- Dendreon will not have enough cash to pay for its 2016 convertible notes.
- Note holders are unlikely to convert.
- Dendreon is not likely to be bought out.
- European launch of Provenge will not be enough to save Dendreon.
Dendreon Corporation (NASDAQ:DNDN) shareholders got a piece of bad news a few days ago, when the company announced that it was looking at ways to pay off its debt that could include measures that would leave shareholders with little to no holdings in the company. This was not wholly unexpected for shareholders, but nonetheless, sent the stock tumbling. Dendreon is not likely to have enough money on hand to pay off its 2016 notes, and the note holders have no incentive to convert the notes. This will set off a showdown between Dendreon and its note holders sometime in the near future. Also, with no company seemingly interested in buying Dendreon, it appears as though the company is headed for an unfortunate ending.
Why the Panic?
In a recent 10-Q filing, Dendreon included the following passage:
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 pay 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 shareholders with little or no financial ownership of Dendreon.
The company is admitting that it is not likely to have enough cash on hand to pay for the notes. With this in mind, let's take a look at the current situation at Dendreon.
The big hurdle for Dendreon is going to come in 2016 with the need to repay $620 million in convertible notes. Yes, I said convertible notes, so what is the issue? The notes are convertible at $51.24 per share. With the stock trading as low as it is, it is fair to assume that no one is going to convert the debt. Therefore, the holders are expecting to be paid in cash. The company is nowhere close to profitability and is not likely to be cash flow positive anytime soon, definitely not before the end of the year. For the first six months of the year, Dendreon's net loss continued with a loss of $51.7 million. Dendreon will continue to leak money throughout the end of the year, and likely through most of next year as well.
Why No One Is Going To Buy Dendreon
It seems as though the only real hope for shareholders would be that someone is going to buy Dendreon. However, I find that to be hopelessly optimistic. The acquirer can get a better deal in bankruptcy.
The reason for no one acquiring Dendreon is that the acquiring company would have to assume Dendreon's liabilities. A company is not going to buy Dendreon now and have to assume the $620 million in debt. Even if the noteholders agree to a reduced amount, the amount will still likely exceed Dendreon's market cap. Therefore, any buyer would be better off waiting for Dendreon to go into bankruptcy and buy the assets of Dendreon that they like, without necessarily having to assume all of the liabilities.
Another reason is that Dendreon has not shown that Provenge is a good opportunity. Dendreon in all of its years of operation has not been able to successfully market Provenge. The company continues to bleed money, and this would be a huge concern for any company that might consider buying Dendreon, as they are not really sure of the ability to profitably sell Provenge. With many other competing drugs on the market, and more in the pipeline, there will be stiff competition for Dendreon moving forward.
However, let's say that I am wrong and the company does get bought out. I would imagine the buyout looking a lot like Spectrum Pharmaceuticals' (NASDAQ:SPPI) buyout of Talon, in which Talon shareholders got pennies on the dollar. Talon was in dire financial straits and did not seem to have the ability to launch its drug in the United States. That was the best deal that shareholders could hope for. While Dendreon has launched its drug, I would expect a bad deal for shareholders in a buyout because of the inability of Dendreon to generate a profit, coupled with the debt situation.
What about Europe?
Dendreon bulls will point to the launch of Provenge in Europe in the fourth quarter as a potential turnaround. However, at this point, it is too little too late. The company is unlikely to generate meaningful sales in Europe over the relatively short time period that it needs to generate $640 million. While the European launch may be a positive for shareholders, it will further strain resources at Dendreon, and it will take time to see increased sales. With the short time frame that Dendreon has, Europe is not going to be Dendreon's savior.
The future does not appear to be bright for Dendreon. Unfortunately, shareholders are caught in a situation in which they are just along for the ride at this point. The company does not have the money to pay off its debts, and will not likely have the money to pay them off when 2016 rolls around. A savior for Dendreon is not very likely, as any company will buy them out of bankruptcy and save themselves the hassle of having to deal with the $620 million in debt. Unfortunately for Dendreon shareholders, it appears as though the roller coaster is rapidly coming to its end, but it has been an interesting ride.