This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Everybody hates Dendreon
Sometimes, you just can't catch a break. But lately, it seems that "sometimes" is "always" for Dendreon (NAS: DNDN) shareholders.

Take yesterday, for example. Wednesday was a great day for investors in the health-care industry, as one after another, companies like MELA Sciences (NAS: MELA) , Jazz Pharma (NAS: JAZZ) , and Teva Pharma (NAS: TEVA) got the good news from Wall Street.

  • MELA Sciences: Initiated at "outperform" by Cowen & Co., and bouncing 17% off of its lowest price in more than six months as a result.

  • Jazz: Likewise an "outperform" rating recipient, this time from Oppenheimer, who says the stock's good for a 50% profit as it rises toward $66 a share.

  • Teva: On "hold" at Auriga pending confirmation of a "strategic vision for TEVA" by new CEO Jeremy Levin -- but nonetheless said to be "inexpensive," and likely to gain 15% over the course of the next 12 months as it moves toward a $45 price target.

But then there was Dendreon. With the stock down over 80% already over the past year, you might think someone would be ready to cut them some slack. Instead, ace analyst Jefferies & Co. initiated the company at "underperform," and warned investors to expect another 35% "downside." The analyst warns that Dendreon's bet-the-company product, Provenge, is having trouble with "commercialization" (i.e., it isn't selling), and could soon be "relegated to a niche position" (translation: It never will sell well). Adding insult to injury, Jefferies termed Dendreon's cash flows "meager" and insufficient to address the firm's $76 million net "debt overhang."

Second verse, same as the first
If all this sounds familiar, well, it should. Just last week, analysts at Maxim Group told investors to sell the stock as well, predicting a similar plunge to $5 a share. Why have Wall Street analysts been heaping scorn upon the stock?

Two reasons: First, there's an SEC investigation afoot, likely examining Provenge's launch and management's extremely bullish guidance. Some commentators argue this is old news, as management disclosed the investigation in its May 7 10-Q filing. More worrisome is the fact that Johnson & Johnson's (NYS: JNJ) rival prostate cancer drug, Zytiga, is undergoing trials to be used earlier in treatment; it appears to be highly effective and is expected to cost only $5,000 for a course of treatment ... versus $93,000 for Provenge.

The bear ... and bull cases for Dendreon
So here's the problem in a nutshell. The company's in debt already, and it's adding more debt as it burns cash. It's not profitable, and according to Dendreon's own management, it will not be profitable unless it can make $500 million in annual sales.

It's only about $100 million away from this goal, though, and growing briskly. So right now, there's a race on between Johnson & Johnson trying to broaden Zytiga's market, and Dendreon trying to win acceptance (and sales) for Provenge. When (if) Zytiga gets expanded approval, and if the price differential turns out to be true, this could stop Dendreon's growth trend in its tracks. It could literally kill the company.

On the other hand, though, if Dendreon does hit $500 million in sales soon, and if management proves true to its word and reports a profit, then what we have here, folks, is a fast-growing, profitable company selling for about 2 times its then-annual sales -- a cheaper price-to-sales ratio than you'll find at many larger, slower-growing big pharma companies (J&J included). And since Zytiga and Provenge work differently they could be used in sequence to treat patients, instead of an either/or proposition.

It could be that Wall Street is abandoning Dendreon just at the moment it's about to win the lottery.

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At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of any company named above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 321 out of more than 180,000 members.The Motley Fool owns shares of Johnson & Johnson and Dendreon.Motley Fool newsletter serviceshave recommended buying shares of Johnson & Johnson.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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