have been initially optimistic about the company’s drug PROVENGE. I initiated coverage on the distressed biotech name on July 21st of this year with a hold rating. I certainly did not want my followers to buy any more of the stock, and I had my reservations about a cold-blooded sell recommendation due to the extreme bearishness surrounding the company.
What we needed in Dendreon’s quarterly report (released after the bell on July 30th 2012) was a sign that sales of PROVENGE were going to grow enough to bring the company to profitability. In a model I constructed, the number $340,000,000 (in quarterly sales) came up as the approximate amount that Dendreon has to reach in order to reach profitability. I came up with this figure assuming that Dendreon would be able to reach a 40% profit margin by selling PROVENGE, and that the company’s costs remains similar to where they are today.

After Q2 2012 results, I was shocked to see that PROVENGE revenue not only failed to increase at the rate we were hoping for, but actually declined. It is a potential sign, not a confirmation, that PROVENGE might be approaching its peak sales. I’d wait another one or two quarters to make the assumption, however.

The full reaction to the news may not be over, but it only took two trading sessions to bring Dendreon 30% lower in open trading, erasing roughly $200 million in value. There are about 38 million shares short, which are now in the green (since Dendreon is trading at a 52-week low). This eliminates, or at least delays the huge potential short squeeze we may have seen if Dendreon had reported a decent quarter.
The one positive takeaway from the quarterly release was that Dendreon seems to finally realize how unsustainable their business model is, and CEO John Johnson has finally come up with a restructuring plan that can bring some profitability. Dendreon plans to reduce costs by $150 million per year, and move profit margins above 50% by closing one of their high-tech facilities.

Dendreon has become a very cheap stock compared to what it used to be, but betting on PROVENGE is still a dangerous move. There is only be a certain amount of improvement in the manufacturing process of the drug, and until we see sales revenue grow we are looking at a permanently unprofitable company.

In a note to clients, J.P. Morgan analysts downgraded DNDN to Neutral from OW on the heels of the company’s 2Q report and restructuring announcement believing that while management took difficult yet decisive action with regard to restructuring (thus lowering the breakeven threshold by 20%), the move may be too little, too late.

Wrote the analysts: “There’s no denying that Provenge is about to face increasing competition in its key pre-chemo market segment. The question is whether it becomes an either/or market (i.e. Provenge or Zytiga/enzalutamide) or one where sequential therapy of effective products becomes commonplace. In the end, we think it will depend on the particular physician (and payor), but in an environment where we are still consistently surprised by the lack of understanding (by docs) of the Phase 3 IMPACT data that led to Provenge’s approval, we question how quickly the majority of physicians will gravitate towards sequential therapy. With Provenge sales slipping 2% q/q ahead of Zytiga’s pre-chemo approval, we’d prefer not to stick around to see how it does when Zytiga is actually readily available in this setting.”

 

Accordingly, the banker said they are not comfortable investing in a company with significant turnover from top to bottom and with declining growth ahead of potentially substantial competition.





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