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.
And speaking of the best...
With shares that have lost more than half their value over the past year, cancer-fighting-drug maker Dendreon (Nasdaq: DNDN ) is one of the least popular stocks we track on CAPS, ranked a lowly two stars. But might Dendreon finally be cheap enough to buy?
One analyst thinks so -- almost. Last week, after emerging from a meeting with management in New York, banker R.W. Baird rushed out a note arguing that while Dendreon remains just a neutral rating, Baird is becoming "incrementally positive" on the stock -- and sounds like it's on the cusp of making a real upgrade.
Why?
Baird's got three things it sees as arguing in favor of a buy rating:
First, the analyst argues that while Dendreon's sales were down sequentially in the most recent quarter, they were still up 66% year over year. What's more, the "June downtick" doesn't seem to be related to Johnson & Johnson's (NYSE: JNJ ) competing Zytiga drug, or to Medivation's (Nasdaq: MDVN ) enzalutamide, either. Rather, Baird points out that about 18% of Dendreon's sales rep positions were vacant in June, and this simple lack of manpower negatively affected Provenge sales. Today, however, Dendreon's "sales force [is] back at full-strength," and this is likely to boost sales quickly.
Second, Baird believes that Provenge can piggyback on the popularity of enzalutamide through a potential "large Provenge/enzalutamide combination trial." The analyst notes that the two drugs appear to work well together, and offer "potential immunotherapeutic synergy."
Third, Baird argues that Dendreon's recently announced cost-cutting efforts "could [eventually] bring COGS [down] to 20-30% -- a threshold we believe could make DNDN a more attractive take-out candidate."
Is Baird right?
Anything's possible. But even the most fervent Dendreon bulls have to realize that what Baird is suggesting would require the company to cut the cost of producing Provenge by more than half -- a pretty tall order. There's also no guarantee that Medivation would want to partner its drug with Provenge... or that patients will continue to prefer Provenge (at $93,000 per course of treatment) once they have access to Zytiga (at $5,000).
In short, there are still plenty of risks in this stock, even after Baird's more bullish note Friday.
So what's it going to take?
What would it take for Dendreon to succeed? What does Baird think we need to see before giving the stock a full-fledged buy endorsement? According to StreetInsider.com, Baird is keeping its buy rating powder dry, against the day that Dendreon shows actual "tangible signs of revenue uptick."
Management itself has said that it needs $500 million in annual revenue to break even and start earning profits. Right now the company is just a smidge under $430 million on a trailing-12-month basis... but closer to $320 million if you annualize the Q2 results into a long-term trend.
Worse, the consensus on Wall Street now is that the company won't break above $500 million before 2014 -- a year later than previously estimated. Worst of all, the latest projections on actual profit at Dendreon now suggest we won't see breakeven before 2016.
Foolish takeaway
Can Dendreon prove the skeptics wrong, and win the upgrade that Baird so clearly wants to give it, but can't yet justify? The numbers I'm looking at tell me its chances are increasingly slim -- revenue targets, and profitability, are getting pushed farther and farther back, while with each passing year, competitors' products get closer and closer to market.
Dendreon gets its next chance to prove the skeptics wrong on Oct. 30, when it's scheduled to report Q3 earnings. But for my money, it's probably time to put Dendreon in your rearview mirror, and move on to stocks with brighter prospects. If you're looking for companies with more traction in industries that are easy to navigate, then read our latest report: "Middle-Class Millionaire-Makers: 3 Stocks Wall Street's Too Rich to Notice."
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