Should you Buy this Company on Earnings?

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

Dendreon Corp. (NASDAQ: DNDN) investors have been on a perpetual roller coaster ride due to shifting expectations from Provenge. The company reported its quarterly results the other day and beat Street estimates. However, Provenge faces severe competition from Astellas’ (NASDAQOTH: ALPMY) Xtandi and Johnson & Johnson’s (NYSE: JNJ) Zytinga. I believe that despite the recent positives it’s still too soon to be bullish on Dendreon, and I advise investors to wait for more good news before taking a long position.

Dendreon

Dendreon is a biopharmaceutical company involved in the discovery and commercialization of novel therapeutics for oncology. Dendreon’s primary candidate is Provenge, an autologous cellular immunotherapy for cure of asymptomatic/minimally symptomatic, metastatic and castrate-resistant prostate cancer. Other products under development include DN24-02, carbonic anhydrase 9, carcinoembryonic antigen and TRPM8.

The company's stock price has fluctuated between $3.69 and $13.89 during the last 52 weeks. This extreme fluctuation has been due to changing customer expectations from its star drug Provenge. Provenge was initially being hailed as a multibillion product, but underwhelming sales have been a problem. The company faces an increasingly competitive market, especially with the recent approval of Zytinga and Xtandi.

Dendreon previously announced preliminary results for its fourth quarter. The Street was expecting Dendreon to report an EPS of $-0.56 and it had already pre-announced quarterly revenues of $85.5 million. If we exclude the $3.8 million favorable adjustment to the company's chargebacks reserve, revenues come down to $81.7, missing expectations by approx. 2%. As the table shows, the company has missed expectations in the last 3 quarters.

<table> <tbody> <tr> <td> <p><strong>Earnings History</strong></p> </td> <td> <p><strong>11-Dec</strong></p> </td> <td> <p><strong>12-Mar</strong></p> </td> <td> <p><strong>12-Jun</strong></p> </td> <td> <p><strong>12-Sep</strong></p> </td> </tr> <tr> <td> <p><strong>EPS Est</strong></p> </td> <td> <p><strong>-0.23</strong></p> </td> <td> <p><strong>-0.63</strong></p> </td> <td> <p><strong>-0.6</strong></p> </td> <td> <p><strong>-0.86</strong></p> </td> </tr> <tr> <td> <p><strong>EPS Actual</strong></p> </td> <td> <p><strong>0.26</strong></p> </td> <td> <p><strong>-0.7</strong></p> </td> <td> <p><strong>-0.65</strong></p> </td> <td> <p><strong>-1.04</strong></p> </td> </tr> <tr> <td> <p><strong>Difference</strong></p> </td> <td> <p><strong>0.49</strong></p> </td> <td> <p><strong>-0.07</strong></p> </td> <td> <p><strong>-0.05</strong></p> </td> <td> <p><strong>-0.18</strong></p> </td> </tr> <tr> <td> <p><strong>Surprise %</strong></p> </td> <td> <p><strong>213.00%</strong></p> </td> <td> <p><strong>-11.10%</strong></p> </td> <td> <p><strong>-8.30%</strong></p> </td> <td> <p><strong>-20.90%</strong></p> </td> </tr> </tbody> </table>

Source: Yahoo! Finance

Stock Mover

Dendreon's stock is in a poor state, and recently went below its 200 day moving average of $5.74. This decline is due to investor expectations from these earnings. The company had to satisfy the following two concerns with these earnings:

i) The market was closely monitoring the cash position and margins on Provenge. The company has recent sold its Jersey factory and is also focusing on improving Provenge sales by reducing salesforce turnover. If it is able to beat EPS estimates and show an improved cash position, the stock market will react positively to earnings.

ii) Until the company churns out new FDA approvals, its valuations are tied to the fate of Provenge. Therefore the sales expectations for the next quarter will be crucial to the stock's movement. The company has shown some improvement in preliminary results, especially in community sales of Provenge.

Actual Results

The company surprised the market with better than expected earnings by reporting an EPS of $-0.26 (a loss of $38.7 million), as compared to $-0.56 per share expected by the Street. The beat has instigated a rally of approximately 5% as investors showed their pleasure on a smaller than expected loss. According to the company, Provenge sales were also impacted by seasonality, superstrom Sandy, and salesforce vacancies. According to the company it would start it’s direct to consumer marketing efforts for Provenge during the first half of 2013.

Competition

Provenge operates in very competitive market with tough competition from Xtandi by Astellas and Zytinga by Johnson & Johnson. Zytiga is the pricier product due to a superior brand name with J&J and its ability to market the drug. The drug has recently also received approval for treatment prostate cancer in late stages even before patients receive chemotherapy. It has been approved because studies show that it reduces tumor growth and increases life expectancy by an average of 5 months.

According to reports, Xtandi received approval last August and has been available since September. It is even pricier than Zytiga at $7450/month ($5,500/month for Zytiga). According to analyst forecasts, the drug has the potential to generate peak sales of $2.2 billion by 2015 as compared to $1.8 billion for Zytiga. Despite these high caliber competitors, there might still be hope for Provenge because this market is expected to hit $9.1 billion in sales by 2021. 

Bottom line

The market has reacted positively to improving sales data for Provenge and more focused management by the company. There is little doubt of the mammoth potential in this market, but Zytiga and Xanti are both breathing down Provenge’s neck. Therefore I recommend that investors hold and wait for more good news before going for this risky investment.


SmartEquity 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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