Friday, January 11, 2013

Dendreon (NASDAQ:DNDN): Provenge Doesn't Seem to Be Fading; Could DNDN Be One of 2013's Best Performers? - Porges

Bernstein's uber analyst Geoffrey Porges is making a big biotech call upgrading Dendreon (NASDAQ:DNDN) to Outperform from Market Perform with a $10 target (prev. $7).

- Porges now convinced Provenge is not dead; Raises his estimates significantly; Sees $1+ EPS power by 2016 yielding significant upside for the stock.

The basis for his upgrade is the feedback he and his firm received from urologists in recent months as part of Bernstein's ongoing monitoring of the adoption of Medivation's Xtandi and its positioning against JNJ's Zytiga. That feedback, particularly from community urologists, convinces them that Provenge is not going to disappear, and in fact is more likely to return to modest but steady growth once the turbulence in the market (and the company) stabilizes. When the market (and industry observers) realizes that this is occurring, Porges expects the stock to offer significant upside given current low expectations.

Dendreon has been one of the worst performing stocks in biotech for the past two years, languishing between $4 and $5.50 since mid 2012 compared to prior highs of $40 to $45 in 2011. The last 18 months have seen the progressive disaster of poor forecasting, reimbursement challenges, slowing revenue growth, insider selling, excessive cash burn, shareholder class action suits, changes in management and board membership and finally restructuring. Most traditional healthcare and biotech investors have abandoned the company, and the stock now reflects a significant probability of extinction, in Bernstein's view. Investors have endorsed the dogma that the firm outlined in their coverage initiation a year and a half ago, which suggested that new prostate cancer drugs such as Zytiga and Xtandi will crowd out Provenge and gradually reduce its revenue opportunity, such that Dendreon fails to ever achieve sustained profitability.

- To explore the impact of these competing drugs, and how perceptions of Provenge are evolving, Bernstein recently conducted a series of one-on-one detailed phone interviews with urologists who are current users of Provenge – their thesis was that if Provenge is going to disappear, current users should be reducing their patient numbers now, or expecting to in the future.

When they contacted urologists with significant experience with Provenge, the firm found the opposite of these bleak expectations. The busiest urologist Provenge prescribers have been increasing their use, and recruiting colleagues and peers to use the product as well. These high volume users acknowledge some hiccoughs, but are adamant that they will recommend the drug to a significant and growing minority of advanced PC patients. Not only do they not expect any reduction in the frequency of use, but instead expect a 10-20% increase in the frequency of use in 2013, compared to 2012, and a further increase in 2014. These findings differ from Bernstein's prior research and other opinions about Provenge because they come from current users of Provenge; however, they are consistent with Dendreon's own comments and information (+15-25% sequential growth in urologists' use) from the last three quarterly conference calls.

- Based on these findings they are increasing their revenue forecast for Provenge; They  now forecast peak revenue for Dendreon of $799mm by 2017, compared to $580mm previously with a significant contribution from ex US markets.

- They expect the company's cash expenses to now match revenue by mid 2013, and for the company to report full year positive earnings in 2014. Firm's adjusted EPS estimates are now for pro forma earnings of $0.17 in 2014, then $0.54 in 2015 and $1.14 in 2016. These are all significantly higher than recent consensus;

This call is consistent with Bernstein's more cautious stance about the higher quality mid cap biotech stocks toward the end of 2012. Porges believes there may be more opportunity in the disliked "out of favor" names (of which Dendreon is the poster child) than in chasing new highs for the recent sector leaders.

Given the cost and complexity of Provenge, Porges thinks Dendreon is unlikely to be a free standing company long term.

Notablecalls: There are several reasons why this is a big call and likely to have significant positive impact on the stock:

1) Porges is the probably the most respected analyst in the space; He is the Axe.

2) Dendreon has been left for dead by almost everyone except some die hard cult followers; Short interest stands at 30%.

3) Porges is now saying outright Provenge is going to survive and even thrive; His estimates are now way above Consensus.

4) EPS power of $1+ in '16 will yield in a $20-25/share stock = huge upside.

5) Porges is making a very sensible bet saying out-of-fav names are going to be the place to be in 2013. DNDN is the prime candidate.

6) This call is a huge surprise. I bet there are analysts out there today telling their associates to get on the effin phone and start talking to docs. If the feedback they are going to get is anything similar to what Porges recieved there are going to be more upgrades.

All in all, this call is likely to take the stock above $6/share today and toward $7 in a few weeks.


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