by James Brumley | January 18, 2013 11:19 am
In early 2010, Dendreon (NASDAQ:DNDN) was unstoppable. The biotech company’s lead drug candidate — Provenge — was en route to an April 29 approval, ushering in the era of cancer-fighting immunotherapy. Shares of DNDN had rallied from early-2009’s lows of under $3 to a peak of $57.67 shortly after the Food & Drug Administration gave the prostate cancer treatment the green light.
And why wouldn’t investors be excited enough to bid the stock up nearly 2,000% in a little over a year? After all, Provenge was a game-changer.
Yeah, well, that was the theory anyway. In reality, Provenge’s highly lauded approval was also the beginning of the end for the stock. DNDN never moved a dollar higher than the peak price it hit immediately after news of the approval was posted. In fact, it ended up losing 93% of its value following the approval, with new multi-year lows being hit just this past October.
Hopeful investors are understandably at (if not past) the point of losing hope. But now’s the exact wrong time to do so.
It’s a story we’ve seen too many times: A biotech stock goes ballistic on the promise of a key drug approval, but once the FDA gives it the green light, the stock hits a wall. Why? Because there’s nothing left to talk about … including sales of the drug.
Yes, like nearly every other new drug since the invention of aspirin, Dendreon’s Provenge didn’t fly off the shelves beginning the day after its approval. Why not? Though traders loved the idea and promise of a cancer immunotherapy, the medical community — prescribing doctors — is slower to embrace new ideas.
After Provenge production began in mid-2010, Dendreon sold only $48 million worth that year. No need to worry yet, since it can take a while to get the sales force, the market, the manufacturing process and the medical community on the same page. In early 2011, Dendreon projected sales of Provenge would reach $400 million that year, a figure more acceptable for a company then valued at $5.2 billion.
But it wasn’t to be. Dendreon sold only $228 million worth of Provenge in 2011 (though at least partially because doctors were concerned they wouldn’t be reimbursed). Its market cap was whittled down to $1.15 billion.
Surely, 2012 would be Provenge’s breakout year, right? Well, it sure wasn’t through the third quarter. Dendreon’s drug revenue reached a tally of about $240 million for the first three quarters of last year. Another $80 million worth of Provenge sales for the fourth quarter would get the company up to a top line of only $360 million for the whole year — another letdown. In that light, the stock’s 30% dip during 2012 makes a lot of sense.
After three years of results that never even came close to reaching the lofty dreams of 2010, disgusted investors had enough.
It’s a maddening irony, but now that Dendreon has a reputation for doling out disappointment, it’s actually starting to dole out encouraging news.
Take the stock’s price. The three-year implosion has finally whittled it down to something that makes more sense for a company doing around $360 million in annual sales. At last look, Dendreon is a $972 million enterprise, translating into a rather typical price/sales ratio of 2.25.
Simultaneously, we’re seeing a measurable increase in Provenge sales. Revenue cranked up from $228 million in 2011 to what will be something close to $240 million for last year. There’s no forecast for 2013 yet, but it’s unlikely Dendreon would sell less of it.
That’s not to say 2012’s 5% improvement in sales was red hot. It wasn’t. But Dendreon has a couple of catalysts on the horizon that could truly light a fire under the stock.
One of them is a possible approval of Provenge in Europe. The final decision should be announced sometime in the middle of the year. Given its OK in the U.S., however, the odds favor a European approval, too.
Bigger still is the fact that the medical community is warming up to cancer immunotherapy. Remember, Provenge was a cutting-edge idea at the time. Although other biotech companies are developing cancer immunotherapies, Dendreon was the first to get one of these treatments on the market. Since then, a handful more have been approved, like Yervoy, BCG, and aldesleukin. Doctors are slowly but progressively embracing these drugs, after witnessing that they can be effective.
The clincher is the reasonable possibility that Dendreon is an acquisition target.
No suitors have expressed any clear interest yet — at least not publicly. But the company could make for a win-win situation for plenty of potential buyers. Dendreon’s R&D platform is good, and scooping up the sub-$1 billion company would be a cheap way for a bigger pharma name to bring that biotechnology in-house.
At the same time, a higher-profile brand name on Provenge may well give the drug the credibility it needs with more traditional doctors. In turn, sales growth could accelerate beyond the current 5% clip.
Bottom line? Last year’s low for DNDN was the proverbial “darkest before dawn.” The rally effort since then is the daybreak.
As of this writing, James Brumley didn’t own any securities mentioned here.
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