Is “Less Bad” As Good As It Gets For Dendreon?

By Stephen D. Simpson, CFA | November 05, 2012 AAA

Investors who continue to stick by Dendreon (Nasdaq:DNDN), and its struggling prostate cancer therapy, Provenge, finally got a glimmer of good news after third quarter results. While Wall Street seemed to be pleased that this quarterly result was closer to "on target" (after a string of bad quarterly reports), Dendreon still has a lot of work ahead of it to turn this story around. I know Dendreon still has a loyal core of supporters, but it's difficult to argue for buying this stock when so many other drug companies offer better prospects for long-term gains.

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Less Bad Will Do for Now
Dendreon didn't really have an especially strong quarter, but it wasn't another surprisingly bad one, so investors found reason to breathe a sigh of relief. What's more, the company legitimately did well with its streamlining efforts, lending more credibility that breakeven could indeed be possible at $100 million in quarterly revenue.

Although Dendreon reported almost 27% year-on-year growth in Provenge sales, the company once again missed the average sell-side estimate (though by a small margin). Perhaps more concerning should be the 3% sequential sales decline, which followed a similar 3% sequential decline in the second quarter of this year. Dendreon continues to see encouraging growth in community urologists (likely the real high-potential market), as revenue rose 14% from the second quarter. Revenue from academic oncologists (which never has been, and likely never will be, a good market) fell 25% sequentially.

I'll come back to revenue later, but I think management really does deserve credit for its expense reduction/profit improvement efforts. Gross margin improved by about ten full points on a sequential basis, and the company cut SG&A spending by about 15% on a sequential basis. The company still has a ways to go before it can achieve cash flow breakeven on $100 million in revenue, but there's definite progress in that regard.

Plenty of Challenges Left to Surmount
Dendreon added 54 net new accounts this quarter, bringing the active total to 741, but the "same store" sales number still has yet to really improve, and it looks like the company just isn't seeing the hoped-for utilization improvements from more experienced accounts. In my mind, this is the biggest danger sign to the bullish thesis - if the doctors who are most familiar and comfortable with Provenge aren't using it significantly more, what's the long-term potential for the therapy?

By and large, a blockbuster drug will generate about $250 million in its first year, and Provenge didn't manage that. What's more, I've been following med-tech since the mid-90s, and I can't think of too many examples of drugs that had sluggish launches but eventually turned it around and became big contributors (though Novartis' (NYSE:NVS) Gilenya may be on that path).

Looking at it another way, Provenge has delivered about $240 million in revenue so far this year, versus about $230 million for Jevtana (a prostate cancer drug from Sanofi (NYSE:SNY) that launched at roughly the same time as Provenge, but for which there was no real expectation of major success). Johnson & Johnson's (NYSE:JNJ) Zytiga is just under $700 million in year-to-date revenue, however, and JNJ management believes they have about 30% share of the pre-chemo market - even though the FDA hasn't approved that indication yet. Keep in mind, too, that Medivation's (Nasdaq:MDVN) much-anticipated prostate cancer drug Xtandi is now on the market as well.

Now, it's true that Dendreon has new management and a new approach. Dendreon is focusing more on the community urologist and community oncologist instead of academic oncologists, and this is a logical move - it may not carry the "opinion-leader" cache, but academic oncologists just do not like Provenge (for a variety of reasons that go beyond the scope of this article). In addition, the company's decision to run sequencing studies with Zytiga and Xtandi makes quite a bit of sense, and it could establish a viable and enduring niche for the therapy, but also at the risk of pretty much erasing the arguments in favor of Provenge if the studies don't go well.

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The Bottom Line
The fact that Provenge does actually appear to work makes it difficult to say that there's no way that Dendreon can recover and work as a stock (not to mention as a company). On the other hand, the feeble sequential momentum in Provenge sales is hardly encouraging, and I do have my doubts that the company can gain much traction in the wake of strong data (and strong marketing efforts) from Johnson & Johnson and Medivation, not to mention experimental compounds in the clinic (remember, clinicians make money for enrolling patients in trials).

I suppose that Dendreon shares should be worth around $6 to $8 per share if you believe that the company can push Provenge sales to $400 million per year. Relative to the risk of that not happening, however, I struggle to find a reason to own Dendreon shares in favor of many other appealingly priced pharma and biotech stocks. Consequently, while I do very much applaud management for its progress on margins this quarter, I just don't have the faith it takes to take a leap into this stock with my own money.

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

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