Since Dendreon (NASDAQ: DNDN) reported its second-quarter earnings, the stock has declined 40%. Following the quarter, analysts from Wedbush and Deutsche Bank issued price targets of $0 and $1, respectively -- but which is right, and what went wrong for this company?
Cause and effect
Last year, Dendreon announced that it was closing its largest manufacturing facility in Morris Plains, N.J., and was reducing its headcount by 600 people.
With these changes, the company disclosed that it could generate positive cash flow with $400 million in annual revenue. Prior to the closing of Morris Plains, $600 million in sales was needed before the company could generate positive cash flow.
The problem is that sales of its prostate cancer drug Provenge produced year-over-year declines the last two quarters. In addition, the company has essentially abandoned any notion that significant growth could occur in the second half of 2013, via its second quarter conference call.
Currently, with trailing 12 months sales of $311 million, Dendreon is a long way from reaching positive cash flow, and at this point, there are few reasons to believe that they ever will.
The inevitable fall from grace
The situation surrounding Dendreon is a tough pill to swallow, as Provenge must be one of the most hyped flops of the last 15 years. Just 30 months ago, Dendreon was trading at more than $40 a share, and today we're talking about $0 and $1 price targets!
So, what went wrong? Of course, some of Dendreon's failure comes from executive decisions, but a large part is due to Provenge itself.
Depending on whom you ask, Provenge's overall survival benefit varies. Some Dendreon bears will find subgroups of data and claim that Provenge extends life by a year, but its median survival is in fact 4.1 months. For 4.1 months of additional life, patients pay $94,000 per month for three treatments. This combination of benefit versus high cost has undoubtedly affected the company's success.
Then, there's Dendreon's non-existent pipeline and its commitment to place all of its eggs in the Provenge basket. Immediately, some Dendreon investors will say that an argument against a one-drug company is flawed, and they will point to Questcor Pharmaceuticals (NASDAQ: QCOR) or an Ariad Pharmaceuticals as proof.
In regards to Ariad, the jury is still out, as its leukemia drug Iclusig was just launched earlier this year. Therefore, it is hard to say whether it will be a success or failure. In the case of Questcor Pharmaceuticals, the company bought its only product, Acthar Gel -- a product that treats several rare diseases -- for just $100,000. Dendreon has racked up an accumulated deficit of $2 billion and debt of $600 million in the development of Provenge.
Questcor constantly develops Acthar, expanding its usage, and over time, has increased the price of Acthar from just $50 to over $28,000 a vial, due to additional orphan indications. Dendreon's Provenge is limited in treatment potential, targeting a protein that is highly expressed in prostate cancer but not many other forms of the disease.
Questcor is a great company with 60% revenue growth and an operating margin of 55%. Dendreon's revenue is declining roughly 10% over the last year, and its operating margin is negative 76%. Clearly, these are two entirely different companies, as Acthar is relatively cheap to produce, while Provenge is not. Thus, Questcor's one-product approach is supported by Acthar's success.
Lastly, the icing on the Dendreon cake is its manufacturing woes and why the outlook for Dendreon should have always been sketchy. Creating Provenge is an expensive process that requires the patient's own blood and must be made in single doses that can't be stored. This requires multiple trips by patients to receive treatment and keeps Dendreon from achieving the excellent margins seen on most cancer drugs.
Recap
I don't see any reason to be optimistic about Provenge or Dendreon. We're talking about a company with an obscene amount of debt and obligations with a poor pipeline and no end in sight for their ongoing cash drain.
Instead, if looking for an immunotherapy company, I prefer Celldex Therapeutics (CLDX 0.83%), a company with a large pipeline including two late-stage products to treat advanced breast and brain cancer. The company has no debt, and has released positive data on all of its clinical programs. Thus, Celldex's likelihood of becoming the next Dendreon is rare, due to the diversity in which Celldex has developed its pipeline, not relying on one cancer drug.
With that said, I'm skeptical of Provenge's value for investors. The company can only cut costs so far, meaning investors must then seek value in Dendreon's pipeline. But with no near-term pipeline catalyst, no profitability, and a need for cash Wedbush's $0 price target may be the ultimate outcome for Dendreon.
Editor's note: An earlier version of this article incorrectly summarized the process of creating and administering Provenge. The Fool regrets the error.
