Biotechnology company Dendreon (NASDAQ:DNDN) is not in good health in 2014. The company has lost around 30% of its market capitalization so far this year and its first-quarter results didn't inspire any confidence either, although they were marginally better as compared to last year. Dendreon's cancer drug, Provenge, turned in weak sales. As a result, despite cutting its losses in half from the year-ago period, Dendreon shares fell.
But, on a year-over-year basis, management observed an increase in its revenue in the first quarter. In addition, Dendreon says that sales of Provenge have stabilized despite facing stiff competition. As a result, the company expects that the drug's performance should improve in the second quarter.
Solid opportunity ahead
Dendreon has got a solid opportunity ahead of it given the solid growth expected in the market for prostate cancer drugs. According to Decision Resources, this market is expected to grow at a robust CAGR of 10% till 2022, driven by key markets such as United States, France, Germany, Italy, Spain, the United Kingdom and Japan. As we see, most of these markets are based in Europe, and this is where Dendreon is presently concentrating.
Dendreon has plans to make Provenge commercially available in Europe, which will boost its growth. But before the launch of any drug, safety is one of the important factors that everyone is concerned with. Consequently, Dendreon had a successful European Association of Urology (EAU) meeting and received a positive response from key opinion leaders ((KOLs)) to include Provenge in the new EAU prostate cancer guidelines.
In fact, consensus findings suggest that European physicians are enthusiastic about Provenge. According to management:
"A panel of 21 physicians from the European consensus panel of prostate cancer expert agreed and published in European Journal of Cancer that PROVENGE is an appropriate option for the treatment of asymptomatic, minimally symptomatic metastatic castrate resistant prostate cancer. 70% of these physicians support the use of PROVENGE prior to Abiraterone or Enzalutamide."
Dendreon has been approached by a number of additional KOLs interested in opening centers of excellence. The company presented preliminary data from its Phase 2 study at the 29th Annual European Association of Neurology. This presentation highlights Dendreon's commitment to spread awareness and understanding about immunotherapy and Provenge in Europe.
The company has worked out a two-step process for Provenge's European endeavor. The first step includes making the drug available to physicians and patients through centers of excellence. This would be achieved using the company's contract manufacturing organization, PharmaCell, beginning with Germany and the United Kingdom. Dendreon has plans to treat its first commercial patient by the fourth quarter this year.
The second step includes further expansion of Provenge in Europe once automation is approved. The company is in negotiations with European regulatory authorities regarding automation. According to interim CFO Gregory Cox, "We expect automation to not only play a key role in our ability to expand in Europe but to also be an important strategic driver to help us lower our cost of goods sold in the United States."
Dendreon's moves in Europe should lead to an increase in its revenue in the long run, as the market for cancer drugs is huge. According to BCC Research,
"The market for biological therapies for cancer in Europe and the rest of the world was worth $15.6 billion in 2009, down from $17.6 billion in 2008. This number is expected to increase at a compound annual growth rate of 7.8% to reach $22.8 billion in 2014."
Hence, Dendreon should benefit from Provenge's expansion in Europe as it is a multi-billion dollar market, while automation moves should lead to lower costs.
Impressive cost reduction moves
Dendreon is also focused on restructuring its expenses. It has already implemented the cost restructuring process, which will enable it to become a leaner biotechnology company going forward. In fact, the company has already started to realize the benefits of its restructuring process and the results were evident in the first quarter.
For example, cost of goods sold was approximately $37 million, or 53% of revenue, in the first quarter. This was down from approximately $43 million, or 64% of revenue, in the first quarter of 2013. In addition, sales, general, and administrative expenses came in at $39 million, down from $62 million in the year-ago quarter. Dendreon expects this impressive pace of cost savings to continue in the future as well.
Growth despite stiff competition
But, as Dendreon is making progress with Provenge, so are its competitors. Dendreon has to face tough competition from peers such as Johnson & Johnson's (NYSE:JNJ) Zytiga and Medivation's (NASDAQ:MDVN) Xtandi. Both these drugs have increased their competitive share in the post chemo arena. Even in pre chemo and oncology, Xtandi is offering a tough fight to Dendreon. However, Dendreon management is taking various initiatives to retain its market share.
For example, Dendreon finished the first quarter with 93 large accounts, significantly up from just 54 in the year-ago quarter. The company defines a large account as having an annual run rate of more than $1 million in sales. During the first quarter, targeted accounts represented around 80% of Dendreon's business. The company has adopted an account base model to drive depth and penetration in its large accounts. This can help the company improve its top line through incremental growth.
However, investors should also keep an eye on the risks that Dendreon faces. First, the company has a huge debt, and according to Bloomberg, it has the highest debt-equity ratio in the biotech industry. Bloomberg also points out that Dendreon has less cash available to repay its debt.
Dendreon's debt stands at almost $610 million. In comparison, the company's cash position is weak at $155 million. Moreover, a look at Dendreon's cash flow indicates that it is burning cash right now. Over the last twelve months, Dendreon's operating cash flow is a negative $157 million, while the levered free cash flow is a negative $31 million.
In addition, as mentioned earlier, Dendreon is facing competition from Xtandi and Zytiga. So, if Dendreon is unable to improve sales of Provenge, and its foray into Europe doesn't provide the required results, then it won't be a good investment.
Dendreon has taken considerable steps to reduce its expenses. At the same time, the company is making strategic investments in key initiatives that will ultimately drive growth, such as Provenge sales in Europe. This combination looks encouraging, and analysts are of the opinion that Dendreon's bottom line will grow at a CAGR of 85% for the next five years. So, considering the moves that the company is making, it might make sense to buy Dendreon on the pullback.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.