REFILE-UPDATE 1-Dendreon faces uphill battle to win credibility

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BOSTON/NEW YORK (Reuters) - Dendreon Corp, which makes the high-priced prostate cancer vaccine Provenge, faces an uphill battle to win back investor confidence after abruptly withdrawing its sales forecast for the drug last month.

The company will discuss its future on a conference call with investors after the market closes on Thursday and lay out a restructuring plan that is expected to focus on cutting manufacturing costs and boosting profit margins.

Investors, who feel management has promised more than it has delivered, are more interested in action than words. Dendreon shares fell 5.5 percent ahead of the call, hurt in part by European approval on Wednesday of a rival prostate cancer drug, Johnson & Johnson's Zytiga.

"It's not good enough for management to just tell investors that they think that can do X, Y or Z," said Eric Schmidt, an analyst at Cowen and Co. "If Dendreon wants to convince us they can improve their margins to levels more in line with the industry, they are going to have to make actual progress before many of us buy in."

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Gross profit margins in the pharmaceuticals industry range from 70 percent and 90 percent. Dendreon's was roughly 42 percent in the last quarter.

Analysts expect the company to achieve most of its savings by shutting down a manufacturing facility or scaling back all three of its plants.

"We see little room for them to lower their other discretionary expenses," said Geoff Porges, an analyst at Sanford Bernstein who initiated coverage of the company on Thursday with an "underperform" rating and $8 price target.

Dendreon management lost credibility with investors last month when it abandoned its 2011 sales forecast for Provenge on the heels of disappointing second-quarter results. The move cost the company two-thirds of its market value and sparked a flood of lawsuits.

"They've done such a bad job of being transparent that nobody knows what's going on there," said Brad Loncar, who spearheaded a move by individual shareholders to shake up the company's board but has since sold most of his shares.

"They have to get expenses in line with revenue projections," said Loncar, who believes Provenge is a very good drug that has not been properly promoted. "What would make me happy is to know exactly what the situation is and to see them have a tangible business plan."

At issue is whether sales of Provenge have been held back by a fundamental lack of demand.

The company previously blamed slow sales growth on manufacturing constraints, which have since been resolved. More recently, it has blamed a steeper-than-expected learning curve by physicians and uncertainty over whether the drug would be reimbursed.

Joseph Pantginis, an analyst at Roth Capital Partners LLC, said it is not surprising that an altogether new type of drug like Provenge would take time to settle in the market. But he said management needs to prove it is creating demand for the product, which costs $93,000 for a course of treatment.

"They definitely have taken a hit from a credibility standpoint," he said. "Companies that blind-side investors like this tend to be in the penalty box for a while."

Sanford Bernstein's Porges said the market may become too crowded and too complex for immunotherapies such as Provenge to achieve much "commercial traction."

Before abandoning its long-held forecast, the company indicated 2011 Provenge sales would reach $350 million to $400 million, with about half of that coming in the fourth quarter.

Dendreon is expected to tell investors that one of the main goals for its sales force will be to educate physicians.

The company said last month that only about 25 percent of potential Provenge prescribers were aware of a June 30 decision by Medicare to cover the drug's cost and the issuance of a so-called Q code that can help speed reimbursement. It said many doctors were waiting to prescribe Provenge until they were sure they would get paid.

Cowen's Schmidt is skeptical that lack of physician education is the cause of Dendreon's problems.

"I'm sure concern over reimbursement is a headwind but nothing any other company hasn't experienced," he said. "I think there is a real demand issue here."

Dendreon shares were off 5.5 percent at $10.97 in afternoon trading on Nasdaq. They are down from a year high of $43.96 in May. (Reporting by Toni Clarke in Boston and Bill Berkrot in New York; editing by John Wallace)

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