Can an EU Approval Save This Dying Biotech?

Dendreon (NASDAQ: DNDN) is one of the most well-known cautionary tales of hype and broken promises in the biotech industry. In April 2010, the stock hit an all-time high of $54 per share after the company's prostate cancer drug Provenge was approved by the Food and Drug Administration. Yet two key problems broke the stock: high cost and questionable efficacy.

Provenge's hefty price tag of $93,000 for a three-dose treatment scared away patients and insurers, and an investigation last October claims that the final clinical test for Provenge prior to FDA approval was flawed. Suddenly, the drug was no longer worth billions, but merely millions, and shares fell more than 90%.

A glimmer of hope in Europe
Although Dendreon's problems are well known, the stock rallied on Tuesday after the company announced that Provenge had been approved in the European Union. Is this the shot in the arm Dendreon needs to generate higher revenue, or is it simply too little, too late?

If anything, the positive phase three studies that concluded in Europe involving 737 patients could reduce doubts about the validity of its final clinical studies in the United States. Beyond that, however, the approval doesn't address the real problems facing Dendreon -- pricing, efficiency, and rising competition.

Understanding Provenge's lack of appeal
Johnson & Johnson (JNJ -1.15%) and Medivation (MDVN) are two of the biggest threats to Dendreon. Johnson & Johnson manufactures leading prostate cancer treatment Zytiga, while Medivation and its Japanese partner, Astellas Pharma (ALPMY 0.74%), produce the newer treatment Xtandi.

To understand why Zytiga and Xtandi are major problems for Dendreon's Provenge, simply compare the pricing and efficacy of these three prostate cancer drugs.

Sources: Forbes.com, NYTimes.com, Xtandihcp.com, and company websites.

Both Zytiga and Xtandi can extend a patient's life longer than Provenge, although Xtandi is the most effective at the lowest price. In addition, both Zytiga and Xtandi are orally administered, compared to Provenge, which must be administered intravenously for 60 minutes.

Patients and doctors also favor Zytiga and Xtandi over Provenge, as seen with recent sales figures. Both Zytiga and Xtandi are also approved in Europe.

Sources: Company websites.

As Provenge declines, sales of Zytiga and Xtandi are climbing. Xtandi's sales growth right out of the gate is the most encouraging of all, already exceeding Provenge sales.

Zytiga, on the other hand, could face generic competition by 2016, which prompted Johnson & Johnson to acquire Aragon Pharmaceuticals in June for its experimental prostate cancer drugs. Aragon's ARN-509 is a key product, since it can treat patients whose cancer hasn't spread to other parts of the body, or nonmetastatic, as well as patients whose cancer has already spread.

By comparison, Zytiga, Xtandi, and Provenge are only approved to treat patients with metastatic prostate cancer. ARN-509 will have U.S. marketing exclusivity until 2028, which could offset the eventual decline of Johnson & Johnson's Zytiga sales.

Does Dendreon need a miracle?
Dendreon originally had a target of $325 million in Provenge sales for fiscal 2013, which would have matched last year's sales. However, Provenge sales only came in at $141 million for the first half of the year -- meaning that Dendreon would need to come up with $184 million in sales in the third and fourth quarters to hit that target.

Considering that sales have been declining, it's unlikely that Provenge will post higher sales in the second half of the year, although the recent EU approval could provide a slight boost. Therefore, Dendreon warned that it would miss full-year sales targets last month during its second-quarter earnings conference call, causing shares to fall even further.

In addition, Dendreon faces $545 million in convertible debt due in 2016 -- an unpleasant situation for a company that finished last quarter with only $280.6 million in cash and equivalents.

Besides Provenge, Dendreon has some interesting treatments in its pipeline such as an immunotherapy treatment for breast, lung, and colon cancer, and a small-molecule treatment for lung cancer. However, these treatments are still in the early stages of clinical trials and are irrelevant to the company's current predicament.

The Foolish takeaway
I believe the story of Dendreon is one that should be told to all investors. It is a tale of a company pinning all of its hopes and dreams on a single product, riding high on Wall Street hype and euphoria, and ultimately going down in flames after being taken down by superior rivals.

Therefore, investors shouldn't read too much into the rally regarding Provenge's European approval, as it answers absolutely nothing about Dendreon's future.