Dendreon Earnings: Initial Reaction

Here are some quick initial thoughts on Dendreon's (Nasdaq: DNDN  ) third-quarter results announced this morning. Expect further analysis later in the day and over the weekend.  

The good
We actually have some good news, so that's a nice change of pace from the past couple of quarters. CEO John Johnson is successfully restructuring the company to bring its costs in line. The New Jersey plant will be completely closed by the end of the year, reducing cost of goods sold to below 50%. We can already see some early headway, as net loss was not as bad a feared, only $0.33 versus an expected $0.82. 

Also the critical trial testing Provenge with Johnson & Johnson's (NYSE: JNJ  ) Zytiga has completed enrollment with results due in the first half of 2013, and while widely assumed, the company has began putting together a similar trial with Medivation's (Nasdaq: MDVN  ) Xtandi. If Provenge, which has a different method of action, can prove itself as a complementary therapy, it can carve out a successful niche in the market.

Finally, the revamped sales force seems to be hitting the ground running after heavy turnover was blamed for last quarter's poor results. Dendreon added 54 accounts and saw a 14% increase in Provenge orders from urologists, while at the same time arresting last quarter's 8% decline from oncologists. 

The bad
Unfortunately, the gains made among community doctors couldn't offset the 25% use in academic institutions, resulting in a second sequential decline of revenue down to $78 million. It's wonderful that the restructuring is going smoothly and should bring about the expected positive changes, including a lower breakeven of $400 million in annual sales. But investors are missing the bigger picture. At this rate, the company will never hit $100 million in quarterly revenue. Sales have declined for two straight quarters now. Has Provenge hit an inflection point and the $82 million sold in the first quarter is the high water mark?

The bottom line
I honestly don't know why shares are up more than 20%.  Without positive results from the trial with Zytiga -- or perhaps more importantly for the long-term future of the company -- the trial using Provenge in sequence with Xtandi, doctors may not be seeing enough benefit to justify the cost. Keep in mind that Dendreon has been good about getting market penetration, now 741 infusing accounts, but we are seeing the sales per account dry up quarter after quarter. European approval could provide a boost, but given Europe's strict cost-benefit analysis, skepticism over meaningful sales abounds.

Dendreon's past releases have been train wrecks, so by comparison this is more of a fender-bender, but it doesn't change the fact that the vehicle is damaged. Positive trends or not, whether Dendreon will ever run right is still up in the air.

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David Williamson owns shares of Johnson & Johnson. The Motley Fool owns shares of Dendreon and Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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