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Everyone seems to be focused on Dendreon's (Nasdaq: DNDN ) continued guidance of "modest quarter-over-quarter growth" for its prostate cancer treatment, Provenge. We still don't have a firm definition of what management means, but based on yesterday's conference call, at least we know it's somewhere between 0% and the almost 30% growth we saw in the third quarter. Not too helpful.
The number investors really should be focused on is $106 million. That's the amount of cash the company burned through last quarter. With only $568 million, the runway is getting shorter.
Cost of goods seems to be the main culprit for the cash burn. With three manufacturing facilities up and running at less than full capacity, Dendreon's gross profit margin -- a measly 14% -- looks more like a discount retailer than a brand-name drugmaker. By comparison, here are the gross margins of a few companies with recent drug launches.
Most Recent Calendar Quarter Reported
|Vertex Pharmaceuticals (Nasdaq: VRTX )||Q3 2011||94.2%|
|Acorda Therapeutics (Nasdaq: ACOR )||Q2 2011||81.5%|
|AVANIR Pharmaceuticals (Nasdaq: AVNR )||Q2 2011||95.2%|
|Human Genome Sciences (Nasdaq: HGSI )||Q3 2011||59.7%*|
Source: S&P Capital IQ.
*Gross margin on Benlysta sales only.
The good news is that there are a lot of fixed costs in Dendreon's number because of the way Provenge is made individually for each patient. As the company increases sales, it should be able to dramatically increase gross margins.
Dendreon has said it needs sales of around $500 million annually to be cash flow positive, and it's currently at a run rate of about $250 million. To get there in five quarters -- the amount of cash left on hand -- it would need quarter-over-quarter growth of about 15%, which seems reasonable to me but may or may not be management's definition of "modest."
Of course, it doesn't really need to get to $500 million that quickly because the burn rate will go down as the sales ramp up.
Long-term investors don't really need to worry about the haircut the stock got today or the definition of "modest quarter-over-quarter growth." As long as the company can get to cash flow positive, the long-term returns will be based on Provenge's peak sales.