Can Anything Save Dendreon?
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As a longtime follower if not fan, I’m going to put in my two cents worth on Dendreon (NASDAQ: DNDN). Dendreon concerns me as investment in three key areas. Management, past and present, has made some terrible decisions. Dendreon invested in production capacity far exceeding the requirements of demand, forcing its New Jersey production facility to close and resulting in the dismissal of 600 workers. Long-term, this will save money, but the short term costs are staggering. Consider just the cost of severance pay for these employees. Then, having brought in John H. Johnson as CEO, for the express purpose of expanding Provenge sales, the board announces his elevation to the post of Chairman. What’s that all about? The restructuring effort will be at the expense of earnings, necessitating a multi-million dollar stock issue to raise capital, further diluting shareholder value.
Financial Picture and Peers
Dendreon's financial strength, as alluded to earlier, is entirely at the mercy of the capital market. Its debt to equity ratio is 285.94. Both operating and levered cash flow are in the negative, as are earnings. If the market turns its back on future capital initiatives, stick a fork in Dendreon.....its done. This is even before considering the fact that the bulk of Dendreon’s existing long-term debt will need to be repaid or refinanced in 2014 and 2016.
As competitive therapies come to the fore, Dendreon's economic moat weakens. In addition to Johnson and Johnson’s Zytiga, competition is also on the horizon from Medivation (NASDAQ: MDVN) in the form of its promising new prostate cancer therapy, enzalutamide, which is in its final phase of clinical trials. Medivation’s fundamentals, like Dendreon’s, are pathetic, but the most telling numbers are these. In August, Dendreon lost some 60% of its value, while Medivation was trading at more than 6 times its value of a year ago. Johnson & Johnson, with a beta of 0.48 plods along, relatively unchanged. For the moment, Johnson & Johnson (NYSE: JNJ) is having great success against Dendreon with Zytiga. Zytiga is besting Provenge on the sales front. Greater sales mean greater earnings, and earnings drive stock prices. Johnson & Johnson has about $17 billion in cash on its balance sheet. Dendreon has $432 million. Which one do you think will prevail in the marketing war?
A Closer Look at Provenge
Although things may be turning around, it is by no means a sign that Provenge will eclipse Zytiga. As investors, we have to look at the empirical evidence, and recognize ... maybe there’s a reason. At $93 thousand for a course of treatment, isn’t it possible, even probable the oncology community doesn’t see the cost/benefit?
Even if I were to concede that Provenge is a superior therapy for prostate cancer, which I do not, being the best isn’t always enough. In my view, in the best of outcomes, Dendreon can become an Apple (AAPL). That would require Dendreon to hang on financially, successfully reduce manufacturing costs in the highly complex production techniques for its immunotherapy, boost sales volume and continue to raise capital for ongoing research and development. As Mr. Johnson said in an excellent interview, “there’s an important role for immunotherapy, and there will be a role for the new agents.” I believe the more likely scenario is one in which Dendreon is ‘acquired’, not for Provenge per se, but for its expertise in immunotherapy, its patents and its production facilities.
Nothing I’ve written here explains what incites so much passion and vitriol in Dendreon shareholders and Provenge supporters. Provenge detractors have actually been on the receiving end of threats! For example, when the FDA declined to approve the drug in 2007, because a clinical trial failed to show it slowed tumor growth, protests, lawsuits and even death threats ensued against physicians on the FDA advisory panel who did not recommend approval.
Usually, I’d say, “Follow the money for an answer.” But let’s face facts ... the money is spiraling down the proverbial pipe. Please read this exceptional article by Sharon Begley, published March 2012 in Reuter’s. It paints an ugly picture of coercion and flawed research. Mary Huber, a scientist whose research figures prominently in Begley’s piece, suggests a placebo used in Provenge trials may actually have resulted in the premature death of patients in the control group. The premature deaths in the control group created the illusion that the group receiving Provenge was living longer. In my view, it is an unbiased and damning article. It could explain the resistance Provenge is meeting in the oncology community.
Looking Ahead
In the short-run, this stock can move in either direction, but its financial circumstances are bad and growing worse. In my view, there is nothing but downside for long-term investors and the only viable reason to own the stock at all is as a short-term technical trade. At the end of the day, the only money to be made with this stock will be made shorting it.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of Dendreon and Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
