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Author: TMFGebinr Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
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Subject: When do you add to a turnaround? Date: 8/10/2012 11:56 AM
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Hi everyone,

Well, I've finally had a chance to read through Dendreon's Q2 earnings release and conference call, catch up on the news swirling around the company (along with all the analyst downgrades) and do some thinking.

It was not a good quarter. The company missed on both revenue ($80 MM vs. $85 MM expected) and earnings (loss of $0.64 per share vs. loss of $0.59 per share expected). Worse, while Provenge sales climbed 66% YoY, they slipped 2.5% sequentially. As David Williamson pointed out (http://www.fool.com/investing/general/2012/07/31/can-dendreo...), that's turned a declining sequential growth trend into a sequential decline.


Qtr Sales (MM) QoQ
Q1 2011 $27.0 8.0%
Q2 2011 $48.2 78.5%
Q3 2011 $64.3 33.4%
Q4 2011 $77.0 19.8%
Q1 2011 $82.1 6.6%
Q2 2011 $80.0 (2.5%)

This seems to imply that the annual amount achievable is about $300 MM to $350 MM. That's still below the $400 MM the company now claims is the cash-flow break even point (let along making a profit). This is causing a lot of analysts to question whether Provenge can make even $500 MM in annual sales, let alone the $1 billion (or more) it was first expected to have.

In addition, last fall, in announcing a restructuring program, management said they expected to exit the year at 50% COGS margin. This quarter, COGS was 77% of sales. Now, with the new restructuring plan, management says it will reach 50% COGS margin (again) when the New Jersey facility is closed, possibly as early as the end of the year.

As a result, essentially every analyst that follows the company either reduced the price target (that is, the price they expect the shares to be in 12 months) or did that and downgraded the company. See the summary at http://articles.marketwatch.com/2012-07-31/markets/32955067_....

It was both the poor performance and the slew of analyst downgrades/PT changes that helped the share price to decline by more than 20% the day after earnings were released. Adam Feuerstein, a biotech analyst I've found to be pretty good in the past, summed up the situation pretty well at http://www.thestreet.com/story/11645155/1/dendreons-provenge....

The question is, are they right? Is Dendreon essentially dead?


My thesis for investing in Dendreon was as a turnaround. I first bought in Aug 2011 after the company announced poor performance for Q2 2011 and then added a small position in Oct 2011. For the 58 shares the MUE port currently holds, the basis is $10.10. Now there's slowing sales and a second restructuring plan (including closing one manufacturing facility) and shares are about $4.70 (it's up about 4% so far today). Is my thesis busted?

I went through the conference call for the restructuring plan from last September (unfortunately, not available on Seeking Alpha) and compared that to the plan talked about in the last call. Frankly, I think there were more details, and more sense, in the just-announced plan than in last year's. One question asking why the NJ facility was chosen was answered quite candidly -- closing it led to a larger COGS drop than keeping it and closing one of the other two. Management talked about increased automation and efficiency at the existing plants and how that would let them produce enough Provenge to cover 2.5-times the current demand.

Last year's plan didn't include such details. It also didn't include details on revamping the sales staff. Declines in sales staff were called out as a primary reason why Q2 failed everyone so badly. High turnover, some areas left uncovered, etc. "[W]e've really rebuilt the commercial organization, and a big part of that was the changes in sales leadership both at the VP and the regional manager level" To me, that reads as if they fired a bunch of more senior people for not doing their jobs.

In addition to that, getting more sales staff out there means more touch points with customers and potential customers, more chances of educating doctors on the process and reimbursement. And to help move patients along into the first infusion, nursing staff is being added, freeing up sales people's time to go after more sales instead of shepherding things along. (Higher than expected cancellations were also blamed as a reason for the poor showing.)

Another part of the plan is to push harder on patient education. While that's been mentioned before (e.g. in the last restructuring), I got the feeling that management was more serious about it this time. They better be, at least. Intuitive Surgical has succeeded quite well along these lines and management should look at them as a case study. Get patients to ask for the product.


The proof is in the pudding, of course. What will Q3 and, especially, Q4 produce? New CEO and a new operations guy (Joe DePinto). Can they turn this puppy around? DePinto's biography is somewhat impressive. He's been in sales and marketing for 20 years, with stints at Abraxis and ImClone (before Eli Lilly gobbled up the latter) and at J&J before that (longest tenure there). He should know what works.

Right now, I'm leaning toward buying more shares. At $700 MM market cap, it's trading for about 2.2-times sales of $320 MM. If it can sell $500 MM and kept that same multiple, it would be at $1.1 billion market cap, about a 60% rise from here or about $7.35 per share. I could lower the basis of my position to about that level by buying 60 shares or so (which would bring it up to my 3% highest-risk sizing). However, there's a lot that has to go right for the company in order to grow sales by 56% ($500 MM vs. $320 MM). A $2.70 share price gain vs. a potential $4.60 loss is not a very favorable ratio. It really depends on how much product the company can sell.

More thinking required.

Cheers,
Jim
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