Dendreon Jumps On Provenge's Turnaround Print
By Brian Wilson, Lead Contributor   
Monday, 14 January 2013 02:02
It's been a rocky road, to say the
least, for Dendreon Corporation (NASDAQ: DNDN) and its investors.

DNDN stock has been one of the

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most disappointing investments of the past few years, with 56% in losses within the
last 12 months and roughly 80-90% in losses for investors who bought after the approval of Provenge – the company's flagship product.

To understand why Dendreon moved up almost 21% last Friday in the midst of a downward correction, one must understand the factors that have been dragging down DNDN in recent history.

After FDA approval, DNDN looked like a no-brainer investment to the market. It was one of the most innovative therapies ever seen on the market, and was at the front of the cancer immunotherapy movement. Given the size of the market for metastatic castration-resistant prostate cancer (MCRPC), investors were able to justify Dendreon's valuation based on very optimistic assumptions on Provenge's ability to penetrate that market and to possibly expand its indication in MCRPC and hopefully other forms of cancer down the line. Recall that right after FDA approval of Provenge (sipuleucel-T), the company briefly reached a valuation of over $8 billion.

Dendreon looked fine at $35 or $40 per share until the sales figures came in 2011. A combination of low sales volume, terrible profit margins, and problems with the therapy's reimbursement at clinics made Provenge a very unattractive product to sell. The initial problems were blamed on Q-codes and uncertainty over the product, but quarter after quarter we saw only marginal improvement in Dendreon's financial data. At a certain point (in 2012), the quarter-over-quarter sales growth for Provenge seemed to even stop.

This would not have been a major problem had Dendreon's profit margins on Provenge been half decent, but they simply weren't. Profit margins on provenge sales alone (neglecting sales, general, and administrative expenses) were roughly 23% until the company enacted some cost-cutting efforts in the middle of 2012. We last saw profit margins of roughly 34%, which were not good enough – especially considering that the company's sales revenue was not improving while the overall earnings were still negative.

With Dendreon's sale of their immunotherapy manufacturing facility in New Jersey, and with preliminary Q4 2012 results, we now have a bit more insight on how Dendreon's cost cutting will affect the company's financial data. More importantly, we can get a better read on whether or not DNDN is worth buying this year.

Dendreon announced $85.5 million for the four quarter of 2012, which is actually very encouraging since it demonstrates some much-needed growth  in revenues. Dendreon believes that it can break even as a company by boosting profit margins on Provenge, reducing other superfluous costs, and by boosting quarterly sales to about $100 million or more. While I think this is a bit too optimistic, Dendreon's most recent results at least show that the company is making progress towards profitability. They were also able to boost the number of Provenge infusing physician “accounts” by 61, bringing the total to 802 (an 8.2% jump). Analysts have also jumped on these exciting developments, boosting price targets on DNDN and injecting some much needed enthusiasm into the investment community.

I do think that EPS-positive DNDN would be a huge psychological victory for the bulls (and the opposite for the bears), and I do think that there is a strong possibility that we may see this happen in 2013. What I am still concerned about is the actual valuation of Dendreon itself, and its long-term prospects.

After the recent rally, Dendreon is trading at a market cap of roughly $923 million. This seems to price in additional sales growth in Provenge, or at least some sort of improvement in its profit margins. There is also substantial faith placed in their phase II therapy DN24-02, which is developed as a targeter of HER2+ urothelial carcinoma.

At the very least, keep an eye on the finalized results for DNDN's seemingly terrific quarter, as well as future developments in case they are good enough to warrant a knife-catching attempt on DNDN stock. While staying on the sidelines isn't a lot of fun, it will protect you from the possibility that Provenge's upswing in sales is only temporary.

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