Biotech investors are a stubborn and hopeful lot, and many of them will never give up the ship. While confidence and patience are admirable traits up to a point, it sometimes feels like some biotech investors would spin the sun going dark as a positive, as it means no more skin cancer. In the case of Dendreon (Nasdaq:DNDN), it's only the true believers and traders who have any confidence that this company has much of a future. With another very disappointing quarter in the books, I think the only real debate left to have is whether the company can survive.
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Another Disappointment, Another Round Of Excuses
Disappointments have been pretty common with Dendreon and the sales of its Provenge immunotherapy, but this quarter was another bad one.
Revenue fell 18%, as Provenge sales declined 18% from the year-ago period and 21% from the prior quarter (or 17% on an adjusted basis). This is both the worst result since the third quarter of 2011 and a big (15%) miss relative to expectations.
While sales declined, the company was able to improve its margins and reduce its loss as per its previously announced cost-reduction efforts. Gross margin improved nine points (to just under 36%) and the company reduced its operating loss by more than $30 million, but much of that came from a reduction in non-cash compensation expenses.
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Not Winning Where It Counts?
Not surprisingly, most of the accompanying data for this quarter didn't look very positive. Management had been saying for a while that it believed it could have greater success in smaller “community” practices as opposed to larger facilities and research hospitals. Well, revenue to that category declined 16% sequentially this quarter, with an 11% decline in community oncology revenue and a 23% decline in community urology practices. In contrast, large accounts were up 15% sequentially. It's also worth noting that the company added only 33 net new accounts this quarter.
There's really nothing very new about what's wrong with Provenge. Doctors continue to elect to go with new prostate cancer therapies from Johnson & Johnson (NYSE:JNJ) (Zytiga) and Medivation (Nasdaq:MDVN) (Xtandi). As the data and labeling on these drugs continue to get better, Provenge is finding itself increasingly squeezed into a corner. Management can say what it wants to about reimbursement, calendar effects, weather or what have you, but the reality is that doctors are aware of Provenge and simply not impressed with what it can do.
Where Does Dendreon Go Now?
As befits a struggling biotech, bulls still have a few threads left to grab. Dendreon has launched a direct-to-consumer marketing campaign, and management is confident that this will lead to better sales in the second half. I don't share this confidence – there is little precedent for DTC advertising in oncology, and I really doubt that it will change prescribing habits.
I'm incrementally more positive on the company's sequencing studies with Zytiga and Xtandi. If these somehow showed meaningful improvements in outcomes, that could give some support to prescriptions and revenue. Unfortunately, it will be a while yet before that data is in hand, and there are no guarantees that it will be positive.
I'm bearish on Dendreon's prospects for achieving a level of sales that will allow for meaningful profitability. I think the company's hope of achieving year-on-year sales growth this year is slim. Likewise, I believe the company won't achieve the $100 million or so in quarterly sales I think it will need for cash flow breakeven for another three years, by which time the company's convertible debt will be a big problem.
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The Bottom Line
I know how biotech investing works, and I know my bearish attitude is going to attract plenty of angry bulls. That doesn't bother me, as I was bearish at $40, $14, $10, and $6 per share, and those calls have proven correct so far. While I know there will be investors who believe that the DTC campaign or European approval will turn things around, I see no reason to believe that. Likewise, I see no reason why a larger drug company would acquire this drug/company for any real amount of money, as I believe the underlying demand and profitability of Provenge just aren't good enough.
Dendreon may yet be good for multiple trading opportunities, but short-term trading is not my forte and I'll leave that discussion for others. I see fair value for Dendreon around $3 on a long-term cash flow basis and maybe $5 at most on a discounted revenue basis. While that is more than 20% above today's price, I think that's the best-case scenario and that's not nearly enough potential to account for the risks.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.