Dendreon (DNDN), a big name in the prostate cancer world, is struggling to heavily market the drug PROVENGE ® much to the dismay of its shareholders. DNDN was trading around $38/share a year ago, but have fallen more than 80% as a double-whammy of underwhelming sales data and very narrow profit margins brought the company into negative-EPS territory. For the most part, this is not something that is expected by the market after a company with a highly anticipated game-changing drug gets an FDA approval (which happened in April 2010).

The bulk of the ~80% drop occurred on August 3^rd 2011, when Dendreon unveiled second quarter results. It wasn’t only the underwhelming revenue and weak earnings that upset the shareholders, but the company’s guidance on PROVENGE®. Included in the report is an explanation for the dynamics of the PROVENGE launch, with major blame being put on knowledge of the problems regarding the reimbursement program. Physicians would be required to keep enormous lines of credit (not surprising given the $93,000 cost of PROVENGE® per full patient treatment).

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Last quarter we saw PROVENGE® sales of approximately $82 million. Although this is set to grow into the future, the earnings generated from the drug are underwhelming. At a profit margin of approximately 27%, PROVENGE is not nearly as profitable to distribute as we may have originally thought. It’s true that the manufacturing process is extreme complex, and will require time to refine (in terms of cost reduction), but the bottom line is that improvements are necessary to the company’s survive.

In my financially-based analysis of Dendreon, I found that PROVENGE’s quarterly sales would have to reach approximately $340,000,000 (with a much higher 40% profit margin) just for Dendreon to break even in terms of revenue versus total expenses. This far exceeds the sales of Johnson & Johnson’s (JNJ) Zytiga, which enjoys a far better marketing environment.

The takeaway is that Dendreon is in a very difficult situation as a company. Even if roughly $5 billion was blown off the market cap of DNDN since mid-2011, this is not so much a value play as it is a very long bet on an improvement in the drug’s marketing prospects. We will see in future quarters whether or not PROVENGE can ever bring Dendreon into profitability though, so this is a company you might want to keep your eye on in the event that we see a miracle.

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