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Bill Maurer posted an argument for shorting Dendreon (NASDAQ:DNDN) even after a substantial price drop following its report on the June quarter that took place on Thursday, August 8 [See Has Dendreon's Window of Opportunity Closed?] I believe that the risk to shorts is greater than the risk to longs at the closing price of $3.37 of Monday, August 12, 2013. At that price the market capitalization is just $531 million, not much for a biotechnology company that has an FDA approved cancer therapy on the market.

Dendreon posted revenue was $73.3 million, up 8% sequentially from $67.6 million, but down 8% from $80.0 million in the year-earlier quarter. GAAP net income was negative $68.8 million, slightly improved sequentially from negative $72.0 million, and improved from negative $96.1 million year-earlier. GAAP EPS (earnings per share) were negative $0.45, improved sequentially from negative $0.48 and from negative $0.65 year-earlier.

Essentially all of Dendreon Revenue comes from sales of its Provenge therapy for prostate cancer [which is currently approved only for asymptomatic or minimally symptomatic metastatic castrate resistant (hormone refractory) prostate cancer].

Updating the chart from my Dendreon's Provenge Revenue Trends of January 9, 2013:

Provenge revenues, millions201120122013
Q1$28.1$82.0$67.6
Q2$49.6$80.0$73.3
Q3$65.8$78.0?
Q4$77.0$81.6

Provenge revenue may be trending upward with Q1 2013 representing the bottom. But we have already had 2 quarters that were sequentially up, only to be followed by a down sequence. There may be some seasonality. But on the whole, it looks like $80 million would be a good quarter in the current environment. The problem is that Dendreon management said that with some work they could get to break even if revenue reaches $100 million per quarter. That was before they added $5 million per quarter for the direct-to-consumer advertising campaign, which is costing $5 million per quarter, making the new break-even $105.

While no specific guidance was given last Thursday, management withdrew a previous statement that full 2013 revenue would exceed full 2013 revenue. To meet that earlier projection revenue in Q3 and Q4 would have to be around $90 million each quarter. At this point I would be pleased to see y/y growth in Q3, but management would not even guide to that. So a reasonable estimate is mid-70s.

There are several possibilities for changing the current environment. New data could allow Provenge to get a wider label from the FDA. Allowing it to be used earlier or later would presumably expand revenue. Or is given along with or in sequence with Zytiga or Xtandi. Currently the choice of either of those therapies means that once a patient progresses, they are likely no longer within the Provenge label. Clinical trials are underway to see how effective sequencing is and whether it is more beneficial to treat with Provenge before, with, or after other agents.

The main card Dendreon has in the hole is likely European approval [See Dendreon Gets European Recommendation]. If approval comes in late 2013, then patients could begin receiving treatment there as early as Q1 2014. Reimbursement is likely to be an issue in Europe as it was in the U.S. at first, but by the end of 2014 all that should be sorted out in the leading national markets within Europe.

The other issue is expenses. Provenge is not like small-molecule therapies where cost of goods sold (COGS) is usually a small percentage of revenue, or even orphan drugs and large molecules where COGS are a substantial percentage. The cost of production of Provenge, which requires the re-engineering of an individual patient's white blood cells, is quite a large percentage, as this table shows:

Dendreon expenses, millionsQ2 2012Q2 2013Q2 2013 % of revenue
Cost of Goods Sold$61.7$43.859.8%
Research and Development$19.7$18.224.8%
Selling, General and Admin.$80.2$66.891.1%

Year over year we see substantial improvements. Yet clearly COGS remains a problem, and not the only problem. Investment in R&D is necessary to get label expansion and to develop the Dendreon pipeline. SG&A needs to be cut more severely as well, despite the y/y improvement. Management's goal is still to reduce COGS to 50% of revenue or less, but part of reaching that goal would need to be a more substantial revenue ramp.

One change might fix a lot of Dendreon's problems. Given the safety and effectiveness of Provenge, and given the cost of other cancer therapies, and given the cost of creating an individual therapy for each patient, it makes sense to raise the price of therapy. In effect Dendreon has been selling its therapy for below cost.

Although I don't see how Dendreon can get into the black this year, cash burn has been slowed enough to allow us to think about 2014 events, including new Provenge data and a European launch. The cash and investments balance at the end of Q2 was $280.6 million. Even though debt is considerable at $573 million of convertible notes, if cash burn ($56.7 million in Q2) trends down Dendreon has enough cash to get it though a European approval. In contrast to Bill Maurer, I do think Dendreon will be able to refinance its debt and raise capital if it gets European approval or the new capital is to acquire and develop an attractive pipeline candidate.

In my view the main danger for Dendreon investors at the moment is a delay in approval in Europe.

I believe a revenue ramp in the U.S. is more likely than not. Zytiga and Xtandi will eventually fail for most patients, just as Provenge eventually fails for a majority of patients. We are not near having a true cure for late stages of prostate cancer. Whichever therapy is administered first, the others will be tried later, provided the patient is still alive and within the label.

I would argue that Dendreon is in much the same position today as Onyx Pharmaceuticals (NASDAQ:ONXX) was five years ago. At that time Onyx had a liver and kidney cancer therapy, Nexavar, on the market in collaboration with Bayer, but still lost money in most of the intervening quarters (especially if you except one-time revenue events). ONXX was seldom recommended by sell-side analysts. After the enthusiasm from the original FDA approvals (sending it up over $50 per share) wore off, ONXX stayed mostly between $25 and $35 per share from 2008 until the end of 2011. Over this time ONXX built its pipeline, including extensions to Nexavar's label. In 2012 the value proposition became more clear. Onyx is now discussing several acquisition bids, and closed on August 12 at $125.90 per share. Long term investors have received ample rewards by sticking with the company, and especially by buying on dips.

Of course, there is no rule that DNDN will follow the same path as ONXX. Dendreon management needs to ramp revenue, reduce expenses, and land the crucial European approval. Then there is time for pipeline development and label expansion.

I am holding my Dendreon stock. I agree there is considerable downside risk, but looking at the overall picture, I believe the upside opportunity is greater, today, at its current price (again: $3.37 per share).

Source: Dendreon Revenue And Cost Trends