| About: Dendreon Corporation (DNDN)

With yet another disappointment in the bag, maybe the Dendreon (DNDN) bulls can take a break with the "success is just around the corner" stories. Every controversial story has its supporters, but supporting Dendreon has come at a high cost as the price has continued to break down on successive disappointments with the cancer vaccine Provenge.

I hope that with second quarter results in hand and a significant restructuring on the way, the argument will at last shift from whether Provenge is a great drug (it's not) to whether it's a salvageable business (it might be).

Q2 Results - Successful Launches Don't Look Like This

Though management had guided to low single-digit sequential growth, Dendreon's Provenge sales were even more disappointing - falling almost 3% from the first quarter to $80 million (up 66% from the year-ago period). By way of comparison, Sanofi's (SNY) Jevtana, a prostate cancer drug approved around the same time as Provenge (and one for which expectations have been fairly modest), saw 20% sequential growth to approximately $80 million.

Unfortunately, Dendreon saw no efficiencies of scale with the year-on-year increase in Provenge sales. Gross margin declined nearly 17 points from last year, and about four points sequentially, due at least in part to underutilized overhead. Operating loss did improve, but due largely to lower SG&A spending.

Restructuring Ahead, Or "How Do You Take The Hill While Retreating?"

In response to sluggish sales, Dendreon is taking measures to reduce their breakeven point. Foremost among them is the decision to close a plant in New Jersey, cut 600 or more employees, and try to wring $150 million of annual costs out of the system.

These are logical moves; keeping surplus capacity at this point is largely pointless and conserving liquidity is a smart move. But it is just another clear signal that not only has Provenge failed to live up to lofty expectations, but it's not likely to anytime soon - a company should be looking to increase its production capacity two years into a launch, not shuttering surplus capacity.

Management also talked about reorganizing its sales force and "market access teams", while also pointing to sales turnover as a contributing factor in the sales miss this quarter. Unfortunately, this is yet another sign of the steep hill Provenge has yet to climb. The earnings of most pharmaceutical sales reps are tied to commissions or sales-linked bonuses and that leads to a very mercenary attitude - if reps are leaving, it's because they can't make the money they want selling Provenge, and they don't see a near-term likelihood of that changing. What's more, given the number of sales reps laid off by major pharmaceutical companies over the last few years, it's not like there's a surplus of jobs out there.

What Now?

Let's say that management can cut that $150 million in annual expenses. That still leaves the question of whether they can grow revenue to the $100 million or so quarterly run-rate that they need to breakeven.

Johnson & Johnson's (JNJ) Zytiga seems like it has at least a fighting chance of getting FDA approval for pre-chemo use based on the "302" study. While this study didn't meet the pre-specified hazard ratio for an early end (one of the co-primary endpoints), it was nevertheless stopped early. The label expansion that JNJ wants, use in a pre-chemo setting, would place it straight in Dendreon's wheelhouse with Provenge, to say nothing of what may happen when Medivations (MDVN) much-heralded enzalutamide hits the market as well.

Though Dendreon management has maintained that it's not an "either/or" choice and that there could be room for both, the sluggish early take-up of Provenge doesn't suggest a lot of faith on the part of oncologists. Whether they're bothered by the lack of PSA response, the unconventional nature of the therapy, or what have you, it doesn't really matter - the fact is, Dendreon management has to find a way to accelerate sales significantly and get to $100 million in quarterly sales.

Is There A Buyer In The House?

At this point, investors ought to take any management guidance with a shakerful of salt, including the ability to achieve $150 million in annual cost reductions and essentially double gross margins from this level. But could someone else do better?

Amylin (AMLN) sold itself to Bristol-Myers Squibb (BMY) and AstraZeneca at least in part because of its difficulties in selling its once-weekly GLP-1 analog Bydureon. While Bydureon offers the convenience of once-weekly injections (as well as strong efficacy and safety), its launch was tracking to only about 60% of the earlier launch of Novo Nordisk's (NVO) once-daily injected drug Victoza due in part to insufficient sales and marketing resources. I believe Amylin realized the limitations of its self-supported sales efforts and took a good deal when it saw one.

Although I do not believe there's bubbling interest out there for Provenge, I do think there could at least be a debatable level of potential interest from companies like Amgen (AMGN), Celgene (CELG), J&J, Sanofi, or Roche (OTCQX:RHHBY). Celgene's interest in oncology is well-known, while Amgen, JNJ, Sanofi, and Roche not only have interest in oncology, but considerable experience with difficult-to-manufacture drugs. While an acquisition of Dendreon wouldn't be totally free of incremental SG&A (particularly marketing and field support), I do believe that any of these four companies could make a profitable drug out of Provenge.

The Bottom Line

The problem for Dendreon in any buyout situation comes down to need and price - Amgen, Celgene, J&J, Roche, and Sanofi don't need Provenge and don't have any particular reason to pay up for it. Dendreon has amply demonstrated that Provenge won't sell itself, so this is going to have to be a significantly de-risked deal for the buyer (think more like Glaxo's (GSK) deal for Human Genome Sciences (HGSI) rather than Bristol-Myers' bid for Amylin).

Honestly, I don't think there's going to be a top-tier buyer for Provenge, nor do I believe that management will somehow find the right combination of price, sales strategy, and cost structure to make this look like a good franchise. Instead, I think this drug is destined to go down in the books next to Pfizer's (PFE) Exubera (inhaled insulin) - an interesting technological achievement, but a drug that never manages to find a sustainably profitable level of market interest. Either way, I see a lot of uncertainty and still very little reason to swim against the current and own Dendreon shares today.

Disclosure: I am long AMLN, OTCQX:RHHBY.