The Final Blow For Dendreon?

| About: Dendreon Corporation (DNDN)

It hasn't been the best year for shares of Dendreon (NASDAQ:DNDN), the biotech behind the prostate cancer treatment Provenge. After shares nearly doubled in January, starting the year at $7.60, they hit a high of $17.04 in early February. But since then, it has been all downhill, with shares now trading under $5. A couple of so-so earnings reports have been part of the reason, but increasing competition is also hurting Dendreon. Last week, an even bigger piece of news came out, and this one could signal the final blow for this struggling name. I'll examine the news, and discuss why this adds to the growing list of troubles for Dendreon.

The big news:

Last week, the US Food and Drug Administration gave approval to Medivation's (NASDAQ:MDVN) prostate cancer drug, which will now be sold under the name Xtandi. Medivation is collaborating on this drug with Japanese firm Astellas Pharma. While it was not surprising that this drug was approved, most were expecting a decision to come later this fall, probably in the October to November period. This treatment is designed for advanced stage prostate cancer.

Medivation's drug could be a game changer. According to Howard Liang, a Boston-based analyst for Leerink Swann LLC, "Medivation's cancer drug looks to be the best drug so far for prostate cancer, which is a big category, a big market."

Medivation's drug is expected to go on sale during mid-September, which again will be months ahead of schedule. For Dendreon, this makes the competition even greater. Dendreon's Provenge, which generated sales of $162 million in the first half of this year, is already facing an uphill climb against Johnson and Johnson's (NYSE:JNJ) Zytiga, which generated $432 million in revenue during the first half of this year. According to Bloomberg data, Medivation's revenue, which totaled $60 million in 2011, could rise to nearly $357 million in 2013 thanks to the approval of Xtandi.

Medivation shares hit another new high on Tuesday, closing up more than $4 to $109. This is a stock that was at $60 just six months ago and under $20 a year ago. It has been a huge run.

Financial flexibility is weakening:

Another reason why Dendreon's troubles are mounting is that the company is not profitable yet, and the balance sheet is getting much worse. The table below shows some key balance sheet ratios at the end of the past six reported quarters.

Now a couple of notes on the data provided below. First, the senior notes number includes those due in both 2014 and 2016. The second note is on those senior notes due 2016. In the March to September 2011 reported quarters, Dendreon reported those notes as current liabilities. Starting in the December 2011 quarter, they were shifted to long term liabilities. For consistency and easy comparisons, I have included them as long term liabilities for each of the six quarters below, to get a more accurate view of the financial picture. All dollar values are in thousands.

*Includes both short-term and long-term investments.

Other than some minor improvements in the December 2011 quarter, the trend is negative, and the numbers are not expected to get much better. For instance, the current ratio has not gotten worse only because current assets have dropped from $814 million at 3/31/11 to $559 million at 6/30/12. Current liabilities have also gone up, rising from $54 million to $92 million. On a dollar value, it doesn't seem like much, but look at what it has done to the current ratio.

In terms of the senior notes, the notes due 2014 have seen their balance stay at $27.685 million for all these quarters. The increase in the total is due to the 2016 notes, which has seen its balance rise from $491.4 million at 3/31/11 to $520.3 million at 6/30/12. That means more interest payments, and remember, these 2016 notes are convertible.

As Dendreon's financial flexibility continues to weaken, it may be forced to raise more money. Let's say they need $300 million, or roughly half the $600 million they raised last year. If they go the way of debt, the interest rate on that debt will probably be 10%, or more, depending on how much they need and when the debt is due. At 10%, you're talking about $30 million in interest costs, pre-tax, which is a bit considering revenue estimates for 2012 and 2013 stand at just $330 million and $400 million, respectively. But if Dendreon was to get $300 million through an equity offering, you're talking about a huge amount of dilution, given that the market cap at Tuesday's close was just $745 million.

Poor Quarterly Results:

As the competition is growing, Dendreon is having a hard time meeting expectations for what it needs most, and that is revenue. When Dendreon announced its second quarter results, revenue of $80 million missed analyst estimates by nearly $6 million. That follows Q1 results where revenue was just in-line.

Now, Dendreon is working on cutting costs, and they announced a huge restructuring plan along with those second quarter results. The restructuring plan is expected to take a year, and the company believes it will reduce annual expenses by $150 million. Also, the cost of goods sold is expected to be reduced from 77% to less than 50% of net product revenues.

Dendreon says the restructuring will help it become cash flow positive once it hits $100 million in quarterly revenue, but when will that be? Current analyst estimates call for just $82 million in Q3 revenue (quarter ending in September), and $85 million in Q4 revenue (ending in December). Analysts currently predict $400 million in annual revenues for fiscal 2013, but Dendreon hasn't met expectations recently so estimates could come down. Also, that number probably means that the company won't hit $100 million in a quarter until at least Q2 or Q3 of 2013. Given the balance sheet trends I showed above, that means things will get much worse.

Final Thoughts:

Dendreon shares spiked nearly 11% to $4.98 on Tuesday, despite no real news out on the name. Shares are up almost 20% from the recent 52-week low, but still remain well below the $6.18 where they went into last quarter's earnings.

Dendreon is an extremely risky investment here, and the short side of the trade seems like the better one at current. Although Dendreon says its restructuring plan will really help, this is still a company that is multiple quarters away from being cash flow positive and multiple years away from profitability. Revenues have stalled a bit and I think that the competition is a little greater than Dendreon realizes. Add in a balance sheet that is getting worse by the quarter, and you don't have a name that I would want to be in currently.

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.

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