How Will Dendreon be Affected by the STOCK Act?
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The President very recently passed the STOCK Act into law, which is meant to put an end to any Congressional insider trading (hence the STOCK acronym meaning Stop Trading on Congressional Knowledge). For such a negative topic, there can still exist a positive spin that can help current stocks in industries not as affected by the government (with the obvious exception of the Food and Drug Administration), including potential winners like Dendreon (NASDAQ: DNDN). Firms in the biotech industry, at least in comparison to the members of big pharma, run on the promise of returns all based on the not-so-near future.
Quite frankly, investors have a similar mindset to CEOs – they prefer a laissez-faire attitude by our government towards big (or small) business. While other industries are perhaps pleased by the passing of the STOCK Act and simultaneously vexed that it was even necessary, pharmaceuticals and biotechnology firms pay more attention to the FDA as their biggest influencer. But the STOCK Act, as it pertains to preventing insider trading by members of Congress does have an impact, for example, on members of the Congressional Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies. In a completely theoretical case, if a Congressional member of this subcommittee was working on FDA legislation and had information about specific drugs and their companies, he or she could have benefitted from this information before the STOCK Act was passed in a completely legal fashion. If said member knew that the passing of a law could impact the value of those companies, stock could have been bought or sold in large quantities before the legislation was passed. With this law, there is a more level playing field for all who are interested in these pharmaceutical and biotech stocks.
Dendreon is focusing on development of cancer-related projects and has one prostate cancer drug that was FDA-approved almost exactly two years ago. The company's pipeline includes a handful of candidates in Phase 1, 2 and 3 clinical trials, showing gaining confidence needed to maintain momentum towards an NDA for each drug, and ultimately, profitability. Its price per share has fluctuated wildly over the past year, and its price to earnings ratio remains negative. The company should have some ability to tap the equity markets again if it ever needs to, with a market cap around $1.5 billion and 1500 employees. The company also has a relatively long operating history going for it. Founded in 1992, Dendreon is a biotech that has survived later into its lifecycle, with its first drug recently approved and others in-process.
The usual suspects in big pharma paint an even more matured picture, with the standout in the holdings reviewed being giant GlaxoSmithKline (NYSE: GSK) with a market cap of over $200 billion. Knowing that pipelines can dry up without acquisitions, GlaxoSmithKline has been actively collaborating with or acquiring newer biotechs (e.g., Genelabs Technologies Inc.). A victim of massive layoffs throughout the recession, its employee base remains around 100,000. It has one of the better operating margins at over 30% and a very high earnings multiple of approximately 27.5, which is a good 10 point or higher ratio than the other big pharma stocks I’m reviewing here.
Pfizer (NYSE: PFE) most closely mirrors GlaxoSmithKline, differing in a market cap about $50 billion less and a price to earnings ratio around 17.5, but near identical employee numbers and operating margin. Novartis (NYSE: NVS) has a much higher employee count at nearly 125,000, with recent layoffs just like Pfizer and GlaxoSmithKline. Its market cap of around $132 billion, operating margin of 21% and a 14.5 earnings multiple are significantly lower than GlaxoSmithKline, and less so than Pfizer. Finally, Sanofi (NYSE: SNY) comes in with the lowest market cap of the big guys, just under $100 billion, but second highest employee count at over 110,000. Its operating margin is identical to Novartis, and its price to earnings ratio is lower by about a point.
So how does all this figure with the passing of the STOCK Act? First, an overall improvement in confidence can be healthy for most of the stock market, and there’s no reason that biotech / pharmaceutical holdings won’t fall into this category of winners. In this case it’s the perception that matters, and those reluctant to have a more risky portfolio after suffering heavy recent losses may be ready to take money out of more conservative temporary locations and get back into the game. Biotech is a great way to do this, and Dendreon represents this recommendation well. Finally, as biotechs and pharmas are used to working with the FDA, even if it’s tough on drug approvals in the US, it is preferable to worrying about others with inside knowledge messing with the business and integrity of the firms. After a rough start with the FDA on its approval of its first drug, Dendreon benefited earlier this year from negative FDA reports on a rival firm’s similar drug, and the stock price climbed upward.
Most signs are pointing to a slowly recovering economy, and I don’t believe investors are receiving the STOCK Act in a Pollyanna manner, but are keeping their eyes open. They do, however, want to stop holding their collective breath and get back into the business of business. As pharmaceuticals are a part of nearly every American’s daily life, it makes sense that the pipeline will continue to be fed with new ideas. If big pharma sees the value in investing in smaller biotech firms for their own growth, it stands to reason that outside investors should see the same thing. Still new to having actual products on the market, Dendreon is poised for a long-run investment payoff. As faith in the US market is beginning its hopeful turn upward, this may be a good point to buy before everyone else decides they want to get back in the game too.
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