One of the industries that offers the most potential for large returns on investment is the biotechnology industry. Investors are constantly on the prowl looking for that next company that can transform itself into a biotech giant. However, finding that diamond in the rough is not without risk, as most biotechnology companies will end up failing. However, there is one particular area within the biotechnology industry that appears to be making great strides. And that specific area is prostate cancer.
Prostate Cancer Market
The American Cancer Society predicts that prostate cancer will be diagnosed in 238,590 men in the U.S. this year. The statistics also show that prostate cancer kills just under 30,000 men each year, which is only behind lung cancer.
Prostate Cancer Companies
Genomic Health, Inc. (GHDX) is a molecular diagnostics company focused on the global development and commercialization of genomic-based clinical laboratory services that analyze the underlying biology of cancer allowing physicians and patients to make individualized treatment decisions.
Genomic Health has had an unbelievable 3 months, which was magnified this morning on a positive press release.
As you can see, the stock first soared on its recent earnings report. And it has soared again on a positive press release in which the company revealed that its novel test helps predict whether prostate cancer is aggressive or slow-growing, giving patients and doctors more information to shape treatment for the most common tumor found in men.
The company revealed the results at the American Urological Association meeting in San Diego. The results showed that this test may triple the amount of men whose cancer can be closely monitored for growth rather than those just targeted for destruction.
With only 3% of low-risk prostate cancers being life threatening, this test can be used to give men more options than just surgery and/or radiation.
Fundamentally, the company appears to be in strong shape, especially when examining its recent earnings report. The report was filed on May 7, 2013, for the period ending March 31, 2013. The balance sheet showed that the company had $17.1 million, down only $1 million from the 3 months before. However, even though the cash went down, the total current assets went up by about $2.5 million. Additionally, the company has no long-term debt on the balance sheet. On the income side, the company was able to generate $63.1 million in revenues, an increase of $4.6 million from the same period a year ago.
The company does face a few risks. This product will be competing directly against Myriad Genetics Inc. (MYGN). Myriad Genetic's product is called Prolaris. Additionally, the company will begin talking to insurers about covering the cost of the product. That is never a sure thing and can present problems, as was seen with Dendreon (DNDN) a while back.
Dendreon Corporation is a biotechnology corporation focused on the development of cancer therapeutics. The company's current flagship product is Provenge, used in the treatment of prostate cancer.
The best place to start analyzing Dendreon is through its financials. Dendreon already has a fully approved product that is currently being sold so it's important to see what kind of progress the company is making. The company's 2012 annual statement was filed on February 25, 2013. 2012 turned out to be an impressive year for the company as product revenue came in much higher than expected. Dendreon generated $325.3 million in product revenue, an increase of $122 million from the prior year. Additionally, the trend continues to be extremely positive especially if we go all the way back to 2010 when the company generated just under $48 million.
If we turn our attention to the operating expenses we will notice that they came in rather large at $665.3 million which was an increase of $22 million from 2011. But it's also important to put that in perspective. The expenses increased at a slower rate than product revenue increased by. If Dendreon can continue that trend in the future, the company should be able to continue making solid progress.
Now a good question is when will Dendreon break even on cash flow? Corporate executive have estimated that the company needs to generate $100 million in revenue per quarter in order to hit that break even level. So although $325.3 million was well short in 2012, the company is making progress towards that.
If we turn to the balance sheet, we will notice a couple things. First, the company has plenty of cash to continue funding operations. The company ended 2012 with $188.4 million in available cash and $487.3 million in current assets. Now the one cause for concern is the long-term debt which stands at $577.5 million. Dendreon will have to think long and hard about how to retire that. If they can ramp up revenue enough, it's possible that the company can generate enough to pay it down but that remains to be seen.
Analysts are currently projecting revenue for 2014 to be $429.7 million. If that indeed happens, the company will have a strong likelihood of being cash flow positive and making a big dent in the annual losses that seem to be accumulating.
Since Dendreon's revenues haven't quite lived up to the billing, company executives have had to find other ways to keep the company going. .
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.
Now Dendreon does have two upcoming events that could result in large moves. The first is their earnings announcement currently scheduled for May 9, 2013. Investors and analysts will be waiting on pins and needles to see if the company was able to hit that $100 million in revenue number. It will also be interest to note what impact Dendreon's cost cutting measures have had on the bottom line. The second event is potential approval for Provenge in Europe. The company has already begun patient enrollment and treatment for its study in the EU. Dendreon expects to get the decision by mid-2013. Approval in Europe would be a big lift to the share price and get the company closer to that quarterly $100 million revenue on a consistent and permanent basis.
Now the company does face several risks. First, the stock is trading very weak at the moment. It's unclear whether the stock could see further weakness in the future or if it represents an opportunity for longs to get in at cheap prices. I would lean towards the latter but this chart isn't very pretty.
Another concern is from the competition that Dendreon faces. Johnson & Johnson (JNJ) has its own approved treatment for prostate cancer called Zytiga. Zytiga actually generated more than $960 million in sales in its first year on the market. Clearly it has had more success than Dendreon. Part of the problem for Dendreon is that they can't match the marketing and spending power of a biotech giant like Johnson & Johnson. So the company will need to be smart and strategic about how to play catch up. A third risk is if Provenge doesn't receive EU approval. It would likely send the shares under $4 and investors would be left wondering when the next catalyst might be.
The fight against prostate cancer is not and won't be an easy one. However, with this form of cancer being the most common among men, it is imperative that strides be made. The companies mentioned in this article are doing all they can and both investors and those being treated can only hope for a positive outcome.