Shocker! Sell-Sider Admits Dendreon Buy Rating Was Mistake

SEATTLE ( TheStreet) -- ISI Group analyst Mark Schoenebaum downgraded Dendreon ( DNDN) to a hold from a buy Wednesday. Nothing shocking here given Dendreon's admission that first-quarter Provenge sales are lagging. What's remarkable, perhaps unprecedented, about Schoenebaum's Dendreon downgrade is that he actually apologized for making a bad call.

Here's what he wrote to clients:

Clearly this stock has not been a good call for me over the past ~2 years. In fact, it's been my worst call of my 13 year career -- by far (yes -- even worse than NABI in 2005). We all make mistakes, but this mistake bothers me more than all others since, in retrospect, I really did have all the information in front of me I needed in 2011 to be suspicious of eventual Provenge uptake. But, alas, for reasons that will forever elude and haunt me, I missed it . . . . And, for this, I apologize.

Sell-side analysts are not known to publicly acknowledge stock-picking mistakes, so Schoenebaum's mea culpa stands out and deserves respect.

"Everyone just walked away from reading that e-mail like, 'Mark's good, at least he owned it," said one hedge fund trader to me this morning.

A hedge fund manager remarked, "Mark is a good man. It takes guts to admit when you're wrong."

The days of institutional investors buying stocks based on sell-side recommendations and price targets are long gone. It's doubtful most healthcare investors even knew or cared that Schoenebaum had a buy rating on Dendreon, which makes his candid admission of error so refreshing to read.

Schoenebaum downgraded Dendreon, in part, because CFO Greg Schiffman warned investors yesterday that expectations for first-quarter Provenge sales were too high.

Dendreon had previously told the Street to expect first quarter sales below fourth-quarter sales of $81.6 million. Speaking at an investor conference on Tuesday, Schiffman said:

In terms of Q1 outlook, on our Q4 call last week we did note that Q1 sales were facing potential headwinds and we expect they would be below Q4 pro forma sales of $81.6 million. After our earnings call, we looked at the updated consensus for Q1, it's approximately $80.6 million, or about $1 million down from Q4 revenue. It would be premature as we indicated in the call for us to give any specific estimate of Q1 revenue at this point in time, so we indicated on our call, there are a variety of factors which could dramatically impact the range of decline. However, I would note that the $1 million reduction from Q4 is within range of error that's outside of our forecast accuracy, would represent an error rate that would not have caused us to announce reduced expectations for Q1. We think sales may be meaningful below Q4...

Schoenbaum's interpretation:

Assuming a decline in 1Q vs 4Q sales, we estimate Provenge is annualizing at approximately $300M. Recall that the company has said it needs to grow sales to approximately $400M just to break even. We remain hopeful that Provenge will have a role in the treatment of prostate cancer given it's good safety profile, demonstrated overall survival benefit, and economic incentives to use the drug.

However, we fear that competition might be playing a big role in the disappointing 1Q sales pseudo-guidance. Recall that 1Q is the second full quarter for Medivation's (MDVN) Xtandi launch, and this drug appears to be growing the market for Xtandi+Zytiga (at the very least, we can conclude that Xtandi sales are not coming at the exclusive expense of Johnson & Johnson's (JNJ) Zytiga) -- implying that some sales might be coming at the expense of Provenge (rather than just Zytiga). We need to carefully watch this trend, as Xtandi surely will continue to grow. In addition, Zytiga now has a label that will allow it to compete directly with Provenge -- this label was granted by FDA in December, so 1Q is the first quarter in which we will see the commercial impact of this important development.

Dendreon shares were down 3% to $5.52 in Wednesday trading.

-- Reported by Adam Feuerstein in Boston.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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