Everyone is focused on Dendreon's (NASDAQ: DNDN ) cost-cutting measures to get the biotech to profitability. And for good reason -- in the fourth quarter of 2011, a whopping 74% of net product sales were used to manufacture its prostate cancer treatment, Provenge. It's hard to turn a profit when costs are that high.
The company is slowly working toward its goal of getting the cost down to 50% of sales; in the fourth quarter, manufacturing costs were under 64% of net sales. Selling, general, and administrative costs were also down year over year.
That's all good news for sure, but I don't think investors should forget about sales growth. You can only cut costs to a certain point; sales growth can theoretically go on forever.
Excluding adjustments for a chargeback that boosted revenue slightly, fourth-quarter Provenge sales were up 5% over the previous quarter. That's not too shabby. At that rate, Dendreon could be above its sales target of $100 million per quarter to be cash flow positive in the fourth quarter of this year.
Unfortunately, it doesn't look like we'll see that same growth in the first quarter. According to management, it's not prostate cancer treating season.
That's right -- Dendreon blamed "seasonality" on an expected slowdown in sales.
We've seen this with other drugmakers. Biogen Idec (NASDAQ: BIIB ) and Elan (UNKNOWN: ELN.DL ) blamed slower growth of their multiple sclerosis drug Tysabri on summer vacations. Edwards Lifesciences (NYSE: EW ) blamed doctors going on vacation for missing revenue guidance last year.
In Dendreon's case, the company thinks sales are light in the beginning of the year because doctors want to verify insurance, which can change at the end of the year. Doctors are on the hook to pay for the rather expensive drug and are reimbursed by the insurance companies, so it's reasonable for them to make sure they can get paid back. This isn't the first year we've seen this issue in early January, so I'm willing to give Dendreon a pass.
The problem for investors is that it's going to be hard to separate seasonality from the recent expanded FDA approval of Johnson & Johnson's (NYSE: JNJ ) Zytiga into pre-chemotherapy patients, the same prostate cancer patients that Provenge is approved to treat. We'll likely have to wait until second quarter sales numbers are released before we know if the first-quarter headwinds were temporary or a permanent issue from competition with Zytiga.
Resurgence, or dead cat bounce?
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