If You Can't Beat Them, Cut Costs Until You're Profitable

Dendreon (NASDAQ: DNDN  ) had a goal of becoming cash-flow breakeven for its U.S. operations at $500 million in annual sales of its prostate cancer treatment, Provenge.

Then it cut costs, and said it could break even when sales were at $400 million per year.

Now, even that reduced goal seems unattainable in the near future. Seeing the writing on the wall -- or should we say, the competition passing it by -- Dendreon decided that further cuts were required to get to breakeven. The biotech is cutting 20% of its workforce, and $50 million in non-people costs, to achieve a $125 million reduction in its cash burn next year based on this year's run rate.

Management wasn't willing to give a new revenue requirement to become cash flow breakeven. Based on the savings of $125 million and the old guidance, it would seem that sales would only have to hit $275 million to break even. In reality, the actual number is likely higher because Dendreon was already counting on some of the savings to be breakeven. The "$125 million in cash operating expenses from the Company's 2013 run rate" is a little misleading because the 2013 run rate includes the first and second quarter when expenses were higher.

If you can't beat 'em, join 'em
There's no doubt that competition from new prostate cancer drugs -- Johnson & Johnson's (NYSE: JNJ  ) Zytiga, and Medivation  (NASDAQ: MDVN  ) and Astellas' Xtandi -- has caused sales of Provenge to grow slower than expected; sales were actually down 13% year over year in the third quarter. It's hard to tell from the clinical trial data if they're actually that much more effective than Provenge, but Dendreon's drug is more complicated to administer than Zytiga and Xtandi, which are taken orally.

Rather than try and compete with Johnson & Johnson, Medivation, and Astellas, Dendreon's plan is to convince doctors to use both. A trial sequencing Zytiga with Provenge is fully enrolled, and one with Xtanti and Provenge was recently started. If those trials can show a benefit to using Provenge and its competition, it's possible Dendreon could accelerate sales.

Survival mode
But Dendreon has to survive until then. At the end of the third quarter, Dendreon only had $233 million in the bank. Burning $47 million per quarter, like Dendreon did in the third quarter, isn't sustainable. Cutting costs was the only option.

Dendreon also has debt that has to be paid in a couple of years. At this point, it seems unlikely that it'll be able to pay it with profits, so refinancing, or potentially finding a buyer for the whole company -- debt included -- seem like the only options. Management is considering its choices, and plans to update investors on its next quarterly conference call.

The opposite of cost cutting
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