Dendreon Treads the Neutral Path

We are maintaining our Neutral recommendation on Dendreon Corporation (DNDN - Analyst Report) with a target price of $4.75. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

Dendreon suffered a loss (including stock-based compensation expense but excluding other special items) of 63 cents per share in the second quarter of 2012, narrower than the year-ago loss of 79 cents per share. However, loss was wider than the Zacks Consensus Estimate by 4 cents.

Revenue in the second quarter climbed 66.1% to $80 million. However, revenues were below the Zacks Consensus Estimate of $86 million. Revenues were down 2.4% sequentially. Lower-than-expected revenues were due to the disappointing performance of Provenge (sipuleucel-T), a therapeutic vaccine for treating advanced prostate cancer. We are disappointed by the sequential decline in Provenge sales in the second quarter of 2012.

We note that Provenge sales failed to live up to management as well as our expectations. Provenge’s 2011 sales of $213 million were well below the company’s original forecast of $350 million - $400 million, which was withdrawn due to the dismal performance of the vaccine.

Based on Provenge’s disappointing track record, we do not expect sales to improve significantly in the near future. We are also concerned about competition in the prostate cancer market given the presence of Johnson & Johnson’s (JNJ - Analyst Report) Zytiga and the new entrant in the form of Medivation, Inc. (MDVN - Analyst Report) and Astellas’ Xtandi.

Dendreon plans to mitigate cost through layoffs and by closing a manufacturing plant. The company plans to close down its Morris Plains, New Jersey manufacturing unit by year end. The company plans to operate through its Union City, GA and Seal Beach, CA facilities, which have a manufacturing capacity of approximately $1 billion of Provenge and can be doubled with the implementation of automation.

The company plans to reduce the number of employees by 600 (both full-time and contractual) in the next 12 months. The restructuring initiatives are expected to yield savings of approximately $150 million per year. On implementation of the plan, cost of goods sold (COGS) is also expected to decline to 50% of net product revenue as compared to 77% in the second quarter of 2012. The company expects to see the results of these initiatives from the first half of 2013.

We remain on the sidelines until we see a meaningful improvement in Provenge sales.