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.
Is it finally time to buy Dendreon?
"How long have you owned Dendreon (NASDAQ:DNDN)?" How you answer the question probably determines the answer to a second question: "How much do you hate Dendreon?" If, for example, you've owned this cancer researcher since it hit its high of $54 back in April 2010 and are sitting on a 92% loss, chances are you hate the stock quite a bit. If, on the other hand, you've owned Dendreon less than a year and suffered no worse than the stock's 52-week loss of 44%, you may only loathe it a little.
But what if you've never owned it at all? What if you were taking a look at the stock for your very first time, and deciding what to do with it -- would you consider cutting Dendreon a break, and maybe even buying a few shares?
Innocent as a newborn babe
That's the question we're asked, in effect, as we ponder Needham & Co's decision to "initiate" coverage of Dendreon's stock Monday morning. Taking a look at Dendreon with fresh eyes, Needham wonders if all the other analysts who've been following the stock for far longer just might have set their sales expectations "too low." Examining the trends, the analyst wonders if we're starting to see the first signs of an improvement in profit margins at Dendreon.
Well, have they? Well, are they?
A few months ago, Fool biotech analyst Brian Orelli took a close look at Dendreon, and here's what he found: Competition from rival oncology drugs out of Johnson & Johnson (NYSE:JNJ) and Sanofi (NYSE:SNY), with yet another rival on the horizon from Medivation (NASDAQ:MDVN), has forced Dendreon to reset expectations for future Provenge sales. While the possibility of blockbuster growth remains viable, for now the company's shuttering one plant and aiming for a more modest goal of $1 billion in annual sales.
That's not quite as much as it previously hoped to achieve, but on the bright side, Dendreon now thinks it can achieve positive cash flow, and eventually positive free cash flow, on as little as $400 million in annual sales versus the $500 million previously targeted.
Now, the good news here is that if other analysts are still fixated on the old goal -- and furthermore underestimating Dendreon's ability to move product -- then the company could surprise us and start generating cash sooner than expected. Right now, analysts are projecting $380 million in revenues at Dendreon next year, with the company topping its new $400 million objective only in 2014, then hitting its old objective of $500 million in 2015 -- and proceeding upward from there.
The better news is that Dendreon is already at $400 million annual revenues today. Fact is, total revenues for the past 12 months exceeded $440 million. This suggests that future years' revenues could be correspondingly higher, and that profits (now not expected anytime before 2017) could emerge faster than we think.
The bad news, however, is that despite hitting its new $400 million revenue target, Dendreon is still burning cash hand over fist -- $118 million in negative free cash flow over the past year. This being the case, the promise of positive cash flow at $500 million must also be in doubt. And indeed, with competition mounting faster than a Provenge patient's doctor's bill, there's not going to be any guarantee that the company gets to positive free cash flow... ever.
Whether you're an old hand at Dendreon, or one new to it like Needham*, the facts remain the same: This company isn't profitable today, and may never become so. At $400 million in revenues, $500 million, infinity, or beyond.
*Interesting bit of trivia by the way: Fact is, while Needham says it "initiated" coverage of Dendreon just this morning, in fact, our record on Motley Fool CAPS confirms that the analyst also recommended it once before, back in 2009. And Needham was wrong about Dendreon then, too, underperforming the S&P 500 by 18 percentage points before throwing in the towel.
You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 276 out of more than 180,000 members. (For the record, Needham's CAPS rank is No. 10,340).
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.