Can this Bio-Pharmaceutical Rise Again?

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Shares of Dendreon (NASDAQ: DNDN) have seen an epic decline due to weak sales numbers for its star drug Provenge. The drug has missed analyst expectations and has failed to justify high valuations for its creator. I believe the company is correctly priced at these levels and there is little room for an upside. In order to warrant better valuations in the future, company management should be focusing on strengthening the bottom-line and better marketing management of Provenge. Provenge also faces competition from Astellas’ (NASDAQOTH: ALPMY) Xtandi and Johnson & Johnson’s (NYSE: JNJ) Zytinga.

Company Profile

Dendreon is a biopharmaceutical company that engages in the development, discovery and commercialization of novel biopharmaceutical product, aimed at treatment of cancer in human patients. It offers Provenge, which is an autologous cellular immunotherapy for the treatment of metastatic, asymptomatic, or minimally symptomatic and prostate cancer. The company has two drug candidates still under development: DN24-02 and TRPM8.

Star Drug

Provenge is the primary drug of Dendreon, and its future valuations are tied to the fate of its sales. The shifting investor expectations from the drug is the primary reason Dendreon stock has fluctuated in the range of $3.70 - $17.00 during the last 52-weeks. As is the case with all newly approved drug candidates, reality is very different from sales estimates. 

 Provenge sales have also been way below market expectations. Last quarter the company reported sales of approximately $77.9mn which was below street estimates of $81.6 million. The company is focusing on increasing its accounts to drive sales therefore the growth in these accounts is crucial to the long term success. Last quarter there was a significant decrease in growth from community account as only 54 accounts were added in Q3, compared to 115 in Q2.

Preliminary Results

The company has preannounced its results for the fourth quarter. According to company disclosures it has generated sales of 85.5 million; subtracting $3.8 million from favorable adjustments, we get net revenues of $81.6, 5% growth q/q. According to Dendreon:

"We have focused our commercial efforts on growing our community accounts, where we see the greatest long-term revenue opportunity. Having achieved our highest quarter ever for community sales, we believe that our community strategy is working”

There was a 25% increase q/q in community urology and 4% q/q in community oncology. These increases bring the total community sales to approximately $57 million, i.e. 71% of total sales. There was a slight recovery in account growth which was 61 for Q4, as compared to 54 added in Q3 bringing, total accounts to 802.

Valuations

The mean sell side price target on Dendreon is $6.20 and the high target is $18. The consensus sales target for the next year is $371 million, but the company has missed the earnings target for the last 3 quarters. Using a 20% premium to average industry growth of 13%, the growth rate for DNDN can be calculated at 15%. I have used a higher growth rate because Provenge is still new in the market and should display a relatively higher growth rate than the industry.

$ million

 

2012

2013

2014

2015

Growth Rate

15%

 

 

 

 

Revenues

 

324

373

428

493

No of Shares

 

149.67

149.67

149.67

149.67

Sales/Share

 

2.16

2.49

2.86

3.29

 Competition

Provenge also faces tough competition from a number of candidates and active drugs. The main competitor is Zytiga by Johnson & Johnson. Whereas Dendreon’s Provenge is an immunotherapy and can act as a vaccine for the treatment of prostate cancer. On the other hand J&J’s Zytiga is the only hormone therapy drug that has the ability to stop the hormone production in testes, adrenal glands, and prostate tumors. This drug has been catastrophic to the success of Provenge and has really hurt the valuations of Dendreon.  

Bottom Line

As my estimates and the consensus sell side estimates show there is little or no upside to Dendreon. The money on this highly speculative stock has already been made and the only major upside can come from the pipeline. As it is too soon to bet on its pipeline, I recommend investors stay away from Dendreon for the time being. That said, I am bullish on the sale of New Jersey factory and the renewed focus on reducing sales force turnover. I believe it’s high time that the management accepts reality of Provenge's market potential and focuses on increasing operational efficiency and marketing efforts. The focus should shift from improving the top line only to strengthening the bottom-line as well.

Thesis Weakness

This thesis can fail if the European approval comes through as it can improve valuations on speculation of prospective global sales. Provenge sales can also suffer due to off-label use of Astellas’ Xtandi and Zytinga. According to reports Xtandi has generates sales of approximately $57 million in the Unites States in the previous quarter, an increase of approximately 400% q/q. Any negative growth in Provenge sales number can be catastrophic for the stock price. Another major stock price catalyst could be acquisition news for the company.


Vamosrafa7 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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