Why I'm Still Avoiding Dendreon

Investors sold the news of Dendreon's first-quarter earnings and the company's very slight year-over-year revenue growth, although the stock has more recently risen on the announcement of a Provenge abstract presentation. With $68.8 million in sales last quarter, its prostate cancer drug Provenge has fallen significantly short of the $250 million-plus in quarterly revenue that analysts predicted when Dendreon was a $30 stock.

Shares are now down to a little over $2. Furthermore, with no profitability in sight, a dwindling cash position, intense competition from Johnson & Johnson and Medivation , and the company's stock value continuing to fall, I'm comfortable avoiding this stock.

The most glaring Provenge problems
When cancer immunotherapy Provenge first launched, analysts had bullish expectations, including peak sales potential in excess of $1 billion. However, competition from the likes of Johnson & Johnson and Medivation has crippled Dendreon's fundamentals.

Johnson & Johnson is an enormous company with $18.1 billion in first-quarter sales, and is not overly dependent on any one drug. However, the success of its once-daily oral medication Zytiga for prostate cancer has definitely helped to drive its growth. In the company's last quarter, worldwide pharmaceutical sales grew 10.8% to $7.5 billion, and Zytiga's sales increased nearly 50% to $512 million.

Medivation markets Xtandi, and unlike Johnson & Johnson, the company's well-being is directly tied to the success of this one drug. Xtandi is also given in capsule form, used to treat prostate cancer in patients who have previously received docetaxel. In the first quarter, Xtandi earned $124.5 million in the U.S. and $47.8 million in foreign markets.

Of these two drugs competing against Provenge, only Zytiga is approved to treat prostate cancer patients prior to chemotherapy. Therefore, Zytiga's success can be directly tied to Provenge's trouble. Meanwhile, Medivation recently filed a request with the FDA to use Xtandi on patients who have not previously been treated with chemotherapy. This could be a big blow to Provenge, or even a knockout punch.

The manufacturing difficulty
Xtandi and Zytiga are much cheaper, and are given in pill form and thus are easier to administer than Provenge. Dendreon's product has an extensive manufacturing process that begins as a blood draw. That blood is then shipped to one of Dendreon's two manufacturing facilities -- it used to be three before Dendreon closed its large Morris Plains facility in New Jersey -- where monocytes are harvested and Provenge is created. Provenge then has to be delivered overnight back to the hospital where it cannot be stored or frozen, but rather infused back into the patient.

This expensive and complex process helps explain why the company has not yet turned a profit -- in fact, its cash burn last quarter was about $30 million. As a result, Dendreon's $155 million in cash may continue to decrease through operations and short-term liability payments. Further share dilution may be required.

Final thoughts
Some think the company's European launch of Provenge will create value and drive sales higher. However, with no partner, Dendreon will be forced to either build expensive facilities or make logistical costs even more expensive by overnight shipping across continents. I just don't see the likely benefit here, and this is a stock I would personally avoid.

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The article Why I'm Still Avoiding Dendreon originally appeared on Fool.com.

Brian Nichols owns shares of Johnson & Johnson. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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