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It's been a couple of weeks now since Dendreon (DNDN) reported an absolute train wreck first quarter. Revenues plunged, cash burn was extreme, and doubts over the company's future increased. Now that we've had some time to fully digest the results, I'm here today to discuss what the analyst community has said about Dendreon recently. One thing is certain. Analysts are becoming very skeptical, and that could pose some serious questions about this company's future.

A recap of Q1 results:

Dendreon reported a revenue drop of more than 17.5% for the quarter, coming in at $67.6 million. This number missed even the most bearish of estimates, and the consensus called for $80.15 million. Dendreon blamed the poor number on increased competition. Additionally, gross margins declined a little from Q4 levels. GAAP gross margins were under 36%, but the company has reiterated its stance that restructuring efforts will get them over 50% by Q3 of this year.

Dendreon's GAAP losses improved from the year-ago period, but the company still burned through a large portion of cash. The table below shows some key balance sheet numbers, and I've taken it from my article above. A couple of notes on the data provided below. First, the senior notes number includes those due in both 2014 and 2016. The second note is on those senior notes due 2016. In the March 2011 to September 2011 reported quarters, Dendreon reported those notes as current liabilities. Starting in the December 2011 quarter, they were shifted to long-term liabilities. For consistency and easy comparisons, I have included them as long-term liabilities for each of the quarters below, to get a more accurate view of the financial picture. Dollar values in thousands.

(click to enlarge)

What the analysts have said:

After the poor results, the analyst commentary started piling in, and as you can imagine, it was not pretty. The first note came from Roth Capital, which downgraded the stock to Sell.

Stifel Nicolaus uttered similar thoughts, downgrading Dendreon from Neutral to Sell. Analyst Joel Sendek called Provenge "hopeless," stating that the company should sell the asset before they are forced to hold a fire sale. The analyst believes that Dendreon will burn through its cash by Q4 of 2014, long before they can become cash flow positive. He believes that Dendreon might never become cash flow positive, which could result in bankruptcy.

A quick summary of some other analyst calls:

  • BAML lowered their price target to $1, which doesn't include the potential for more dilution. They noted that "The company's underwater $648M in convertible debt with no clear path to profitability provides a serious challenge to keep the business in operation beyond 2014."
  • Citi downgraded the name to Sell with a $3.00 price target.
  • Blair cut its price target to $2.00.

So where do estimates stand now? Well, I've compiled the following table to show you where 2013 estimates have stood over time.

(click to enlarge)

Why these numbers are important:

Dendreon has stated it will be cash flow positive from US operations when revenues hit the $100 million mark in a quarter. When will that be exactly? Good question. As you can see in the table above, analysts used to think it was a near certainty. Now those analysts almost see it as a near certainty that they will not hit that mark this year.

Currently, analysts expect about $75.6 million in Q2, which makes sense as Dendreon said that they expect revenues in the mid $70s on the conference call. Analysts expect about $82.8 million in Q3, and the current forecast for the year implies about $92.7 million in Q4. Overall, for the year, the forecast calls for yearly revenues to decline by 2.1%. This conflicts with Dendreon's assertion that revenues will grow this year, albeit slightly. Right now, analysts don't see a $100 million quarter coming this year, while Dendreon is still holding out some hope. One thing is certain. It won't be in Q2, and it probably won't be in Q3. That means that the company will continue to burn through cash.

Those cash flow problems are the key here. I showed above how the balance sheet is getting worse. At the end of Q1, Dendreon actually had negative equity, meaning the total value of liabilities was higher than the total value of assets. With the company burning through cash, and the debt pile increasing, the debt ratio (liabilities-to-assets ratio) will only get worse.

As Dendreon's debt ratio climbs above 110%, 120%, or higher, the chances that the company is forced to raise money through equity will increase. They probably can't get any new debt at this point, because who is going to lend to a company that already has more liabilities than assets? I certainly wouldn't. I'm not worried about the nearly $28 million in notes due in 2014, but the $539 million (and climbing) notes due in 2016 could be an issue. If Dendreon is forced to raise $50 million, $100 million, or more, shareholders are in for a world of hurt. The company's market cap as of Tuesday's close was barely above $600 million. A $50 million raise would add about 8.3% more shares to the count, and don't forget the share count is already rising thanks to executive options and the like. If Dendreon raises $100 million, you're looking at more than 16% dilution. Ouch.

Final Thoughts:

Since Dendreon reported its train wreck Q1, analysts following the name have voiced their concerns. A number of analysts now have Sell ratings on the stock. Dendreon shares have lingered around $4.00 lately, and I'm sure at some point this quarter a mini short squeeze will occur. At the end of April, more than 1/3 of the outstanding shares were short. Q2 is not going to be pretty for this name, so even if revenues beat, they will still burn through cash. As I said in my previous article, Dendreon is getting much closer to the edge, which could mean further dilution for shareholders. It's hard to short a name like this that's rallied into the $20s (and even over $50) on good news, but Dendreon is certainly a strong short candidate. Right now, analysts are starting to feel that way as well.

Source: Dendreon Analysts Getting Very Skeptical

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.