This Biotech’s Single Egg Will Never Hatch

Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shares of Dendreon (NASDAQ: DNDN) have taken a beating over the past month, falling more than 30% over the past week after sales of its prostate cancer therapy Provenge fell short of analyst estimates. Dendreon’s decline illustrates a classic dilemma in biotech investing -- what happens when a company only has a single egg in its basket, and that egg fails to hatch?

The single egg cracks

Dendreon only has a single marketed product, Provenge, a therapeutic cancer vaccine for prostate cancer which is custom prepared for each patient. It costs $93,000 for the three required treatments per patient, and extends the patient’s survival by an average of four months.

Hopes were high for Provenge going into 2010, when the stock hit an all-time high of $54 per share. An FDA approval in April 2010 convinced investors that Provenge would be the next blockbuster cancer treatment, but those hopes fizzled out in August 2011, when the company abandoned its long-term forecast for Provenge’s sales growth. That announcement caused the stock to plummet 65% in a single day -- a plunge from which the stock has never recovered. Those problems were exacerbated by an investigation last October that claimed questionable data from its most important clinical trial had propped up the drug.

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An ominous outlook

Last quarter, Dendreon did little to assuage growing investor concerns. The company reported a loss of $0.45 per share, up slightly from a loss of $0.65 per share in the prior year quarter. Revenue, completely composed of Provenge sales, dropped 8.4% year-on-year to $73.29 million. Analysts had expected the company to report a narrower loss of $0.42 per share on revenue of $75.41 million.

Based on its $141 million in Provenge sales during the first six months of the year, Dendreon needs an additional $184 million in the second half of the year to hit its original sales target of $325 million. Dendreon currently has $280.6 million in cash and equivalents, and is facing $545 million in convertible debt due in 2016. Topping off all that bad news was the announcement that CFO Greg Schiffman would be resigning at the end of the year.

Rising competition

To make matters worse, Dendreon is facing major competition in prostate cancer treatments from Johnson & Johnson (NYSE: JNJ) and Medivation (NASDAQ: MDVN).

During the second quarter, sales of Johnson & Johnson’s prostate cancer treatment, Zytiga, rose 70% year-on-year to $395 million -- comprising 2% of the company’s top line. Zytiga’s quarterly growth shows that its annual sales will easily exceed the $961 million in sales it reported in 2012. Zytiga extends a patient’s life by an average of 4.6 months versus a placebo, exceeding Provenge’s estimate, but it is more expensive, costing $5,500 monthly for 18 months of treatment. Although Zytiga sales are firing on all cylinders now, the drug faces generic competition by 2016.

To offset this expected decline in Zytiga sales, Johnson & Johnson acquired Aragon Pharmaceuticals for $650 million to $1 billion in June, with the stated intent to boost its portfolio of experimental prostate cancer drugs. Aragon’s ARN-509 can be used to treat patients whose cancer has already spread or not spread yet to other parts of the body. Zytiga, by comparison, is only approved to treat patients whose cancer has already spread. ARN-509 will have U.S. marketing exclusivity until 2028, making it a viable replacement for Zytiga.

Medivation, on the other hand, is expected to turn profitable next year after its prostate cancer drug, Xtandi, was approved by the FDA last August. The drug is expected to generate revenues between $2 billion to $4 billion over the next five years -- which will boost the size of the $4 billion company substantially. Xtandi extends the patient’s life by an average of 4.8 months, exceeding both Provenge and Zytiga, but is more expensive, at $7,450 per month.

Another major advantage is that Provenge and Xtandi are orally administered, while Provenge is administered via an IV injection.

Is there any hope left?

Faced with dwindling sales and intense competition, it’s no wonder that many investors are giving up on Dendreon. Dendreon has a few interesting treatments in its pipeline, such as an immunotherapy treatment for breast, lung and colon cancer, and a small molecule treatment for lung cancer. However, these treatments are still in the very early stages of clinical trials and are irrelevant to the company’s current troubles with Provenge.

Therefore, investors might have to brace for a crash landing as Provenge sales fade and the company goes back to becoming a speculative biotech, rather than an established one with a marketed product.

A Foolish Final Thought

The fall of Dendreon offers a valuable lesson for biotech investors and investors in general -- a company that pegs its hopes and dreams on a single product is just as likely to meet a tragic end as an investor who dumps his or her life savings into a single stock. Investors should also approach Medivation, which is set up in a similar manner, with similar caution.

Larger companies such as Johnson & Johnson have shown us that diversification is the key to long-term survival, and investors would be wise to remember to never put a single egg in a basket and expect it to hatch.  

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Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Dendreon and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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