Is Dendreon a Turnaround Candidate?

In less than a year and a half, Dendreon (NAS: DNDN) has gone from blockbuster potential to potential turnaround candidate in the wake of a slower-than-expected start for the launch of its prostate cancer treatment Provenge.

Last week, the company announced layoffs, as expected, to lower the cash burn rate. Provenge is produced specifically for each patient, so if Dendreon is selling less than expected, there's manufacturing personnel sitting on their hands with nothing to do. Dendreon is also cutting administrative jobs. Basically, anything that doesn't increase sales directly was affected. All told, it's a 25% reduction in head count.

The company is changing its strategy in Europe. Rather than using a contract manufacturer and then transferring to its own facility once it's built, the plan is now to continue using a contract manufacturer for the foreseeable future.

All told, the restructuring should result in saving $120 million annually. With the new cost structure, the biotech thinks it'll be cash-flow breakeven at $500 million in revenue. There was no word on when Dendreon thought this might happen, though management said the goal was to be cash-flow positive before the company would run out of cash and have to dilute shareholders. Again.

Dendreon is still guiding for modest quarter-over-quarter growth for the rest of the year, but the company released August sales numbers that looked pretty good to me: $22 million, or a 16% increase over July. That's only a run rate of $250 million or so -- a far cry from the $800 million it was hoping to end the year with -- but if sales continue to increase at that rate, it won't take too long to reach the magic $500 million mark.

Whether Dendreon is a good turnaround candidate is solely based on whether the company is correct that reimbursement for doctors is why prescriptions are slow, or whether there's a bigger issue. Management said doctors are being paid in about 30 days, a considerable improvement, but it may take a few rounds of timely reimbursement before they increase their prescription habits.

If reimbursement isn't the issue, then Dendreon has much bigger problems. If the market isn't as big as expected or if competition from Johnson & Johnson's (NYS: JNJ) Zytiga or Sanofi's (NYS: SNY) Jevtana is creeping in, cutting $120 million isn't going to solve its problem.

As with any turnaround target, only time will tell which theory is correct. Add Dendreon to the Fool's watchlist service to keep up to date with the turnaround. Don't have My Watchlist account? Sign up here for free.

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At the time thisarticle was published

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