Dendreon Remains Neutral

We have maintained our Neutral recommendation on Dendreon Corporation (DNDN) with a target price of $39.00 following the announcement of fourth quarter and full year 2010 financial results.

Dendreon’s fourth quarter 2010 loss of 61 cents per share (excluding loss on debt conversion) was wider than the Zacks Consensus Estimate of a loss of 48 cents per share and the year-ago loss of 31 cents per share (excluding gain for warrant revaluation). On a reported basis (including special items), the company lost 64 cents per share in the fourth quarter as against a loss of 28 cents per share in the year-ago quarter. The wider loss was attributable to higher operating expenses as the company is working on expanding its facilities to market Provenge.

Dendreon’s lead product is prostate cancer vaccine Provenge. It is the first product in a new therapeutic class known as active cellular immunotherapies. Provenge boosted survival rates in men with advanced prostate cancer beyond any currently available treatments in clinical trials. We believe Provenge is capable of changing the paradigm of cancer care dramatically. Provenge is critical for the financial performance of the company as the product has blockbuster potential and its successful commercialization should drive a company of Dendreon’s size to profitability. Provenge revenues have been increasing steadily month after month since its launch in May 2010.

Dendreon is working towards expanding its manufacturing facilities for Provenge. Dendreon plans to construct new facilities in Atlanta, Georgia and Orange County, California and build out the remaining capacity (75%) at its facility in Morris Plains, New Jersey (NJ), for which it recently received FDA clearance in March 2011. The NJ facility was until now operating at 25% capacity with 12 workstations. It can now be fully operational with 48 workstations. We believe the approval will significantly increase the availability of Provenge which will help Dendreon to meet pent up demand for the vaccine. The facilities at Atlanta and California are also expected to start producing commercial material by mid-2011. Hence, the company expects capacity to increase ten folds during 2011.

The company has not taken any steps until now to create demand for Provenge due to its limited supply. However, with Dendreon aiming to bring additional capacity online this year, the company is actively ramping up sales force, marketing, and medical education initiatives and hopes to have a good distribution system across the US by 2011 to be able to serve patients well.

Recently, the Centers for Medicare & Medicaid Services (CMS) issued a draft guidance memo proposing to pay for Provenge. CMS will, however, give its final decision on the matter in June 2011. We believe the proposed decision memo removes a major overhang for Dendreon and could lead to Medicare reimbursement in 2011. Reimbursement of the vaccine by Medicare is crucial for the commercial success of Provenge as it is primarily meant for men older than 60 who are dependent on Medicare for their treatment.

Our biggest concern for Dendreon is its dependence on a single product, Provenge, for revenues. The company does not have a robust pipeline with none of its candidates likely to hit the market in the near future. Consequently, if Provenge’s performance lags expectations, the company will have little to fall back on. Moreover, products like AstraZeneca’s (AZN) oral pill zibotentan, Johnson and Johnson’s (JNJ) oral abiraterone and Medivation Inc’s (MDVN) MDV3100 are currently under development for treatment of prostate cancer. These could pose competition to Provenge and negatively impact its future sales. Apart from that, the continuous up tick in operating expenses resulting from the commercialization efforts for Provenge, regulatory affairs and capacity build-out also keeps us on the sidelines.

DENDREON CORP (DNDN): Free Stock Analysis Report

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