Dendreon (NAS: DNDN) has new management in place, but they're sticking with the same guidance of "modest" quarter-over-quarter growth of the biotech's prostate cancer treatment, Provenge. It's unreasonable for investors to think John Johnson and his new crew could turn things around quickly, but investors should keep a close eye on the biotech.

The company has two goals: raise revenue and decrease gross margins -- so basically the same as your typical company that isn't involved in drug development. Most biotechs are only worried about increasing sales because the margins are already plenty high; they have to make up for all the research and development dollars used to create the medicines.

Provenge is different because it's tailor-made for each patient. The company had to build three plants to service the U.S., and if they're not running at full capacity -- they're not -- there are a lot of fixed labor costs that eat into the bottom line.


Dendreon is working on a few things to increase gross margins -- refining the manufacturing processes, an electronic tracking system, and automation for manufacturing and testing the individualized product -- but the biggest near-term gains in gross margins will come from increasing revenue. When Provenge hits $500 million in annual sales, Dendreon thinks it'll be at 50% gross margins, up substantially from the 27% in the first quarter, which will make the company cash flow-positive on U.S. sales.

When it'll hit that milestone is anyone's guess; management certainly isn't saying. At the modest 6.5% quarter-over-quarter growth rate Dendreon recorded in the first quarter, it'll take seven more quarters to get to a run rate of $500 million in annual sales. With impending competition from Johnson & Johnson's (NYS: JNJ) Zytiga, Medivation's (NAS: MDVN) MDV3100, Sanofi's (NYS: SNY) Jevtana, Exelixis' (NAS: EXEL) cabozantinib, and others, I don't think investors are willing to wait that long.

Management claims prostate cancer treatment isn't an either/or issue and Provenge will be used sequentially with the other drugs. Proving it with accelerating sales beyond "modest" growth would certainly help investors buy into the theory.

At the time this article was published Fool contributor Brian Orelli holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Dendreon, Johnson & Johnson, and Exelixis. Motley Fool newsletter services have recommended buying shares of Exelixis and Johnson & Johnson and creating a diagonal call position in Johnson & Johnson. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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