Dendreon Investors Cheer Mixed Q3 Earnings Report Print E-mail
By Brian Wilson, Lead Contributor   
Monday, 05 November 2012 08:26
icon_NewsMakersUPDendreon (NASDAQ: DNDN) has been a major disappointment since the approval and marketing of their flagship product, PROVENGE, in 2010.

Investors held onto hope that the newly approved prostate cancer treatment would generate the kind of revenue that was expected until the Q2 2011 earnings report, when the company posted a disappointing gross revenue of $51 million. PROVENGE's performance in the market was so bad that the company had to cut prior sales guidance for fiscal year 2011 in half, and it even became necessary for the company to cut staff. Shares fell over 66% in reaction, and have never recovered since. The company started to blame reimbursement issues for weak PROVENGE sales too, as demonstrated by this quote from the Q2 2011 earnings report press release

“We believe the market potential for PROVENGE is substantial, and the primary issue affecting the dynamics of our launch is the reimbursement knowledge around PROVENGE.”

This was definitely an obstacle that affected PROVENGE sales until they were resolved, but subsequent quarters revealed that the company's revenue was refusing to grow fast enough to justify the company's valuation. This is what brought Dendreon stock into the single digit price range, and to a new 52-week low of $3.69/share, which was actually made quite recently.

Although the relentless selling of Dendreon stock may seem sentimental or exaggerated in some way, keep in mind that PROVENGE is a high-profile treatment in a very lucrative market (prostate cancer). As innovative and effective as the therapy is, PROVENGE hasn't managed to bring Dendreon into profitability to this point. Many investors have cut their losses, and still deem the therapy a total failure from a business and financial perspective. Indeed, if Dendreon performed to original expectation we would be concerned about how profitable the company would be at this point, not whether or not it could cover its own expenses.

The fact that Dendreon is still an unprofitable company has been the crux of the bearish argument against the stock ever since 2011, but company statements imply that the company is undergoing additional cost-cutting efforts, which will improve COGS (Cost Of Gross Sales) for PROVENGE sales significantly. Dendreon is aiming for COGS of less than 50%, which would be roughly good enough to bring the company into profitability if PROVENGE reached about $100 million in quarterly sales according to the company's calculations.

Dendreon's Q3 2012 earnings report press release, which can be viewed here, showed that the company was making some good on their promise to improve the company's overall efficiency in the pursuit of profitability. COGS for PROVENGE was roughly 77% in the last quarter, but has already dropped to 66%. Even though total PROVENGE sales actually declined, the improvement of the company's profit margins was enough to generate some enthusiasm for the beaten-down stock. After the release last Friday (November 2nd, 2012), DNDN rose 16.10% by the closing bell. Although this seems excessive on a percentage basis, Dendreon has dropped so dramatically that it's time to consider only the market capitalization of the company while ignoring many of the short-term movements.

Those who are interested in Dendreon should consider a few things that should drive the stock in coming quarters – namely the trends in the company's financial data. First and foremost is the overall profitability of the company. If Dendreon continues the trend established by the recent Q3 2012 earnings release, PROVENGE should become efficient enough to pull its own weight given that sales growth continues.

The big problem is that sales growth seems to have halted since Q2 2012, and it'd be a real nightmare scenario to see any serious contraction in the quarterly figures. Even if the company is holding hundreds of millions in cash that could justify its current market capitalization of ~$690 million, it's difficult for the market to keep faith in a biotech company that cannot profit off of an approved product, or grow its sales.

Although DNDN is a steep, uphill battle for the bulls, there is one major factor working in their favor. Pessimism over the stock is extremely high, which manifests itself through bearish analyst commentary about the stock and an extremely high short interest of 31% of float (which equates to roughly 47 million shares). If Dendreon surprises us with a fresh trend of sales growth in PROVENGE combined with further improvements in its operating margin, the stock could see an enormous recovery rally. While bulls are basically asking for a miracle, there's a chance that we may get one. Keep watching Dendreon earnings as they come out to see what happens.



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