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Is Dendreon Back on Solid Ground?

Prostate cancer is one of the most common forms of cancer. It affects millions of men worldwide and costs billions to treat. This year alone, some 192,000 new cases will be diagnosed, and between 2010 and 2020, Americans' spending on prostate cancer treatment is expected to surge from $12 billion a year to as much as $19 billion. 

For that reason, investors had high hopes for Dendreon (NASDAQOTH: DNDNQ  ) when it won FDA approval for Provenge, a unique immunotherapy drug for treating the cancer, in 2010.

Unfortunately, overly optimistic assumptions saddled Dendreon with profit-busting expenses that have derailed the company's attempts to translate Provenge sales into earnings. That's prompted a major restructuring, so let's look closer at the quarter and see if Dendreon's outlook is improving.

DNDN Chart

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Struggling for identity
There are many approved treatments for prostate cancer, including newer therapies from Johnson & Johnson (NYSE: JNJ  ) , which markets Zytiga, and Medivation (NASDAQ: MDVN  ) and Astellas, which market Xtandi.

As a result, Provenge -- and its $93,000 price tag -- have had a tough time carving out significant market share.

Despite posting solid results in trials showing that patients receiving Provenge enjoyed a 4.1 month improvement in overall survival, sales have been sliding.

Dendreon sold just $284 million worth of Provenge in 2013, down from $325 million in 2012. At the same time, sales of Johnson's Zytiga grew from $961 million to $1.7 billion, and sales of Medivation and Astellas' Xtandi advanced from $72 million to $393 million in the United States.

That disparity has been discouraging to investors, particularly in light of Dendreon's expenses. But there are signs of improvement, albeit tepid, in the first-quarter results.

Sales of Provenge posted their first year-over-year growth since Zytiga and Xtandi were approved, moving up slightly from $67.6 million last year to $68.8 million in the first quarter.

And Dendreon took a big step toward getting those pesky expenses in check, too. Operating expenses fell from $126 million a year ago, to $92 million in the quarter. That lowered the company's quarterly operating loss from $58 million last year to $23 million this year, and cut Dendreon's loss in terms of EPS in half, to -$0.24 per share.

But the expense reduction did little to stem the bleeding in the company's balance sheet. Cash and investments fell from $199 in December to $170 million exiting March.

Fool-worthy final thoughts
Dendreon's path isn't going to get any easier. New products are making their way through pipelines that could thwart its path back to growth, and Dendreon continues to face stiff competition from Zytiga, which is already approved as a treatment for pre-chemo metastatic patients, and Xtandi, which is expected to win a similar approval in September. To blunt those threats, Dendreon is trying to shift the market to embrace using Zytiga and Xtandi alongside of, rather than instead of, Provenge.

If it can sway doctors to do that, it would go a long way in shoring up sales, but profit remains a major challenge. The C-suite remains optimistic that cost cutting and automation can eventually reduce their cost of goods sold from north of 50% today into the 30% range over time. But that's a bold goal, and a lot of moving pieces will need to fall together nicely (especially in terms of automation) to achieve it. As a result, the company thinks it could be years before they get there. That suggests investors should remain in wait-and-see mode until the company can prove that it can indeed make money.

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Todd Campbell

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

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