By Sabina Bhatia
Dendreon (DNDN) is your typical biotech story, where stagnant sales, a competitive landscape, and a high cash burn ultimately leave the company in the hands of a creditor committee consisting of bond holders. Looking back at history, in the early 2000s, banks were more willing to provide financing to companies such as these in the biotechnology sector. Although banks are lending today, companies such as DNDN will have to provide attractive deal terms to investors who will be willing to take the balance sheet risk. Our thesis here remains that a restructuring of the balance sheet is the only means of survival for the company. All bets are off if this is not dealt with immediately. To illustrate our point, we will discuss the company's balance sheet and its influence on the company's survival.
(click image to enlarge)
Competitive landscape for DNDN's Provenge
Recently, the FDA approved Medivation's (MDVN) prostate cancer drug, which will be sold under the name "Xtandi." This drug will be used for advanced stage prostate cancer. Its competitiveness has been enhanced by the fact that it was approved a lot sooner than it was originally expected -- approval was anticipated in October or November. Also, Johnson & Johnson's (JNJ) drug, Zytiga will add to the challenge for Provenge. Zytiga generated $432 million in revenues in 2H2012, and Xtandi could possibly generate close to $300 million in revenues by 2013. Provenge has a lot of catching up to do, as sales for 2H2012 were only $160 million. The company claims that there were holes in the sales force and new patients failed to materialize. For us, one thing seems clear -- currently, Provenge is not a preferred option for oncologists and urologists.
State of the balance sheet
As off quarter end June 30, 2012, DNDN has $433 million in cash and short-term investments, and $548 million in long-term debt, which consists of $521 million of 2016 convertible senior notes and $28 million of convertible subordinated notes, due in 2014. Cash burn averages $90 million a quarter, which translates to sufficient liquidity for less than five quarters. Dendreon does not have access to any additional liquidity in the form of a term-loan or credit facility.
Additionally, the company expects to realize $150 million in annual cost savings with its restructuring efforts, which might be a little too late. We always tell companies, "Raise capital when you can, not when you need to." Although the lending environment today does not mirror that of 2008, it is tough environment for companies with lackluster performance. Further, now DNDN has to answer to the convertible holders who are next in line to be paid, too. The Top 3 holders of the 2016 Convertibles are JP Morgan, Camden Asset Management, and Ameriprise Financial. Dendreon will probably need their approval before it can issue more debt or equity.
We can't consider this name as a long-term play until the company is able to resolve its short-term capital needs. We don't think a short idea in the name is relevant today, either. We checked around to find out if one could borrow DNDN stock. We are told there is a -9.95% rebate on anything above 200,000 shares.
Is there hope?
Last quarter, DNDN announced more data analysis on Provenge's effectiveness, saying that it extends the average patient's life by more than a few weeks. This might get the drug some attention, but given the company's liquidity profile, it seems unlikely it can survive without raising new capital. It's possible that DNDN could be bought out by a candidate who truly believes in the growth of Provenge and is willing to take over the $548 million in debt. Finally, DNDN could possibly issue more equity to raise capital. Keep in mind the dilution impact of raising more equity, however.
This leaves us believing that DNDN is a name that has an immediate short-term need to raise capital and clean up its balance sheet. Watch the name closely for management to announce new plans to raise capital.
Please see our article, published on August 27, for more information on DNDN.