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Johnson & Johnson (JNJ), Medivation Inc (MDVN): Why I’m Selling Dendreon Corporation (DNDN) Today

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It was a fair investment choice, but it didn’t work out.

Nine months into running the real-money portfolio I manage for The Motley Fool, I invested a small amount in Dendreon Corporation (NASDAQ:DNDN), seller of prostate cancer treatment Provenge. I bought shares after bad news came out and the stock price got pummeled, back in the summer of 2011, buying a bit more shortly thereafter. It shouldn’t have taken too much, I argued, for the company to recover, grow sales, and succeed against reduced expectations.

Dendreon Corporation (NASDAQ:DNDN)

Unfortunately, in the two years I’ve owned shares, the company hasn’t managed to meet those reduced expectations, and I’m now sitting on a loss of 68% or so.

In the most recent quarter, sales of Provenge actually fell 8.4% year-over-year to $73.3 million. A year ago, management said cash flow breakeven would be at a level of $100 million in sales a quarter, but today that goal is even further away. Selling into Europe might help, but it might be a matter of too little, too late.

One might argue that management is improving the business. For instance, cost of goods sold was 60% of revenue this past quarter, down from 77% a year ago and on the way to a 50% target. And SG&A expenses are down 17% year-over-year , on the way to a 35% reduction target, both targets called out by management after the second quarter last year.

However, I don’t think the company will have time to get where it needs to go. Or if it does, it’s going to be really close and particularly painful for shareholders. The balance sheet is much worse today than a year ago, with unpalatable decisions facing management.

The big worry is $620 million in convertible notes due Jan. 15, 2016, less than two and a half years away. Given that the conversion share price is more than $50 per share, I doubt holders will go that route, and instead insist on cash. With rising interest rates and (so far) declining sales, refinancing those notes at a reasonable rate looks iffy.

Further, the company has only $207 million in cash and short-term investments today,  and it spent more than $155 million in cash over the past year. If it wants to survive, expand sales into Europe, and pay for the various drug trials it is running, it must raise more cash. Shareholders should expect either massive equity dilution or a slug of expensive debt.

Given these prospects and increased competition from Johnson & Johnson (NYSE:JNJ)‘s Zytiga and Medivation Inc (NASDAQ:MDVN)‘s Xtandi, both of which are seeing growing sales, I’m selling my remaining position in Dendreon Corporation (NASDAQ:DNDN).

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