Sometimes a notable scientific and technological achievement nevertheless fails as a commercially viable product. With another disappointing quarter in the books and little evident momentum, all but the staunchest Dendreon (Nasdaq:DNDN) bulls have to be entertaining some nagging doubts that the cancer vaccine Provenge is ultimately never going to be the blockbuster that they hoped. Certainly it's not yet over for Provenge, but doctor enthusiasm is decidedly muted and there is a growing roster of promising alternatives for prostate cancer.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Q3 Results - As Expected on Sales, But Poor Margins
With Wall Street, it's always one thing or another. Dendreon actually met its (lowered) revenue guidance, but with an unexpected boost of about $3 million in royalty revenue from Merck (NYSE:MRK) for the hepatitis drug Victrelis. Provenge sales were up about 28% on a gross basis and 30% on a net basis, and up a bit less than 6% sequentially for the last month of the quarter.

Margins were troubling, though. The gross margin dropped unexpectedly to 14.5% from 38.6% a year ago, and Provenge gross margin was more on the order of 10%. Although it's well known that Provenge is not cheap to create/manufacture, this is a worrisome trend and with about 85% of those COGS being fixed, it highlights the importance of getting to a "critical mass" of revenue. Dendreon reported a net loss for the quarter and ended with less than $40 million in net cash (though the bulk of the company's debt does not mature for another five years).

Where's the Momentum?
Arguably the most troubling part of the Dendreon/Provenge story is the lack of momentum. Consider that Pfizer's (NYSE:PFE) Prevnar vaccine has been on the market longer, is growing faster (35%), and has surmounted $1 billion in quarterly sales. Now of course there is little similarity between a pneumococcus vaccine and a cancer treatment, but my point is that for all of the hype and press, Provenge is still a pretty small drug at present.

The lack of momentum here is concerning. Management mentioned that awareness regarding reimbursement, supposedly one of the major problems with Provenge usage, roughly tripled from 25to 70% between July and September. And yet, clearly, usage has not picked up just because of that. Perhaps even more worrisome is that when management was asked about "same store sales" on the call, they said that usage with existing prescribers was "consistent" - hardly a ringing endorsement for what was supposed to be a breakthrough.

Shades of the Past
Biotech journalist Adam Feuerstein beat me to the punch with an eerie resemblance between Dendreon's Provenge and a once-exciting HIV drug called Fuzeon that was developed and sold by Trimeris. I remember the excitement over this drug - it was a first-in-class fusion inhibitor - and the resulting excitement over Trimeris. Unfortunately, the drug was expensive to make and was unpleasant to administer (twice daily injections in a world where most HIV drugs were and are oral). All in all, it (and Trimeris) failed despite offering some pretty compelling efficacy at the time; the drug never became a standard of care and was eventually ignored in favor of more conventional therapies. (For more on the drug market, read Evaluating Pharmaceutical Companies.)

Competition a Real Threat
Dendreon does not have a lot of time to make Provenge into a success. Johnson & Johnson's (NYSE:JNJ) Zytiga offers good efficacy, a more conventional administration profile, and more cost-effective pricing despite what can be unpleasant side-effects. Beyond that is Sanofi's (NYSE:SNY) Jevtana. The morning after Dendreon's earnings report, Medivation (Nasdaq:MDVN) reported very encouraging data on its MDV3100 drug for prostate cancer (which does not require prednisone like Zytiga). And then there's Exelixis's (Nasdaq: EXEL) cabozantinib - a drug that has become more controversial with management decision to pursue a Phase 3 study with pain as a primary endpoint, but that has shown strong results in earlier studies in both prostate and medullary thyroid cancer.

Perhaps none of these are Provenge-killers in their own right, but there are only so many patients to go around. What's more, much as some people want to cast doctors as brilliant and studious, the fact is that they're still people. Most doctors are not comfortable with cutting-edge technology (until they've seen it work for a few years and is no longer "cutting edge) and most of them read the papers - enough bad press on how other doctors are hesitant to try or use Provenge will likely encourage others to wait as well.

The Bottom Line
Provenege works,and it is hard to completely write off a drug that works. That said, the holiday season usually sees medical activity slow down and it will be harder for Provenge to build a lot of momentum in the next quarter. Perhaps Dendreon would consider a marketing partner or some new strategy to get more docs to try Provenge. It's clear, though, that they have to do something - Provenge's current rate of growth is likely not going to power the sort of financial results that Dendreon needs and there is only so much time before competition will intensify. (For additional reading on investing in this sector, check out A Checklist For Successful Medical Technology Investment.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen D. Simpson, CFA did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  2. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  3. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  4. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  5. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  6. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  7. Stock Analysis

    The Safest Stocks You Can Invest in Right Now

    These stocks are likely to hold up better than others in a bear market, but there's a twist.
  8. Investing Basics

    5 Reasons to Expect Lower Stock Returns

    Lower stock returns are likely here to stay for some time. Here are five reasons why.
  9. Investing Basics

    What to Cut From Your Portfolio Right Now

    Owning stocks may shortly become too scary for your portfolio. Here's why, and here are some alternatives.
  10. Personal Finance

    Careers: Equity Research Vs. Investment Banking

    Equity research is sometimes viewed as the unglamorous, lower-paid cousin to investment banking. In this article, we compare the two careers.
  1. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  2. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  3. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  4. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  5. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  6. Impact investing

  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!