The Dendreon (NASDAQOTH:DNDNQ) bear argument typically revolves around the drug's disappointing sales performance to date, and the competition it's facing in the future. However, one aspect of the bull argument today has nothing to do with sales -- and everything to do with costs.
When revenue growth is hard to come by, taking a hard look at costs is a necessary evil. The company's done just that by right-sizing its manufacturing footprint in order to lower the sales hurdle needed to achieve profitability. A look at Dendreon's current quarter financial sheds light on the opportunity presented by reducing manufacturing costs to below 50% of product sales, a goal it hopes to achieve by the third quarter of 2013.
Even if sales were to remain at current levels, reducing manufacturing costs to 50% would amount to about $13 million in quarterly savings, or about $50 million a year from current levels of about 66% of sales today. Unfortunately, even after achieving that level of cost savings, the company would have a long way to go before breaking even on a cash flow basis, let alone on GAAP earnings.
Even then, investors need to consider the more than $500 million in convertible debt sitting on Dendreon's books. In 2016, the time comes to repay those lenders, and in the absence of some amazing revenue growth the funds are likely to come through a secondary offering.
Editors Note: A previous version of this article contained a video suggesting that Dendreon could become profitable by cutting manufacturing costs to 50% of product sales. We discovered an error in this analysis, and have removed the video as a result. The Fool regrets the error.