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Dendreon Corporation (DNDN - Analyst Report), which is currently going through a rough patch, tried a hand at improving its financial position. This time, Dendreon has entered into a deal to sell its royalty interest in Merck, Inc.’s (MRK - Analyst Report) hepatitis C product Victrelis. Dendreon acquired the intellectual property rights to Victrelis in July 2003 from Merck and co-developer Corvas International, Inc.

The Victrelis royalty rights were bought by CPPIB Credit Investments Inc., a wholly owned subsidiary of CPP Investment Board (CPPIB), for $125 million in cash. CPPIB is a professional investment management organization which manages funds for the Canada Pension Plan. The deal is expected to close by the end of this year.

We believe that the sale of this royalty interest will strengthen Dendreon’s cash position which is currently struggling from a dismal performance of its prostate cancer vaccine, Provenge. In a similar drive to bolster its finances, Dendreon announced in September this year that it will lay off almost a quarter of its workforce as part of a drastic restructuring plan. The plan was announced to reduce spending to cope with disappointing Provenge sales.

Victrelis is approved for the treatment of chronic hepatitis C (CHC) who are previously untreated or who have failed previous interferon and ribavirin therapy. Victrelis is the first in a new class of medicines known as hepatitis C virus (HCV) protease inhibitors to gain approval. Victrelis is approved in the US, EU and Brazil. Merck has an agreement with Roche (RHHBY - Analyst Report) for the global marketing of Victrelis as part of a triple combination therapy.

Our Recommendation

We currently have a Neutral recommendation on Dendreon. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

The successful commercialization of Provenge is crucial for the financial performance of Dendreon as it can drive the company to profitability. Though we still have faith in the long-term prospects of Provenge, the drug has so far failed to live up to expectations, clouding our visibility for the next few quarters. We believe the stock will remain range bound for some time and prefer to remain on the sidelines until visibility on Provenge’s performance improves. Moreover, in the long run, we remain concerned about the company’s dependence on Provenge and the lack of a decent pipeline. We believe Dendreon has little to fall back on if Provenge falls short of expectations. We also remain cautious on the continuous up tick in operating expenses, particularly in the light of Provenge’s weak performance.

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