Over the past 3 years, Dendreon (DNDN) has had its ups and downs. It has had several wild swings because of FDA announcements and disappointing earnings. Now that the stock seems to have settled down, investors are left wondering what is next. I will list 6 reasons why investors should be encouraged about the future of Dendreon.
Company Profile
Dendreon Corporation is a biotechnology company focused on the discovery, development and commercialization of therapeutics that may improve cancer treatment options for patients.
Dendreon's product portfolio includes active cellular immunotherapy and small molecule product candidates to treat a range of cancers.
The company's flagship product is Provenge. Provenge is an autologous cellular immunotherapy for the treatment of asymptomatic or minimally symptomatic, metastatic, castrate-resistant prostate cancer.
Dendreon also has other product candidates including investigational cellular immunotherapies targeting HER2/neu for the treatment of patients with bladder, breast, ovarian, and other solid tumors.
Reason #1 To Invest - Fundamentals
With a company like Dendreon, a biotech stock that has already received approval and begun its marketing efforts, it's really important to look at some of the numbers that the company is producing. While potential is still important (i.e. future catalysts), the company no longer gets a free pass on a bad financial report. So with that said, let's look at some of the numbers that the company has been generating based on the 10-K that was filed on February 25, 2013.
The company had a very impressive 2012 and showed that the company is slowly, but surely, making its way through the biotech minefield. Product revenue for 2012 came in at $325.3 million compared to the previous year's number of $213.5 million. That was an increase of more than 50%. If you look back all the way to 2010, the company only generated $47.9 million in product revenue, so 2012's net result was an increase of just under 600% compared to 2010. Not a bad three year stretch for the company.
Additionally, operating expenses came in at $665.3 million. This was an increase by roughly $22 million from the 2011 result. Now it's clearly a negative that the company still is running in the red but the positive is that product revenue increased at a much faster rate than the operating expenses increased by. I think almost everyone expected the company to produce a loss in 2012 but most are also impressed at the growth that is taking place.
Now the company states that it needs to generate roughly $100 million per quarter to become cash flow positive. Although its yearly total of $325.3 million was well short of that goal, the company continues to inch its way there and hopefully because of some cost cutting measures being put in place, can achieve that goal soon.
Reason #2 To Invest - Cost Cutting Measures
Since Dendreon's revenues haven't been as much as the company would have hoped, company management has had to find other ways to keep the company going. One way has been through cost cutting measures.
In December 2012, the company sold its New Jersey manufacturing plant to a company called Novartis Pharmaceuticals (NVS). Dendreon received $43 million in this transaction, which it desperately needed to bolster its balance sheet. The goal of this sale was to reduce cost of goods sold below 50%.
Reason #3 To Invest - Projected Growth Rates
As mentioned in the fundamentals section, the company has stated that it needs to hit the $100 million revenue per quarter mark before it can expect to be cash flow positive.
Analysts are currently projecting the company to generate revenue of $358.3 million for 2013 and $427.3 million for 2014. So while it is unlikely that the company will be cash flow positive in 2013 like many had initially hoped at the beginning of last year, 2014 is looking like a potential breakthrough year for the company.
Reason #4 To Invest - Upcoming Catalyst
Dendreon has already started patient enrollment and treatment for its Provenge open-label study for the European Union. This study is being performed in European men with metastatic castrate-resistant prostate cancer. The study will enroll up to 45 patients in four different sites across Europe.
Dendreon has already completed its marketing application for Provenge with the European Medicines Agency set to rule on it by mid-2013. Approval in the EU would be a big lift to the stock and would represent even more opportunity to reach that $100 million quarterly mark that the company needs to hit.
Reason #5 To Invest - Technical
Over the past 52 weeks, Dendreon has had quite the run. Last year, it had a high of $12.21 and recently made its 52 week low of $3.69. However, as the 1 year chart below shows, the stock seems to have been gaining momentum since that low point.
Since the stock reached its low of $3.69, the stock has managed to increase by just over 60%. That is basically a 60% return in a little less than 6 months. I think most investors would gladly take that.
Reason #6 To Invest - Stable Volatility
Stocks in the biotechnology industry, more so than in any other industry, are extremely vulnerable to going concern announcements. A number of factors including trial results, FDA decisions, equity offerings, drug callbacks, and partnership breakups are just a handful of reasons why volatility may soar for certain time periods. Typically, the volatility is at its highest point when a company faces an event/decision which could potentially put the company close to out of business, or at least render the company insignificant for a couple of years.
The volatility chart below shows the 30 day implied volatility, the 60 day implied volatility, and the 180 day implied volatility.
As investors can see, the range has been fairly stable and in fact, is trending downward. As a company matures, one can expect the volatility to be lower than it would have earlier in the company's development. This is an extremely positive sign for longs as it shows the stock seems to be gaining a foothold and that one decision here or there won't necessarily have the impact upon the business that it would have had years ago, or even months ago.
Risks
The company obviously faces several hurdles. The upcoming catalyst with EU approval for Provenge on the line will be a big one. Although many expect approval, nothing is certain in the biotechnology industry.
Additionally, the company has a dwindling cash position. In 2011, the company finished with a cash position of $427.1 million. In 2012, the cash position was $188.4 million. Yes the cost cutting measures will help but the company may need more help. This may involve a secondary offering which may dilute current investors.
Another concern comes in with Dendreon's competition. Johnson & Johnson (JNJ) has its own treatment for prostate cancer called Zytiga. In the first year of sales, Zytiga was able to generate $961 million for Johnson & Johnson. Dendreon hasn't had nearly the same success as Zytiga for a number of reasons. It will need to play catch up, but with prostate cancer representing a large market among men all over the world, I think both companies can serve the market successfully.
Conclusion
In spite of the challenges that Dendreon faces, I still feel that the potential rewards outweigh the risks. With an upcoming catalyst, a management that has instituted cost savings measures, and the sales trends for its products, this looks like a good investment for the long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
