Investing in Dendreon (NASDAQ:DNDN) is a risky business. The company currently relies only on one product: Provenge. While Dendreon has a few drug candidates in the pipeline, the timeline for FDA submission is uncertain.
Provenge (sipuleucel-T) is an FDA-approved autologous cellular immunotherapy used to treat late stage prostate cancer. This is also positioned for the treatment of prostate cancer with slightly symptomatic and with asymptomatic metastatic castrate resistance. Being a highly specialized drug, the market potential of Provenge is relatively small compared to the entire prostate cancer industry.
As a result, sales of Provenge did not come out as expected. After more than two years in the market, the company is yet to prove its profitability. However, the market size is just one of the major obstacles of Provenge. There are other much bigger challenges; one of them is the high cost of treatment. On an average, each patient will have to shell out about $93,000 per therapy. This amount is quite expensive.
Additionally, many doctors are still hesitant to prescribe Provenge to their patients. Perhaps Dendreon failed to convince enough doctors to use its drug. Aside from that, the complexity of the procedure could possibly lead to some doctors to look for less complex alternatives. This is another major obstacle that the product has to tackle.
The therapy is not as simple as taking a pill. It involves using the patient's own immune cells for the treatment. Hence, it is a patient-specific therapy. The administration of the drug requires collection of the immune cells of the patient at a designated cell collection center. This is normally done 3 days prior to Provenge intake.
Unfortunately, patients have no choice, but to comply with the required procedures. After all, it is for their own good and Provenge is the best option so far. But time is ticking for the company. Provenge's dominance in a small market may not last long in the presence of growing competitors. One of them is Zytiga which is marketed by Johnson & Johnson (NYSE:JNJ). Zytiga is slowly gaining ground and eating a bigger chunk of the prostate cancer market.
Declining Revenues and Increasing Costs
Undoubtedly, Dendreon has a noble purpose of saving or of extending the lives of patients with prostate cancer. It is for this reason that many people, especially investors, have high hope for Provenge. But far from expectations, the revenues were declining in the past two years.
In 2012, Dendreon's total revenue was $325 million; down by 5.24% from the total revenue in 2011 at $342 million. While revenue declined, the cost of revenue increased from $159 million to $227 million. Consequently, gross profits significantly decreased from $182 million to only $97 million in 2011 and 2012, respectively. If you include the expenses, Dendreon ended with increasing net losses at $337 million to $393 million.
Apart from having poor revenue performance and increasing expenses, Dendreon kept on acquiring more loans. In 2010, its total liabilities were only $111 million. This tremendously ballooned to $648 million in 2011, and increased further to $686 million in 2012.
Looking at the financial profile, increasing liabilities and expenses amid decreasing sales is an indication of poor financial health. This is a clear sign of inefficient management and poor marketing techniques.
The Brighter Side of Dendreon
While things are not looking good in the balance sheet, there is still hope that investors can look forward to. The Board of Directors was aware of the ailing financial health of the company. It is for this reason that there were changes in the management team recently.
Moreover, Dendreon also did something about the increasing expenses by implementing cost-saving measures. This can be seen by the decreasing total operating expenses in the 4th quarter of 2012 at $110 million. This is down by 36.52% from $150 million in the same period a year ago.
Another sparkle of hope is the increasing net product revenue. While the net revenue declined, the product revenue made a major jump from $213 million to $325 million. This is an inspiring 52.37% increase. This only shows that Provenge had indeed improved its hold of the market.
This was proven in the fourth quarter and 2012 full-year report of Dendreon released last February 25. Dendreon reported a 25% growth quarter over quarter among the urology community. In the oncology community, the quarter-over-quarter growth was slightly slower at 4%. Community accounts are important to Provenge since this accounted to 71% of its total 4th quarter sales.
In the same report, the company committed to boost its direct-to-consumer ads campaign. This was translated into action in the first quarter of 2013; TV commercial ads of Provenge were aired. The ads increased the awareness of many people about prostate cancer and the available treatment today.
Another reason to remain optimistic for Dendreon is its expected expansion to the European countries. The company expects that a regulatory decision will be made in Europe by mid-2013. Once approved, this is foreseen as a catalyst for the rebound from the current sliding share prices.
Balancing Your Choices
Despite the encouraging highlights and the optimism of some investors, Dendreon remains as a highly volatile and risky investment. The company has only one product it relies on for revenues. So, any good news about the product may cause a spike in share prices, particularly with the upcoming EU expansion.
On the contrary, adverse reports can also cause the share prices to slide. Biotech investors are already aware of what happened to Affymax (OTCPK:AFFY). When AFFY got reports of death among 0.2% of the patients who took Omontys, it immediately pulled out the product. As a result, the share prices of AFFY instantly plummeted.
Such tragic event can possibly happen to Dendreon. Like AFFY, Dendreon has no other product to fallback to if something happens to Provenge. While Dendreon has several drug candidates in its pipeline, they are far from FDA approval. But as long as everything goes well with Provenge, the company may survive and even bounce back under effective management.
Therefore, it is important to balance the options. Investing in Dendreon may be relatively risky amid diminishing investors' confidence, but it can be truly rewarding in case of a rebound.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Efsinvestment is a team of analysts. This article was written by one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.