Seeking Alpha
Profile| Send Message| ()  

Dendreon (DNDN) reported a mixed earnings report yesterday, and immediately saw gains of more than 4%. However, those gains then swindled away, and Dendreon is currently trading at the same price as it was prior to reporting earnings, meaning investors are having a tough time assessing the information.

For the third consecutive quarter Dendreon saw year-over-year revenue declines for its prostate cancer drug Provenge. As a result, the $400 million in net annual sales that Dendreon needs to achieve positive operating cash flow remains a far stretched target. However, it appears as though some investors are buying the stock following news of additional cost cuts, but should investors view this news as a positive?

Fool Me Once

Dendreon's Provenge has extremely high costs. The drug cannot be stored; patients, physicians, and the company must undergo a race against time for Provenge to be created. The process begins with a blood drawl, which is then shipped to Dendreon where Provenge is created before being shipped back to the physician, where it is then administered to the patient in a hospital setting.

Dendreon has spent nearly all of its resources to make Provenge a blockbuster product, racking up an accumulated deficit of more than $2 billion and total debt in excess of $600 million. In exchange for these investments Dendreon has a product with quarterly revenue of $68 million, reflecting a 12.8% year-over-year decline.

With cash dwindling, Dendreon has found itself in a position of trying to cut costs to the absolute penny. Last year Dendreon announced a major restructuring program expected to save the company approximately $150 million annually.

In exchange, Dendreon closed its Morris Plains manufacturing facility, which was a major investment on behalf of the company prior to Provenge's launch. Also, Dendreon cut 600 full-time employees, and as a trade this made it possible for Dendreon to become cash-flow profitable with just $100 million of quarterly sales, down from $150 million. In 2012, Dendreon had $325.53 million in annual sales, meaning the trade-off seemed like a win-win for shareholders.

According to Dendreon, the company's remaining two facilities, Union City and Seal Beach, had the capabilities to produce $1 billion worth of product annually, thus adding to what seemed like a good restructuring program for the company. The problem is that Morris Plains was built for a reason; it filled a huge hole in the north-eastern section of the country, making logistical costs less per unit shipped.

As a result, by closing the company's largest facility and cutting 600 employees, Dendreon put more pressure on its ecosystem, including employees and its remaining facilities. The outcome has been double digit year-over-year revenue declines in each of the last three quarters.

Fool Me Twice

Dendreon is trying to sell a similar story to shareholders, one where additional cuts could save the company and allow it to reach profitability. The new plan will save approximately $125 million on Dendreon's 2013 revenue run rate; cutting total employees to just 820 from more than 2,000 at the company's peak.

Essentially, Dendreon is trying to fire everyone but maintain its production. This is bad business 101. For investors, we typically like to see struggling companies announce restructuring programs, and lay off employees, because it improves margins and decreases the possibility of financing. However, that company must have something to work with.

Companies such as Level 3 or Alcatel-Lucent have many billions in annual sales to restructure, divest, or downsize, but Dendreon is working with trailing 12-month revenue below $300 million. Dendreon is running low on options, and is showing signs of desperation. Surprisingly, investors are buying the idea for a second time.

Conclusion

Fool me once shame on you, fool me twice shame on me.

Since Dendreon's last restructuring announcement, its shares have fallen 50%. Today, the company has less cash, deteriorating sales, and essentially zero value in its stock. This is a company with about $250 million in net loss over the last 12 months, and a market cap of only $380 million. With financial obligations due, investors must wonder if Dendreon can pay its bills for another year.

The company has cash of just $88 million and likely could not get additional financing large enough (with a debt to assets ratio over 100%) or complete a public offering that would secure the company's short-term future. Clearly, Dendreon's new plan is a sign of desperation, but since we've been down this road before, and I see no reason to believe the outcome will be any different. Dendreon still looks like a company down the fast path to bankruptcy.

Source: Dendreon: A Classic Plan Of Desperation