Dendreon: Tumbling Without Commercial Success

Jul.12.12 | About: Dendreon Corporation (DNDN)

by Ramu Iyer

Dendreon (DNDN) continues to be the subject of much debate and controversy about its future growth prospects. Market sentiment has soured, the stock is down substantially, and investors have lowered their expectations. According to and many other websites, there is also speculation about a possible takeover of Dendreon. I think that a takeover is unlikely for a number of reasons. The market is highly skeptical about the company and it is likely that would be acquirers share these sentiments. There is also the presence of Johnson & Johnson's (JNJ) Zytiga and Medivation's (MDVN) enzalutamide in the list of potential competitors. This is not to say that Provenge, Dendron's flagship drug is inferior to these two treatments, but only that market perception of the company has definitely deteriorated. If it were to be acquired now, any potential acquirers would have to wait at least one year to see results. In the meantime, if the company can increase sales of the drug, share prices would naturally go up.

Is this not an opportune moment for the company to be acquired? Acquirers would rather pay more for the technology for better chances of a successful treatment, rather than pay less for an experimental treatment that flops. Acquisitions in the biotech industry are not about bargain-hunting, and biotech companies are not acquired merely because they are cheap.

As an indication of the ambivalent feelings towards Dendreon, Jefferies has recently argued that Medivation is a superior acquisition candidate, and has specifically named Amgen (AMGN) as a possible acquirer. The firm argues that the combination of Amgen and Medivation would create an additional enterprise value of $5 billion, which means that Amgen could make a bid at a 55% premium to the current price. Conversely, the combination of Amgen and Dendreon would only add $1.2 billion to the value of Amgen. And even this value for Dendreon is at the current market price, which existing investors are extremely unlikely to settle for. Credit Suisse has separately noted that Dendreon is reorganizing its sales force, and believes that it would not be doing so if an acquisition was part of the offering. The firm also says that 'would be' acquirers would require information on the cost structure and whether any manufacturing plants would need to be closed. They would also like to see what kind of sales Zytiga could achieve.

Other analysts appeared to be equally cautious. Investors are eager to see the company's second-quarter results in early August. The current consensus estimate forecasts a loss of $.59 per share, and this estimate of losses has widened with the passage of time. However, analysts appear to have contradictory views when it comes to the loss estimates and their target prices for the stock. The average price target for Dendreon shares is $10.40, an upside of over 40% on the current price. Credit Suisse has maintained a neutral rating with a target price of $12 per share, which is nearly 60% higher than the current market price. Similarly, Merrill Lynch has maintained a neutral stance, but with little explanation, has maintained a target price of $13 per share, which is 80% higher than the current price. This contradiction is difficult to explain, and I am forced to conclude that pessimism about Dendreon has reached a level where the slightest good news could spark major upward movement in the stock price.

I would like to examine what Dendreon needs to get back into the game. The initial approval for Provenge was regarded as a major step forward for the treatment of cancer. The treatment trains the human immune system to detect what cancer cells look like so that they can be attacked and eliminated. The resulting hype drove the price to high levels until reality set in when the company lost over $200 million in the first six months of 2011. The share price has subsequently remained weak. Moreover, the early indication was that Provenge increased the life of patients by only four months and the data indicated that, like many other diseases, early detection was the key to successful treatment. The second problem remains the high cost of treatment, which will continue to hurt sales. In the first quarter of 2012, the company lost $112.8 million on revenues of $82 million. The company is attempting to expand operations to Europe, but the high cost is going to continue to be a factor for insurance reimbursement anywhere in the world.

The company has three state-of-the-art manufacturing facilities in Georgia, California, and New Jersey, all which have been approved by the FDA. With Provenge sales not taking off as anticipated, these facilities could be used to handle outsourced production for other biotech companies and bring in some much needed money. Alternatively, the company could consider the acquisition of another biotech company with lots of synergies since it already has manufacturing facilities, but requires a product pipeline. One possible candidate is ImmunoCellular Therapeutics (IMUC).

A biotech investment cannot be evaluated in terms of conventional financial metrics and ratios. Instead, it must be looked at in terms of the game changing potential of the drug pipeline, and the ability of the company to come up with one or more blockbuster drugs. In terms of medical advancement, there is little doubt that Dendreon has come up with a highly innovative drug in Provenge, but there must now be some glimpse of commercial success which seems unlikely at the moment, given the cost and customization of the treatment. Neither is there a likely acquirer on the horizon to boost the share price. I must conclude that Dendreon is an investment best avoided at the present time. I would continue to hold onto any existing investment in the expectation of an upturn.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.