This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Dendreon's run is done
I won't say I told you so (but I did). When L.A.-based investment banker Imperial Capital urged investors to buy into Dendreon (Nasdaq: DNDN  ) ahead of earnings last month, I pointed out the risk that this company would fall short of sales expectations. I warned that, at a valuation of 11 times sales, expectations were too high, and any disappointment in this week's earnings report would be bad news for investors.

It was.

Wednesday, Dendreon reported $66 million in Q3 sales for its hoped-for blockbuster Provenge cancer treatment. That was short of what the company had hoped to rake in, but the truly bad news was that the company admitted there's little hope for improvement in the near term. Sales gains will be only "modest" in 2012. Problems with getting reimbursement from Medicare for the $93,000 drug persist. Perhaps most troubling, reports are beginning to arise of dissatisfaction among patients and doctors. Result: Dendreon shares shed 37% of their already depleted market cap.

Adding insult to misery
As if this weren't all bad enough, Dendreon lost one of its most stalwart backers yesterday, when Goldman Sachs announced it was pulling its "buy" rating on the stock, and downgrading to "neutral." Says Goldman, Dendreon's fixed costs are turning out to be higher than expected. And unless the company can scale its operations significantly, it's going to be hard for Dendreon to earn a profit. And with sales growing less swiftly than hoped, it seems reaching such scale of operations still remains a long way off.

"Is it much farther, Papa Smurf?"
Yes, it is. By Dendreon's own admission, the company needs to make about $500 million in annual sales to break even on Provenge. But the company's going to be lucky to pass $200 million this year, and analysts project less than $400 million in 2012 sales as well. Some analysts still think Dendreon could ultimately address a peak market $700 million to $800 million. But rivals such as Sanofi (NYSE: SNY  ) and Johnson & Johnson (NYSE: JNJ  ) aren't sitting still as Dendreon struggles to reach that goal. And competing drugs from Medivation (Nasdaq: MDVN  ) and Exelixis (Nasdaq: EXEL  ) , are making progress, too. All of these companies threaten to take market share that Dendreon needs if it's to ever reach profitability. The better they do, the more Dendreon's prospects dim.

Aside from that, Mrs. Lincoln, how was the play?
Is there any hope for Dendreon investors? Actually, yes. While I remain pessimistic about the stock, two factors suggest that the company's a bit less risky today than it was as recently as Tuesday.

First, the very fact that Dendreon has seen so much of its market cap vaporize over the past two days squeezes a lot of risk out of the stock. Formerly valued at a price-to-sales ratio "three times the valuation of biotechs like Gilead Sciences (Nasdaq: GILD  ) and Amgen (Nasdaq: AMGN  ) -- both of which are already earning profits," Dendreon today costs closer to eight times sales today. As such, it's "only" selling for twice the P/S ratio of its more profitable biotech peers.

And here's the thing: While Gilead and Amgen are only growing profits at 16% and 8%, respectively, Dendreon just finished reporting a sales quarter that was treble what it collected in Q3 2010, and up 28% sequentially from Q2 2011. In short, it's growing sales faster than the other guy -- and if it could just find some way to turn those sales into profits, it would certainly deserve a higher P/S multiple than Gilead and Amgen get.

Foolish final point
And the other second reason to like Dendreon today: Goldman doesn't like it. Bullish on Dendreon before the collapse, Goldman's starting to look like a bit of a contrarian indicator on this stock. (Indeed, it looks that way on many thing biotech -- and industry where only 42% of Goldman's recommendations actually managed to outperform the market.) If Goldman has had its confidence shaken, maybe now's a good time for new investors to take a look ... and see if there's a chance for Dendreon to bounce back.

Want to keep an eye on this former hi-flyer? Add Dendreon to your Fool Watchlist, and we'll keep you updated on all the latest developments.