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Dendreon Risks Fading Into Irrelevancy

Stocks in this article: DNDN JNJ MDVN EXEL

SEATTLE ( TheStreet) -- Dendreon's (DNDN) latest quarterly disaster is a reminder that groundbreaking medicine doesn't necessarily translate into a successful or profitable business.

More and more, Dendreon is looking like Trimeris (TRMS), the once high-flying HIV drug company that unraveled because its novel HIV drug was too costly to make and too difficult to sell.

Provenge sales rose 30% to $64 million in the September quarter over June but Dendreon's expenses grew even more, most notable in a horrific 10% gross margin. Gross margin in the second quarter was 42%.

The unexpected rise in Provenge's cost of goods coupled with management's admission that sales of the prostate cancer therapy will slow down for the rest of the year sent Dendreon shares tumbling 23% to $8.10 Thursday's pre-market session.

Dendreon will not survive long with a 10% gross margin, or as cancer consultant Michael Becker of MD Becker Partners quipped on Twitter: "Dear Dendreon -- 'We lose a dollar on every sale but make it up on volume' is not a viable business model."

Provenge is a real scientific breakthrough -- a first-of-its-kind cancer "vaccine" that trains a patient's immune system to seek out and destroy tumor cells. But the high fixed costs and complex logistics required to manufacture and deliver the personalized therapy is proving to be Dendreon's undoing.

The company still insists it can reach cash-flow break even at $500 million in U.S. Provenge sales, but when that happens and whether Dendreon can ever achieve profit margins investors expect from drug makers isn't clear. The poor third-quarter financial picture doesn't inspire confidence.

Stepping back from the numbers, perhaps Dendreon's larger problem is that Provenge is already being eclipsed by other more promising prostate cancer therapies. When Provenge was being developed, drugs that extended the lives of patients with advanced prostate cancer were rare. Now, doctors have a growing menu of life-extending drugs to choose from, including Johnson & Johnson's (JNJ) Zytiga and Sanofi's (SNY) Jevtana.

Looking ahead, the buzz in prostate cancer is about Algeta's Alpharadin, Medivation's (MDVN) MDV3100 and Exelixis' (EXEL) cabozantinib, all still experimental but which also have the potential to dramatically extend prostate cancer survival.

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