Pharmaceutical companies, especially those who are still in the early stages of clinical trials and research, can be very fragile entities. If news breaks of an FDA approval some of these stocks can skyrocket, as was the case of Arena Pharmaceuticals (ARNA), and on the other hand if news breaks of a downgrade or negative research report, it can send a stock toward a significant sell-off as was the case of Questcor (QCOR) on June 10th.
That being said, I'm wary of both Ampio Pharmaceuticals and Dendreon for a number of reasons. First, I'm very unhappy with the way both companies are exhausting the amount of cash currently on their books. Second, I dislike the way both companies have missed earnings estimates over the last few quarters.
Ampio Pharmaceuticals (AMPE), trades in a 52-week range of $2.54/share (52-week low) to $9.27/share (52-week high), has a market cap of $114.05 million, and continues to burn through a significant amount of its cash. Currently, AMPE is having some significant cash issues that could continue for a while. The company's total cash is only $8.29 million and also has -$10.45 million in operating cash flow and -$7.18 million in leveraged free cash flow. As a result of the company's strain on its total cash, AMPE announced a secondary offering of 4,615,400 shares, valued at $3.25/share. It is anticipated that the company will generate roughly $15 million through the offering.
Analysis: When a company doesn't specifically inform shareholders what the proceeds from the offering are going to be used for, it bothers me. Even though the company has a very comprehensive pipeline of potential candidates worthy of an FDA decision, I think that the company's strategy is a bit off base. For the time being, I'd put all my focus on Zertane (a drug designed for male sexual dysfunction and is in the latter stages of Phase III clinical trials), and once an FDA decision is reached shift back to the development of Optina and Ampion (both of which are in the latter stages of Phase II clinical trials). If the cash burn continues well past the secondary offering, I can see shares trading as low as $2.00/share which is roughly 25% lower than the company's current 52-week low.
Dendreon Pharmaceuticals (DNDN), trades in a 52-week range of $5.69/share (52-week low) to $39.50/share (52-week high), has a market cap of $908.64 million, and currently carries more debt than it does cash on its books. The company's total cash is $497.54 million (-$196.38 million in operating cash flow and -$68.63 million in leveraged free cash flow) and a total debt of $1.7 billion, as per the last 10-Q filed by DNDN.
Analysis: When it comes to a stock, one of the worst things that can happen is a downgrade. When a company gets downgraded significantly or multiple times within a very close proximity, it never ends well. On May 17th Maxim Group initiated coverage of DNDN with a rating of 'Sell', which was followed by a downgrade by Bank of America Merrill Lynch to 'Hold' on July 11th. The major concern for many analysts is the demand for DNDN's product Provenge. Why is there a concern over weakened sales? When you have a drug company with only one FDA approved product, and that product is in the midst of facing off with Johnson & Johnson (JNJ), it may very well be pushed to the side for preferential reasons. Given both the downgrades and the notion that weaken Provenge sales are on the horizon, I'd steer clear of Dendreon at current levels, and would wait for a significant sell-off before entertaining the idea of a long term position.
