Bleak Outlook for Dendreon's Provenge

Dendreon Corporation (DNDN - Analyst Report) reported fourth-quarter 2011 earnings (including stock-based compensation expense but excluding other special items) of 37 cents per share, in contrast to the Zacks Consensus Estimate loss of 31 cents and year-ago loss of 60 cents per share.

Full-year loss of $1.68 per share (excluding special items but including stock-based compensation expense) were narrower than the Zacks Consensus Estimate of a loss of $2.83 and the year-ago loss of $3.07 per share.

Total revenue in the reported quarter climbed to $202.1 million from $25.0 million in the comparable quarter of 2010. We note, however, that revenue in the reported quarter included one time royalty revenue of $125 million related to sale of its royalty interest in Merck, Inc.’s (MRK - Analyst Report) hepatitis C product Victrelis.

Excluding this one-time revenue, Dendreon recorded revenues of $77 million. The Zacks Consensus Estimate was at $113 million. Full-year revenues at $341.6 million were above the year-ago revenues of $48.1 million. The Zacks Consensus full-year estimate was at $259 million.

Quarter in Details

Dendreon reported net Provenge revenue of $77.0 million in the fourth quarter up from $25.0 million in the comparable quarter of 2010. However, we note that earlier on January 5, 2012, during pre-announcement of fourth quarter results, management declared gross product revenue of approximately $82 million.

Research & development (R&D) expenses were $18 million, reflecting a year-over-year increase of 50%. Selling, general & administrative (SG&A) expenses for the fourth quarter decreased 11.3% to $76 million.

Provenge Update

For the full year 2011, Dendreon reported net Provenge revenue of $214 million. Full-year sales of Provenge was, however, well below the company’s original forecast, in a band of $350 million – $400 million, which was withdrawn last year on dismal performance of the vaccine.

Despite a favorable reimbursement environment for the vaccine, Dendreon faced tough times in 2011 as Provenge sales failed to live up to the expectations of the management and the investors. Provenge’s high cost density had been eluding physician acceptance of the vaccine. Other problems which were affecting the sales of the vaccine included lack of easy access to Provenge and inability on the part of physicians to identify eligible patients for Provenge treatment.

According to management awareness gradually improves on the favorable reimbursement environment. The physicians are more comfortable with prescribing Provenge as the average time to payment for physicians has come down to less than 30 days.

Moreover, management pointed out that out of pocket expenses were negligible for almost 75% of the patients on Provenge treatment. Dendreon reported that the number of centers where patients can be treated with Provenge increased from 425 at the end of the third quarter 2011 to 590 centers at the end of 2011. So far, the company has added another 80 sites in 2012.

Management announced that the European Medicines Agency (EMA) accepted the marketing authorization application (MAA) for Provenge, submitted by the company in January 2012.

Outlook

Dendreon expects to post modest quarter-over-quarter growth in 2012.

In the first quarter 2012 the company expects to see moderate single digit growth in Provenge sales. The company said the there was some pull through of January sales in December, of approximately $2 million to $3 million, as patients want have their treatment completed by the year end holidays.

The company expects to achieve cash breakeven at $125 million net revenue each quarter or annual net revenue to be $500 million. At this level of net revenues, the company expects to reduce the cost of goods sold to 50% from the current 70% range. The company expects to reduce cost of goods sold further to 20% – 30% by 2014.

The company expects 2012 R&D expenses to be approximately $100 million. The expenses are expected to be higher in the first two quarters than later in the year. Fourth quarter R&D expenditure is expected to be around $20 million.

In 2012, SG&A expenses are expected to decrease throughout the year, primarily as a result of a reduction in non-cash deferred compensation. Fourth quarter SG&A expenses are expected to be around $70 million.

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 are concerned about the expected discouraging growth of Provenge in the first quarter 2012 and prefer to remain on the sidelines until we get better visibility on whether the improvement in Provenge’s sales is sustainable.

We are also concerned about the competition faced by Provenge from Johnson & Johnson (JNJ - Analyst Report) Zytiga which was launched in the second quarter of 2011 and is doing reasonably well. Moreover, Medivation’s (MDVN - Analyst Report) pipeline candidate, MDV3100, generated positive data in the beginning of 2012 which showed that the AFFIRM study met all the primary and secondary endpoints with statistical significance. MDV3100, if approved, could pose stiff competition to Provenge.

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 further belies expectations.