When a new drug backed by impressive clinical data hits the
market
, investors quickly size up its market potential. And when this
drug receives a thumbs-up from
Medicare
and other insurance-reimbursement firms, projections of
billion-dollar sales start to percolate. But in many instances, the
new wonder drug can barely stand up to such high expectations, so
those lofty sales targets slowly vanish from analysts' models. And
investors, some of whom end up losing lots of money as a result,
hope to never hear about the stock again.
This sums up the sudden rise and fall of
Dendreon (Nasdaq:
DNDN
)
, which has developed an effective treatment for prostate cancer.
Aggressive spending on new manufacturing facilities have begun to
pummel the company's
financial statements
and, to make matters worse, doctors have been slow to prescribe the
once-and-future promising drug, Provenge. Needless to say, the
stock was badly hit, as you can see in the chart below:
Judging by second-quarter sales data, Provenge looked like it would
be an absolute dud. Dendreon reported just $50 million in sales of
the drug, noting that doctors were slow to prescribe it. For many
physicians, the need to lay out money in advance and then wait
reimbursement for this expensive drug was simply too much hassle
(Total cost for a full course of treatment with Provenge, (three
doses) is roughly $93,000). Things improved only slightly in the
third quarter, when sales reached $64 million. Earlier in the year,
analysts had been assuming quarterly sales would exceed $100
million by now.
Equally damming, continuing quarterly losses exceeding $100 million
have proved too much for many investors tobear , and even
Dendreon's most ardent bulls realized this company may just turn
out to be another cash-starved biotech.
Shares
hit an all-time low of $6.46 on Nov. 4 and have barely budged
since. That's a far cry from the $55 high hit back in May 2010, and
further below the lofty $100 price targets many once anticipated
for Dendreon. Well, those days are gone. Dendreon may never even
revisit the more recent high of $40 seen this past summer. But with
much lowered expectations in place, shares -- now under $8 -- may
find fresh appeal, so a move up to $15 or $20 isn't out of the
question.
As it turns out, Provenge still has tangible growth prospects.
Despite a lousy launch, sales will likely exceed $200 million this
year and could hit $300 to $400 million in 2012. Analysts'
forecasts are all over the map, highlighting the hard-to-read ramp
for this new drug. Here's why...
Even at $400 million in revenue, Dendreon would still lose money.
This is the downside of a strategy that has yielded way too much
manufacturing capacity. The key to reaching break-even -- and
eventually profitability -- is international sales that augment the
rising U.S. sales base. But this is not likely to happen before
2013, when Provenge completes the European regulatory approval
process. From there, sales are expected to rise quickly. Think
Equity's Marko Kozul sees U.S. sales of $440 million and European
sales of $250 million for 2013. Layer in 20% more growth in 2014
and 2015, and he thinks total sales could hit $1 billion. At these
sales levels, Kozul expects
operating income
to hit $250 million.
If Kozul is right, then Dendreon's current $1.3 billion
market value
starts to look like a bargain. That's why he sees shares rebounding
to $21, placing him at the high end of Wall Street's forecasted
price targets (and 180% above the stock's current price).
Will Dendreon's
balance sheet
hold out until then? To rebuild cash levels, the company announced
plans in early December to sell royalty interests in another drug,
Victrelis, for $125 million. This leaves Dendreon with a projected
$600 million cash balance for the quarter that ends in a few weeks.
Yet it's the
income statement
that will be in focus. An ample amount of manufacturing capacity
has left Dendreon with too much unamortized
overhead
, which translated to paltry 14.5% gross margins in the most recent
quarter. When annual sales reach $500 million, a run rate that may
be met by the end of next year, gross margins should reach 50%,
according to analysts. So at some point in 2013, assuming European
regulatory approval, Dendreon should finally have the quarterly
sales
volume
to finally start generating cash. It may go down to the wire, but
Dendreon should have enough money to last until profits arrive.
Even if Dendreon is able to post real sales traction for Provenge
and generate the eventual
cash flow
that the most
bullish
analysts expect, we may still be a few quarters away from a change
in sentiment. Many doctors are planning on using Provenge with just
a few patients so they can see the drug's efficacy for themselves
before exposing it to more patients. "While we continue to see
Provenge as having the potential to be a $1 billion plus drug, we
do not see an inflection point for sales acceleration until
mid-2012 at the earliest," Goldman Sachs' analysts say.
Here's the tricky part: if investors wait until then to see more
positive sales trends, then they may miss a quick early move in the
stock. Goldman Sachs suggests that shares only have upside to $11
until this potential inflection point. Still, that's nearly 50%
upside (with perhaps another 100% upside after that if Think
Equity's Kozul is correct).
Risks to Consider:
Weak fourth-quarter sales results would lead shares down to
fresh lows as projected cash burn rates accelerate. Yet sales
should at least meet forecasts as management guidance implied a
sequential flattening in fourth-quarter sales, even though prior
data show a steady ramp as more physicians get up to speed.
Other prostate-cancer treatments, including
Johnson & Johnson's (NYSE:
JNJ
)
Zytiga, are also being studied by doctors and could win "mindshare"
over Provenge.
Action to Take -->
In the biotech community, this is a well-known and well-understood
stock. So the company doesn't need to spend an extended period
getting on investors' radars, unlike many other anonymous biotechs.
This is a stock for further research, as fourth-quarter results are
unlikely to deliver stunning upside. But if results show a
continuation of improving sales trends, then it may pay to get into
this name before the broader investment community warms up to the
stock again in 2012.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
