The biotech sector is perhaps the most volatile and risk-prone sector in the market, but investors still love it. Medical science is leaping forward and new drugs keep hitting the Street, but the hunt for the “safer and more effective drug” is always on. It’s for this reason that we often see contrarians being rewarded massively for their daring positions. The company in focus is Dendreon Corporation (NASDAQ:DNDN), and here are a few reasons why I think it could prove to be a great investment.
The magic drug
To begin with, Dendreon has absolutely ridiculous fundamentals. From towering debt/equity to plummeting profitability, it gets filtered out as a poor stock. But history doesn’t ascertain the future, right?
Dendreon Corporation (NASDAQ:DNDN) was able to develop an immunotherapy treatment called Provenge that attacks cancer cells by boosting a person’s immunity. This not only contributes to cancer reduction/remission, but also improves a person’s defense system against common illnesses like the flu or infections. Unlike chemotherapy and other radiation treatments, this is a more natural approach, but also has its share of side effects. Its common side effects include chills and fatigue, but it’s still way better than chemotherapy, which causes hair loss, bleeding, and body aches. Provenge competes with Xtandi, developed by Medivation Inc. (NASDAQ:MDVN), and Zytiga, developed by Johnson & Johnson (NYSE:JNJ).
Studies have shown that prostrate specific serum antigen levels shrank by up to 85% when Xtandi was used for a month. Zytiga springs into action soon after it has been prescribed, but Provenge takes at least 2-3 months to even show signs of recovery. But, the good thing is that Provenge uses immunotherapy, which is considered to have fewer side effects than its peers.
This is indeed a revolutionary breakthrough, and just like any new business model, it, too, had a painfully long fertility period. Shares of Dendreon were continuously hammered as the company reported a streak of lower-than-expected sales of its cancer treatment procedure, Provenge. This, coupled with poor margins, brought financial havoc upon the company. For the recent quarter, the company reported a net loss of $0.26 per share, compared to a profit of $0.26 per share in Q4 2011. Its quarterly revenue also plunged to $85 million, down from $202 million in Q4 2011.
But, the Street was absolutely delighted, as it was expecting a loss of $0.55 per share. Moreover, the company reported annual sales to the tune of $325.3 million, up from $213.5 million in FY11. Its streak of poor sales finally seems to be over. Its peers are also performing well. Medivation’s Xtandi was launched in Sept. 2012. Its first full quarter sales stood at a solid $57 million and the management expects its Xtandi sales to cross $100 million, and even beat the street’s estimates. Johnson & Johnson (NYSE:JNJ) also recorded impressive sales growth of 6.8% for Zytiga, but its relatively weaker FY13 guidance disappointed the street. For FY13, Johnson & Johnson is expecting to earn $5.35-$5.45 per share.
Despite the increasing competition, I believe that Provenge will report blockbuster growth. According to doctors, the dosage frequency of Provenge is expected to increase by 10-20% in 2013. The coming year actually has a lot more growth potential. The company is expanding in Europe and is expecting approval from European authorities sometime in 2013. According to a news report, Dendreon Corporation (NASDAQ:DNDN) operates with only 10% of its production capacity. This means that Dendreon wouldn’t have to expand its manufacturing facilities to ramp up production, and growth will mainly be demand-driven.
Wrap up
Dendreon Corporation (NASDAQ:DNDN) was approved by the FDA in 2010, and it’s highly unlikely that European authorities would say anything different. Expanding in Europe is a big positive for the company, and analysts have improved its EPS estimate to $0.42, up from a loss of $0.36. I think Dendreon is available at a deep discount, and deserves an Outperform rating.
The article A Magical Drug that Could Change Lives originally appeared on Fool.com and is written by Piyush Arora.
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