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Overview:

Dendreon (NASDAQ: DNDN) is a stock that I've been bearish on throughout the last few months, primarily for the following reasons

-Dendreon has an FDA approved product in a large drug indication, but has been unable to see any profitable quarters, despite nearly three years of marketing efforts following its launch (as covered in previous articles like this one)

-Provenge (Sipuleucel-T), Provenge's autologous cellular immunotherapy, is starting to struggle with top-line growth

-Dendreon has a $533 million ball of convertible debt expiring in 2016 that has not received much attention despite its huge implications for shareholders

-DNDN common stock is very likely to become diluted from either debt conversion or a public offering as the company becomes more financially stressed (more about that here)

There is more to the story though, as many DNDN bulls point to other factors which help to justify their long positions. Here are the three which I feel are the strongest right now.

-Dendreon has been implementing cost cutting measures to stem the "bleeding," which has been reduced to $37 million in quarterly operational losses in Q4 2012

-Provenge may be able to expand sales revenues in Europe (maybe next year with expected approval in mid-2013)

-Short interest in DNDN is quite substantial (~50.4 million shares; ~33% of float) and offers a chance at a major short squeeze if Dendreon manages to rally high enough

Why Dendreon Could Drop Significantly, Even From Here

As significant as DNDN bearishness already is (and has been ever since 2011), the stock continues to disappoint.

Since my last article (bearish) on Dendreon on March 11th, DNDN moved down another 17%. It also seems that more short\ positions have been opened, as the company's financials fail to justify the $734 million market capitalization in any way.

Although many people have been attempting the "catch the falling knife" that is Dendreon for years, it hasn't been working for one very basic reason: Dendreon has a fundamentally flawed business model.

Although I believe that Provenge represents a paradigm shift in prostate cancer treatment, and while I admire its ability to slow progression of the disease, its complexity is its undoing from a financial and business standpoint. In the end, if investors are not concerned with a company's profits they are setting themselves up to lose massive amounts of money.

The Outlook Remains Weak

Despite ~$85 million per quarter in sales revenue, the company manages to lose ~$37 million, a large chunk (~$14 million) of which is from interest expense alone.

An estimate provided by the company suggests that Dendreon will just break even on earnings if Provenge reaches quarterly sales of $100 million (a 17.6% jump in revenues) or more. Although this would be a psychological victory for the bulls, Dendreon would remain incredibly overvalued from an earnings valuation perspective without much bigger jumps in Provenge sales.

Many DNDN investors are still buying the stock on the notion that future sales revenue from Europe will turn the company's financials around, although there isn't nearly enough consideration of additional costs that Dendreon would incur from targeting of the new market.

This wouldn't just be from the marketing costs for Provenge in Europe, but from the extremely expensive manufacturing. Dendreon definitely can't afford to open a new manufacturing plant in Europe given its current dilemma in North America, and could potentially incur even larger losses if they don't secure a good partnership with a manufacturer.

There have also been some rumors that Dendreon's enormous multi-year devaluation process has been attracting some interest from potential acquirers of the company, although I find it hard to believe that any business entity wants to spend money on an asset (Provenge) that has yet to generate any money for its parent company - even after an extremely long and costly development process.

DNDN At $2.00/share?

If DNDN moved to $2.00/share, it would value the company at roughly $300 million in terms of market capitalization which I think is a lot fairer if you consider the company's post-approval unprofitability on Provenge as well as its massive debtload and current revenue stream. Keep in mind that even if the stock were valued more heavily on revenue-multiples, DNDN's upside gets much more limited if they cannot produce more top-line growth.

Although this may seem a bit radical given how far the stock has already fallen in the last few years, betting on this company has been much like betting against gravity.

Many have also been holding on in the hopes that DNDN will make a last-ditch rally following expected European approval for Provenge later this year, although I think this only exposes shareholders to the bigger dangers that exist down the road. In particular, the expiration of Dendreon's ridiculously oversized debts. As they say:

"Don't try to pick up pennies in front of a steamroller."

The Takeaway: Sell

I don't have a crystal ball that can guarantee that Provenge's prospects in Europe will be on par or worse than those in the United States, but this really is Dendreon's last line of defense - and it doesn't look too strong based on what we know.

Investors who are pinning all their hopes on Provenge's expansionary efforts across the pond should specifically entertain the thought that Dendreon's operating losses may grow much larger if the company has a launch similar to the one they had in the United States. This also assumes that the launch goes smoothly, which isn't always the case.

I also think that investors who are interested in smaller companies in the healthcare sector have much better alternatives, some of which are already seeing tremendous profits, like Questcor (NASDAQ: QCOR), which is a similarly sized healthcare stock that has comparable volatility. Note that Questcor is making so much cash that it also offers a ~3% dividend - something that Dendreon will never be able to offer its shareholders at this rate.

While I don't always agree with trends in the market, the fundamentals fully support the multi-year decline in DNDN stock. To say that we overshot expectations for Dendreon and Provenge in 2010 is an extreme understatement.

Without a major turnaround, this company is now on track for further declines in share price and a possible bankruptcy in the distant future.

Source: Dendreon: Potentially Heading To $2/Share By 2016?