Dendreon (Nasdaq: DNDN ) has new management in place, but they're sticking with the same guidance of "modest" quarter-over-quarter growth of the biotech's prostate cancer treatment, Provenge. It's unreasonable for investors to think John Johnson and his new crew could turn things around quickly, but investors should keep a close eye on the biotech.
The company has two goals: raise revenue and decrease gross margins -- so basically the same as your typical company that isn't involved in drug development. Most biotechs are only worried about increasing sales because the margins are already plenty high; they have to make up for all the research and development dollars used to create the medicines.
Provenge is different because it's tailor-made for each patient. The company had to build three plants to service the U.S., and if they're not running at full capacity -- they're not -- there are a lot of fixed labor costs that eat into the bottom line.
Dendreon is working on a few things to increase gross margins -- refining the manufacturing processes, an electronic tracking system, and automation for manufacturing and testing the individualized product -- but the biggest near-term gains in gross margins will come from increasing revenue. When Provenge hits $500 million in annual sales, Dendreon thinks it'll be at 50% gross margins, up substantially from the 27% in the first quarter, which will make the company cash flow-positive on U.S. sales.
When it'll hit that milestone is anyone's guess; management certainly isn't saying. At the modest 6.5% quarter-over-quarter growth rate Dendreon recorded in the first quarter, it'll take seven more quarters to get to a run rate of $500 million in annual sales. With impending competition from Johnson & Johnson's (NYSE: JNJ ) Zytiga, Medivation's (Nasdaq: MDVN ) MDV3100, Sanofi's (NYSE: SNY ) Jevtana, Exelixis' (Nasdaq: EXEL ) cabozantinib, and others, I don't think investors are willing to wait that long.
Management claims prostate cancer treatment isn't an either/or issue and Provenge will be used sequentially with the other drugs. Proving it with accelerating sales beyond "modest" growth would certainly help investors buy into the theory.