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Dendreon's (DNDN) Post-Approval Downfall

Provenge is an innovative immune system-based treatment for metastatic castration-resistant prostate cancer (MCRPC) that looked like a "no-brainer investment" during clinical development. DNDN even rallied as high as $55/share right after FDA approval (bringing Dendreon's market capitalization to over $8 billion at that point), although it didn't take long for the effects of profit-taking to bring DNDN back down to more reasonable levels. The stock has fallen all the way to $4.45/share at this point with relatively slim chances of recovery.

Dendreon is now one of those biotech stocks that seems to invoke very strong emotions in biotech investors. On one hand you have the disgust of DNDN shareholders who may have bought the stock prior to the incredibly disappointing Q2 2011 earnings release that tanked the stock by about 66%. On the other, you have DNDN shareholders who are staying very faithful to the stock based on the proven efficacy of Provenge (sipuleucel-T), and the continuing blame placed on company's sloppy introduction of the treatment into the prostate cancer drug market.

Fundamental Flaws In Provenge's Outlook

The infamous Q2 2011 report showed quite a few things wrong with the company's operation, but the most egregious offense to Wall Street was Dendreon's lowered revenue guidance for Provenge. This was blamed on reimbursement issues, which ultimately turned out to be only part of the reason for Provenge's lackluster sales.

"We believe the market potential for PROVENGE is substantial, and the primary issue affecting the dynamics of our launch is the reimbursement knowledge around PROVENGE. We anticipate the positive National Coverage Determination (NCD) and Q-code will have a significant impact on increased physician adoption. However, we believe this will take time, and for the remainder of 2011, the launch trajectory will reflect a more gradual adoption of PROVENGE as physicians gain confidence in this positive reimbursement landscape."

Dr. Mitchell Gold, CEO Dendreon Corp, Q2 2011 earnings release

In fact, Dendreon never actually found a valid excuse for its lower-than-expected revenue from Provenge sales, which explains why the company stock is down an additional 36% this year. Provenge sales revenue has basically stagnated only two years after approval, and Dendreon is still stuck in negative earnings territory.

Dendreon bulls, eager for good news, considered the recent Q3 2012 earnings report to be a hugely positive event. I discussed the results in greater detail here, but the takeaway was that the results were mixed - not entirely positive.

While Dendreon did make progress towards profitability (specifically with a big drop in COGS from 77% to 66% in just one quarter of cost-cutting efforts), the company once against stayed in negative earnings territory. Provenge also failed to post improvement in sales revenue, although this was mostly ignored.

Since the actual profitability of Dendreon is the most pressing issue, the market just wants to see DNDN return to positive EPS territory. The quickest way to do this is to reduce COGS, so it does make sense that the market was focused on the improvement in EPS rather than total sales of Provenge. Still, it will be hard for Dendreon to progress until it can show a quarter of profitability. This would be virtually impossible without any sales growth in Provenge, so top-line growth is a must for an investor with long-term interest.

DNDN flirted with $5/share right after the Q3 2012 earnings release, and then managed to completely erase its 16.10% rally in a drop below $4/share. DNDN is now creeping towards $5/share again (very slowly) in anticipation of a brighter future for Dendreon starting next year.

$5/share is the line between penny stock status and non-penny stock status, so it's a big psychological barrier for DNDN to cross. Investors who are still long DNDN after all the disappointment that the company dished out after the FDA approval of Provenge are obviously hoping for a brighter future for Dendreon, which is contingent upon two upcoming catalysts:

1.) Provenge gets approved for Europe

The European Medicines Agency (EMA) is set to decide on Provenge's approval in the EU some time in 2013

2.) Provenge grows sales revenue from increased usage

There is growing speculation that Provenge might see additional usage in prostate cancer treatment based on specific studies that show its effectiveness when used in sequence with other drugs (Zytiga) in patients that have underwent a regimen of chemotherapy. There is no specific data for this, but there is hope that this can happen as early as next year.

Conclusion

Time will tell if Dendreon can turn itself around. Even those who don't actually have a stake in the company (like myself) should follow DNDN next year to see what ends up happening.

As a final note, I wanted to state that anyone who is looking to get long should seriously consider a naked put strategy due to the nice premiums on DNDN contracts right now.

Source: Dendreon Cautiously Approaches $5/Share (Again)