Dendreon: Crushed By JNJ/Medivation Or By Own Management?

| About: Dendreon Corporation (DNDN)

Dendreon (DNDN) develops and markets immunotherapies to cure prostate cancer. Immunotherapy enhances the immune response in a patient's body. Currently the company is going through a rough phase, with its revenue seeing a downside due to stiff competition in the prostate cancer treatment market. Further, its current debt levels are further exerting pressure on its bottom line. Dendreon's management believes it can achieve a positive cash flow only if it generates revenue of $100 million per quarter, but we believe this is an unrealistic figure to achieve.

Stiff competition and hesitant patients are major headwind

Dendreon's Provenge therapy was the first immunotherapy approved by FDA in the United States in 2010. The company is facing stiff competition from Johnson & Johnson's (JNJ) Zytiga and Medivation's (MDVN) Xtandi. Zytiga and Xtandi both are oral and once daily drugs, which makes them easy to administer compared to Provenge therapy. This therapy is a cellular immunotherapy in which the drug is made by a patient's own blood, though stimulating the immune system in the patient's blood cell. It requires a lot of the patient's time to perform this treatment process. Dendreon is facing problems due to hesitant patients that don't fully understand immunotherapy when their doctors suggest it as a treatment plan.

Lack of information amongst prostate cancer patients is a major concern for the company. To overcome this problem, it launched a direct to customer, or DTC, campaign on television to educate patients in March 2013. The cost of the campaign is $5 million per quarter. This campaign has proven to be a case of -- Too little, too late; we don't see any of its impact on the company's performance. The company's revenue was merely $73.4 million in the second quarter ended in June 2013 compared to $80 million in the same period last year.

Another issue for the company is the cost of the therapy, which makes it even less competitive. Currently Xtandi's yearly cost is $89,400, Zytiga costs $66,000, and Provenge therapy costs $93,000.

Who would go for the expensive treatment when cheaper cures are available with a better survival rate?

On the other hand, Zytiga has been a star performer for Johnson & Johnson, providing revenue of $395 million in the second quarter ended in June 2013. Medivation's Xtandi's efficacy has provided more satisfaction as compared to the other two options, but due to Xtandi's higher prices, Zytiga continues to dominate the market. We expect Xtandi to struggle in the market place facing competition from Zytiga.

Maturing Debt, posing a financial challenge

The company's financials are another major concern, its debt of $27 million is maturing in 2014 and $545.66 million debt is due in 2016. Currently these debts are trading at distressed levels giving a yield to maturity of 22.42%. Dendreon has to find solution to deal with this convertible debt. Currently, it can only refinance debt at higher interest rates, which will put pressure on the company's bottom line. Another option could be raising further equity, but this would further dilute the shareholders' value.

A shrinking top line and severely cost-burdened bottom line is a challenge for the management. Dendreon's cost of revenue is about 60%, and its interest expense is about 18% of its revenue. The company's current cost structures give a limited scope to the management to control the costs. At current revenue levels, even if the company cuts its SG&A, costs and R&D expenses by 50% each, its cash flow remains negative at 26.34 million.

European Union is positive on approval but, management has lost hope

In June this year the European Medicines Agency's Committee for Medicinal Products for Human Use, or CHMP, gave a positive recommendation for Provenge therapy. This is much needed positive news for the company, but the key concern remains the competition; competitors Zytiga and Xtandi are already approved in the European Union. Pricing could be a major hurdle in the European market, and the company' cost structures leave a limited scope for the management to price the therapy at a discount. We expect Denderon to face similar competitive pressure in Europe as it is facing in the U.S. market.

Meanwhile, Dendreon's management has lost confidence in its earnings. In a recent announcement made by Chief Executive Officer, John Johnson he said,

"Based on enrollments in July and early August, Provenge won't be able to generate enough sales in the second half of 2013 to overcome the first six months losses"

A glance at numbers

Currently Dendreon has a price to sales, or P/S, ratio of 1.47 whereas Medivation, a similar competitor, has a P/S ratio of 20.38. A lower P/S ratio is usually considered better, but in Dendreon's case, the lower P/S is because its share price has come down for reasons other than higher sales. Also, the company is trading at a price to earnings to growth, or PEG, ratio of negative 0.02 which indicates that the company's earnings will further decline.


Dendreon is facing tough competition from Zytiga and Xtandi, and we don't expect significant demand in U.S. or European markets. The management has failed to keep the costs under control and has lost confidence over the earnings. The maturing debts will put pressure on the company's management, and they have to find a solution to return the debt. The company was optimistic with its DTC campaign, but it failed to increase revenue. Looking at the above factors, we expect the company to underperform in the foreseeable future.

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.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta D., one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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