Once Heralded Dendreon May Be Approaching The End Of Its Financial Road

| About: Dendreon Corporation (DNDN)
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During Dendreon's (NASDAQ:DNDN) two year 90% loss there's little denying that longs have had many rough days. These rough days were mostly produced by earnings. Yet despite continuous disappointment, slower-than-expected sales growth, and no end in sight for net loss, the company has always produced growth, thus keeping some level of excitement for the future. Now after the company's first year-over-year loss in Provenge sales and a financial position that continues to worsen, Dendreon could be headed lower and may never reach profitability.

Q1 Earnings & Goals that May Not be Reached

Dendreon has fallen after reporting first quarter earnings, as the company posted a surprising 17.6% loss in year-over-year revenue. The company posted a net loss of $72 million in the quarter, compared to $103.9 million in the year prior, thus showing improvements in margins. The company continues to market its "COGS under 50" restructuring plan, and still believes that it will see year-over-year sales growth in 2013.

Back when Provenge was first approved, it was heralded as the next great blockbuster drug, or the most innovative drug of its time. The analysts who covered the stock predicted sales growth north of $800 million with some as high as $1.50 billion. At the time, we already knew that costs for the company would be high, but with $150 million in quarterly revenue needed to reach profitability combined with peak sales expectations between $800 million and $1.50 billion annually, both investors and analysts thought that Dendreon would become a great story.

Now, fast-forward and we have the company's first year-over-year loss, which was clearly blamed on increased competition. The company has undergone an aggressive restructuring program, closing its Morris Plains manufacturing facility and hoping to decrease COGS to below 50% and then ULTIMATELY perhaps below 25%. In the past the company needed $150 million to reach profitability, but with 2012 sales being $325 million it's clear to see that the company was far from reaching that point.

The company still "expects" year-over-year growth, but I think most would agree that it will be near flat if it occurs. Hence I say we can predict 2013 sales of $330 million for 2013. If the company can reach this level then it would still be far below the $100 million needed per quarter to achieve positive operating cash flow-- not net income, rather operating cash flow. Furthermore, this is only if the company can consistently keep its COGS below 50%.

Last year Dendreon posted a net loss of almost $400 million. In 2013 losses won't be this dramatic, although the company does not appear to have the needed growth in order to produce operating cash flow. The company still has high manufacturing expenses, which include patients undergoing blood draws to harvest monocytes that are then shipped overnight to Dendreon's manufacturing facilities (Morris Plains handled all of the north-east) and then finally shipped back to the patient overnight. This process continues each time, as Provenge cannot be frozen, which is why the company's costs are so high and, as a result, the company's cash position is sinking by the quarter.

Dendreon: A Company in Deep Financial Restraints

For the quarter, Dendreon lost $72 million and reported $337.3 million in cash, cash equivalents, and short-term and long-term investments, compared to $429.8 million as of December 31, 2012. Thus many will assume that Dendreon can continue to operate for another year without dilution; bulls then believe that the company will hopefully be near profitability. However, the most logical question is the one that very few ask: If Dendreon has never seen profitability, where does it get its cash?

Since 2009 Dendreon has posted net losses of $220.16 million, $439.48 million, $337.81 million, and $393.61 million for a total loss of almost $1.40 billion, with just $803.51 million coming from operating activities. This means that, even if Dendreon were to reach annual sales of $400 million (break-even operating cash-flow), the company would still be far from profitable as large losses also come from investing activities.

Dendreon has managed to operate by hitting the debt markets aggressively, especially in the last two years. Aside from running low on cash and being far from reaching operating cash-flow (which still does not produce net income), the company has to manage the debt that it has accumulated. Seeking Alpha contributor, Brian L. Wilson, notes that Dendreon has $27.70 million in convertible senior notes that will expire in 2014 and another $532.7 million in convertible senior notes to expire in 2016 (now $539.1 million after Q1 report).


As of Dendreon's 2012 end of year report, it had total liabilities of $686.51 million, current liabilities of $103.94 million, and a total accumulated deficit of $1,954.35 million! In other words, this company is in horrible financial shape with unimaginable debt and no money to pay off the debt. The only way to humanize the potential trouble that Dendreon is encountering is to think of an average American family with $50,000 in annual income and $120,000 in annual costs with debt obligations of another $150,000, with a near maxed credit line.

With Dendreon having a market cap of $650 million, I would not be surprised to see additional dilution in the coming months. The company is going to need cash to pay its debt, fund its operations, and then enough to create confidence among shareholders. A $150-$250 million offering would not be out of question, and if so, expect much greater loss in a company that may be near the end of its road.

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. I have no business relationship with any company whose stock is mentioned in this article.