Dendreon's Boring Q1 Results
DNDN

May 7, 2012

Dendreon (DNDN) investors (and speculators) have become used to wild price swings. In the early years these depended on opinions about whether the FDA would give marketing approval for Provenge for prostate cancer. After FDA approval came, after years of delay, we had overly-optimistic forward-looking guidance on how fast Provenge sales would ramp from Dendreon management, and wildly optimistic forecasts by bullish analysts. Then Provenge, in 2011, ramped revenues, if not slowly, at least significantly slower than most investor's expectations.

All the while there were people and institutions with big shorts out there, certain that Provenge would not be approved by the FDA, then that it would not be reimbursed by insurance companies and Medicare, and finally, lately, that it would be rejected by physicians as a statistical con game. They were proved wrong on every count.

On the Q4 analyst call Dendreon management had guided to a Q1 with "modest" sequential revenue growth. (Excluding the $125.2 million one-time royalty revenue item in Q4.)

Almost strangely, that is the result that was turned in today. Revenue, almost exclusively from Provenge, was $82 million. Provenge revenue in Q4 was $77 million, giving sequential growth of 6.5%. Enough to sour the collapsing-Provenge-sales shorts, if not enough to warm up the bulls. Year over year results were much more impressive, about triple the $27.0 million of Q1 2011.

Progress can be fairly described as steady. More doctors and patients are trying the therapy. More data supporting the therapy will be released this quarter. March was a particularly strong month, but management does not want to extrapolate from that, instead seeing low-single-digit sequential growth in Q2 from Q1.

There are negatives, the main one being cash burn in the quarter of $59 million. There was $559 million cash left at the end of the quarter. While management is working on reducing costs, mainly they are expecting to reach profitability by expanding sales. The break-even point is expected around $500 million per year, or $125 million per quarter. At a low-single digit per quarter growth rate, that won't come soon.

On the upside is the possibility of European approval. Given the expense of Provenge therapy, and the state of European economics, even if approved there might be some negotiation over price. Still, Europe is a big market, and then there is the rest of the globe.

There are also possibilities for further immunotherapies for other cancer types, but those are not likely to come into play this year. Cancer trials take a long time.

When new biotechnology companies have promising therapies but no FDA approvals they often reach speculative heights that lead to disappointment during the revenue ramp phase. That certainly happened with Dendreon, which hit a share price of $54.06 on April 26, 2010. Its 52-week low this year is $6.46.

With the stock closing at $11.69 before results were announced, giving a market capitalization of just $1.8 billion (and sinking lower in after-hours trading), in my view Dendreon is a buy but carries considerable risk. Failure to gain approval in Europe, or continue to ramp sales up past the $125 million per quarter level, would tank this stock further. I expect European approval and hitting the break even mark in 2013, but that makes for a long wait. It is not exciting stuff anymore, but it is still a solid long-term bet.

Manage your risk, keep diversified!

Disclaimer: I am long Dendreon. I won't trim or expand my position for 1 week following the publication of this article.

See also my Dendreon Q1 2012 analyst call summary

William P. Meyers

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