Dendreon Learns From ICOS' Mistake

| About: Dendreon Corporation (DNDN)
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Why would someone write a biotech article about ICOS, a company that doesn't even exist anymore? Because there are valuable lessons to be learned from its disappearance, first and foremost being: Partner carefully or don't partner at all.

Every biotech investor is looking for "The Next Amgen (NASDAQ:AMGN)." And that makes total sense, because Amgen sets the standard for what a biotech can be and do, going from a tiny start-up -- in this case, just a wild dream of some college researchers who thought they might be able to make some money while doing some good in the world -- to being everyone's ideal of what an investment in biotech could turn out to be: A business behemoth with almost $10 Billion in annual revenues, multiple successful products, and a market cap around $80 Billion. Not to mention a share price that went from an IPO at 18 to a split-adjusted 1000.

ICOS really was supposed to be the fabled "Next Amgen." It was actually founded by George Rathmann, the legendary founder and CEO of Amgen. Rathmann left the already-successful Amgen for ICOS. Bill Gates was among the company's first investors; he took a seat on its board (his only board seat other than Microsoft's (NASDAQ:MSFT) until he left to join Berkshire Hathaway's (NYSE:BRK.A) board) and became a 10% holder. How's that for a pedigree and promise of success?

And ICOS powered out of the gate. Although begun with an aim to study drugs to treat inflammatory responses, like many biotechs the company followed the science as it presented itself. Among 12 compounds being advanced in the ICOS pipeline was a potential cardiovascular drug for hypertension and angina that was failing for those indications, but in which the male trial subjects were reporting, shall we say, "virility enhancement."

Cialis was born. And ICOS followed the path to riches, reaching the biotech promised land of profitability. The Cialis story is well-known: FDA approval, Super Bowl ads, mass marketing, chopping away at Viagra's market share, revenue stream of a billion dollars annually.

Less well known is what happened to ICOS: It ain't around no more. And here's the object lesson: Anyone who invests in biotech start-ups hears the cries: "We need a partner!", "Let's get that upfront cash!", "Big Pharma can guide us through the FDA maze!", "BP can show us how to manufacture!", "BP can show us how to market!"

Big Pharma can also eat your lunch and leave you pondering the crumbs.

ICOS partnered with Lilly (NYSE:LLY) on Cialis, entering into a joint venture called Lilly-Icos that split Cialis profits 50-50 and gave ICOS royalties for the ROW. But it quietly also put Lilly guys on the ICOS board, and gave Lilly final say in marketing Cialis. And a few years saw more former Lilly guys on the ICOS board as "independent directors" (like many companies, ICOS' governance allowed former competitor employees two years removed from employment to qualify as "independent").

Things seemed to be going swimmingly: Cialis revenue poured in, and each quarter the company came closer to profitability as Cialis stole market share from Viagra. Long-time investors were dreaming of all that would come with profitability: Actual earnings, a P/E ratio, the right to an earnings multiple -- all the dreams from the lean days of being a starving start-up finally to come true. Don't we all dream those biotech dreams?

Then ... boom! Lilly offered $32 per share for the company -- $2.1 Billion for a company on the brink of a billion a year in revenues. Management enthusiastically recommended the deal, even though it was labeled an outrage by Institutional Shareholder Services, Rathmann, and HealthCor (a major hedge fund holding a significant stake).

Hmm. Could it have had something to do with the $67.8 million in bribes -- oops, I mean "Golden Parachutes" -- promised to the executive team? Including $23.2 million to the CEO, Paul Clark, including of course his "retention bonus." (What purpose a "retention bonus" serves when your plan is to close down the company, as was immediately done, remains worth mulling over.)

Activist shareholders (me included) fought valiantly against the deal -- and even succeeded in delaying a vote and bumping the deal up to a whopping $34 a share, or $2.3 Billion. But who can throw the foxes out of the henhouse once the acquirer's exes are on your board and the CEO is stuffing the cash in his pockets on his way out the door? The fight was in vain. "The Next Amgen" was no more.

Lesson to learn? Partners can help you; yes indeed. They can also eat you alive.

All of which leads me to this: In my opinion, the true "Next Amgen" is already around and is wisely going it alone. This is Dendreon (NASDAQ:DNDN), the cancer biotech upstart that has attained the promised land of FDA approval for the world's first Active Cellular Immunotherapy. Its lead product, Provenge, treats advanced prostate cancer by training the patient's body to kill the cancer cells. The global market is in the multi-billions.

After FDA approval, the company was very public about the fact (but not the details, obviously) of its receiving multiple partnering offers from Big Pharma. Dendreon was only looking for a rest of the world partner. Big Pharma insisted upon getting a piece of the massive U.S. market. And so Dendreon announced its intention to proceed alone.

100% rights worldwide to the breakthrough cancer treatment of the century. Gotta remember ICOS -- and gotta love it.

Disclosure: I am long DNDN.