Dendreon: Where Do Investors Go From Here?

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 |  About: Dendreon Corporation (DNDN)
by: Think Long Term

Summary

European expansion is weak and a long way off.

Major dilution appears to be coming soon.

The stock has been sold off further and short interest remains high.

Debts issues continue to loom and further funding for expansion is almost a given.

Dendreon (NASDAQ:DNDN) reported yet another dismal quarterly earnings report last week to investors. The earnings call transcript, for those who have not seen or reviewed it yet, can be found here.

Debt Issues -- Possible Dilution

Personally, I have been very upbeat about Dendreon over the past year. However, the most recent developments from the quarterly earnings call, and absolutely no updates or plan from the management team, in regard to dealing with the convertible debt issue plaguing the company is quite troublesome. The company continues to repeat their same verbiage that the debt issue is a high priority, but it is never really addressed to investors about what options the company plans to pursue. Revenue growth for the Q1 period on a YOY basis was very timid, and not a sign of a company breaking out of a slump.

Additionally, the European expansion update appears to be coming on line much slower than most anticipated. With Q4 2014 now being advised as the entry time frame into the European market, I would not expect investors to sit idly by and continue to hold the stock -- especially with the debt issues becoming a more serious issue. This is evident by the immediate sell-off late last week.

With investors selling the stock off even further recently and the short interest still remaining very high, I would expect that most investors see major dilution coming in the shares soon. And with the price of the stock now under $2.00 a share, in my opinion the dilution will be huge and could take the stock under $1.00 easily.

Europe Expansion

With a mere 10 site additions in Europe, how much is this going to actually improve revenues for Dendreon to become a cash flow positive company? For a company with only one product on the market, and having to rely solely on one product for revenues to survive, this expansion attempt seems meek at best. In my opinion, and likely that of many other investors, I believe more was expected from the company on this front. It just seems to be yet another letdown for investors in Dendreon.

The costs of expansion alone is going to burn through almost any remaining cash the company has on hand, if the company chose to use existing cash to fund this move. Funding expansion through existing cash is not feasible if the company plans to continue current operations. The big question is: How does the company acquire additional funding with the looming debt issues it already faces? Certainly, it brings major dilution further into the equation.

While the company has not detailed the true cost of expansion into Europe, the company has already stated in previous years that they would need to raise additional capital. In my opinion, now that the European expansion is approved and ready to move forward, the dilution to shares is imminent and could come at any time now. It is becoming clearer that the equity raise to continue operations beyond Q1 2015, and fund expansion plans, would have to be in the $200 million dollar range (roughly a 66% share dilution). Of course, as the stock continues to slide lower and lower, and all interest in the stock seemingly gone, would Dendreon even be able to complete an equity raise of this magnitude?

Zytiga/Xtandi -- Competition or Benefit?

Dendreon continues to view Medivation's Xtandi and Johnson & Johnson's (NYSE:JNJ) Zytiga as competition, as noted in comments from the earnings call transcript. And while current trials of Provenge use with Zytiga or Xtandi are not even fully enrolled and any data from these trials is a long way off, it seems odd to me the company would continue to use the term competition in this aspect. Could this be the reason why neither Johnson & Johnson, or Medivation, have no interest in buying Dendreon? If Provenge is a strong benefit when taken with Zytiga or Xtandi, then why would Dendreon keep calling it competition, instead of strengthening the position of Provenge as a benefit with the other drug companies, even if the trials are not yet complete?

Johnson & Johnson's Zytiga is set to earn peak-year sales of $910 million. Medivation's Xtandi is said to now expect U.S. net sales of $540-$575 million. These figures only bolster the relationship. I recommend that Dendreon take viewing the benefit of using Provenge in conjunction with Zytiga and Xtandi to bolster sales, vs. calling them competition. It makes sense for the company to bolster its relationship with Johnson & Johnson and Medivation.

Investors have long thought that at some point one of the two companies would have come in and swept Dendreon right up through a buyout of Dendreon at the current trading levels, yet Dendreon continues as a sole entity? Is this a result of the poor financials and debt alone the company has amassed over the years, or is it related to something else? With Provenge being the only FDA-approved immunotherapy for advanced prostate cancer, one has to believe the company is worth much more than where it is now trading, but no one seems to be interested anymore, not even Johnson & Johnson or Medivation.

Where Do Investors Go From Here?

Dendreon has $648 million convertible debt ($28M due in 2014, $620M in 2016), as of March 2014 figures. If Dendreon decided to use current cash on hand to pay the upcoming June 2014 debt of $28 million, this would leave them with roughly $142 million going forward, and with a burn rate of approximately $30 million-plus per quarter, the company would have just enough operating cash left to continue operations into Q1 2015.

Dendreon likely could not get additional financing large enough with a debt to assets ratio well over 100%, or complete a public offering that would secure the company's future at the current trading levels. Even if the company was able to secure additional financing, or attempt to perform a debt swap, the cost to do so would be painful to shareholders.

As I previously noted, when Dendreon fell far from its highs of years ago, and reached the previous lows around $2.80 a share, I was very positive and upbeat that the company was a value investment for the long term. This still may be true. But anyone planning to buy and hold Dendreon for the long term may want to wait a little longer. At least until the plan to handle the debt issues are announced, and investors can see what impact to the bottom line the expansion in Europe is going to have. It is not looking very rosy currently, and I would recommend staying away for now. It seems almost certain that major dilution in the shares is coming soon that will continue to destroy any value the stock does have at this point.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.