Dendreon Corp (DNDN) shares plummeted on August 4, 2011 from $35.84 to $11.69 per share following reduced guidance from management because of tepid adoption rates for the company's prostate drug Provenge. Now is not the time for Dendreon shareholders to panic and sell shares. At $40 per share, the stock was priced for immediate growth and adoption. While we pointed out that the shares were nowhere near as expensive as they appeared to be, shareholders still knew that they did not have much margin of safety owning one of the industry's highfliers.
In the quarter ending June 30, 2011, the company generated $49.6 million in sales compared to $2.8 million from the year ago period, but sales were below expectations because of reimbursement concerns among health care professionals. The concerns slack sales ultimately led the company to withdraw their $350-400 million 2011 revenue guidance and announce workforce reductions.
Still, after dropping to one fourth of the recent share price, it now looks like an interesting investment opportunity considering that the stock may have dropped based on short term factors like slower than expected initial adoption rates and broad market turmoil. For example, on the same day that DNDN dropped 67%, the S&P 500 Index declined by around 4.68%. Obviously the DNDN move was based largely on stock specific factors, but we believe that the broad market weakness contributed meaningfully to the stock sell-off.
COMPANY STILL HAS STRONG SECULAR GROWTH OPPORTUNITIES
1. President Obama's national health care subsidies will increase the number of insured Americans. This increases the potential demand for Provenge and other Dendreon drugs. According to the Commonwealth Fund, there were 52 million uninsured Americans in 2010. Under the national health care change, these individuals will likely be covered under Medicaid and private health insurance plans. While the legislation does not take effect until 2014, this is still a very positive catalyst for Dendreon. Because of the high cost of their flagship drug Provenge, they actually derive outsized benefits from this growth in health care coverage.
2. Prostate cancer cases continue to grow in this country. The American Cancer Society expects the disease to affect more than 240,000 new cases and kill 34,000 men in 2011. The company currently has a market capitalization of $1.8 billion and a price/sales of 15.33. But with a more reasonable price/sales of 5, DNDN would need to provide 3,870 treatments per year to generate the appropriate level of revenues. Once the company reaches a more normalized setting, this adoption rate seems reasonable.
3. Medicare will cover the cost of Provenge ($93,000 for treatment). This is great news for prostate cancer patients and a huge subsidy for DNDN. The Centers for Medicare & Medicaid Service issued a decision memo highlighting their belief that PROVENGE improves health outcomes for Medicare beneficiaries enough to justify coverage for the treatment. While the reimbursement concerns were greater than expected, the support from Medicare is a strong long term tailwind for the company.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DNDN over the next 72 hours. I may also sell out of the money puts in DNDN.
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