Dendreon Provides A Major Warning To Shareholders

| About: Dendreon Corporation (DNDN)


Dendreon announced strong Q2 revenues through a 10-Q filing.

Cash position continued to decline.

Company warned of liquidity risk.

Bankruptcy unavoidable unless buyer found.

Shareholders may not be happy with the end result here.

I've spent a lot of time detailing the short thesis for biotech name Dendreon (NASDAQ:DNDN). Shares of the company have continued to plunge, and closed at just $2.12 yesterday. With the company in a period of executive transition, investors have been waiting for the company's quarterly report. Monday afternoon, the company released a 10-Q filing which detailed the quarter's results, but it also contained an interesting statement that leaves the future of the company in question.

Let me quickly discuss the Q2 headline results. Revenues came in at more than $82 million, nearly $10 million ahead of analyst estimates. The company lost just $0.10 a share, which beat by a dime. However, if you take out the inventory insurance recovery, the company would basically have been in-line with EPS estimates.

Perhaps the most important item investors are curious about is the company's balance sheet. During the quarter, the company did pay back its 2014 notes. That was going to shake the balance sheet up a bit, so the table below shows some financial ratios going back a couple of years.

The most interesting number is the cash and investments balance, which decreased to less than $137 million during the quarter. While the total amount of debt did go down, the value of the ever important 2016 notes continued to climb. If the table above does not show how crucial this issue is, here's what the 2016 notes to cash pile ratio looks like in chart form.

At the end of Q2, the carrying value of the notes represented more than 4 times the value of the company's cash. That carrying value will increase as we get closer to maturity, and the cash pile will probably decrease even further. This should not surprise anyone, as it is a major issue that I've been detailing for a couple of years now. However, Dendreon issued the following statement in the 10-Q that may worry some investors:

Our 2016 Notes, as discussed in Note 10 below, have an aggregate principal amount of $620 million and mature on January 15, 2016. Our stock price is well below the $51.24 effective conversion price for the 2016 Notes, making it unlikely that the holders of the 2016 Notes will exercise their conversion right. As a result, we assume that, absent the execution of a transaction of the type described below, we will be required under the terms of the 2016 Notes to repay the full $620 million principal amount at maturity. Based on our currently anticipated operating results, however, and even assuming the realization of future expense reductions that we plan to make and product revenues that we forecast, there is a significant risk that, while we believe we have sufficient cash to meet our ordinary course obligations for at least the next twelve months, we will not be able to repay or refinance the 2016 Notes. Accordingly, we are currently considering alternatives to the repayment of the 2016 Notes in cash, including alternatives that could result in leaving our current stockholders with little or no financial ownership of Dendreon. Our Board of Directors will consider any strategic alternatives that might be presented by third parties, though there can be no guarantee that any such alternative will provide value for the Company's stockholders.

The most worrying part of that is the sentence that reads "we are currently considering alternatives to the repayment of the 2016 notes in cash, including alternatives that could result in leaving our current stockholders with little or no financial ownership of Dendreon." The company reiterated the main part of the above statement a couple of times throughout the 10-Q filing. As I've detailed in the past, Dendreon has two primary options right now, and those are bankruptcy or a buyout. The book value of Dendreon's equity decreased even further in Q2 to a negative $299.8 million. As of Monday's close, Dendreon's market cap was just under $329 million. That means that the value of the 2016 notes is nearly double that of the company's market cap.

In the end, Dendreon did beat on Q2, but the balance sheet continued to get worse. The company addressed the 2016 notes issue in a big way throughout the 10-Q filing, detailing how the company will not be able to repay the notes. While a buyout is still possible, bankruptcy does remain an option as well. Either way, Dendreon just provided a large warning for shareholders.

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