The Costs of Greed – Dendreon
originally published at Minyanville.
Note: SmartStops saved investors $26.57 a share from the first July 18th risk alert
by Christopher Georgopoulos
Provenge is a proven success, but management has to prove to the market that not only are they brilliant scientists, but brilliant businesspeople.
Partnerships between drug development companies and large pharmaceutical makers are common. These deals provide the usually cash-strapped development firm with capital to see their drugs through the long and expensive phases of testing required by the U.S. Food and Drug Administration (FDA). Along with the capital, these firms receive the expertise of proven and tested marketing channels and the expertise in the infrastructure of clinical and the regulatory processes. But don’t celebrate to early — firms like Merck (MRK), Johnson & Johnson (JNJ) and Pfizer (PFE) do not offer this out of the goodness of their hearts. They charge for it — usually in the form of revenue-sharing of an approved drug.
Partnerships are not the only option these development firms have. They can choose to do it all themselves. They can raise their own capital, usually in the form of dilutive stock offerings or, similar to Mannkind (MNKD), their founder may fund the majority of capital needs personally. Either way, once they have raised the necessary capital to fund the final phases of approval, the rest must be spent on manufacturing and distribution. Or simply, they need to pay to make and sell the drug.
The management of Dendreon (DNDN) had to make this decision and they chose to go it on their own. They believed, and were correct, that the FDA would approve their drug Provenge, the first therapeutic cancer vaccine. They celebrated this victory and saw the potential “streets of gold” and “rivers of honey” and they decided they didn’t want to share any of it.
The market didn’t seem to mind this decision. They raised the necessary capital through dilutive offerings. They were widely covered by Wall Street with some exceptional high price targets. Their manufacturing plants were being built and approved. The stock rose along with the list of billion shareholders. The stock, still very volatile, had its bumps in the road. For example, in the summer of 2010 the stock fell from its highs over $55 to under $30 due to a scare that Medicare wouldn’t cover the expensive treatment. This news kept the stock in a range until the summer of 2011 when Medicare announced that Provenge’s benefits were enough for coverage. This was another solid victory for the solo Dendreon, which then saw its shares rise once again.
This string of victories and brief rise in price came to a crashing halt on its second-quarter 2011 earnings release. The company announced that Provenge sales were weaker than expected, and management even removed revenue guidance for the rest of the year. This revenue guidance was truly important, for the majority of their yearly guidance was estimated to be back-end loaded in the fourth quarter of 2011. Management claimed that the uncertainty of guidance was due to the prescribing doctor’s uncertainty of insurer or Medicare reimbursements. In their terms, “…increased sensitivity to the impact of cost density on doctors’ practice economics…” It also claimed that there was difficulty identifying suitable patients.
The repercussions of such uncertainty from management did not go unnoticed. Wall Street punished the shares, cutting the price by two-thirds the next day. If that wasn’t enough, a string of downgrades followed the price down to pre-approval levels. Analysts and investors alike are both now questioning the once highly anticipated growth rates and possible need for additional capital.
So let’s get this straight:
Management believes that the main reason for the slower adoption is that the doctors that prescribe Dendreon’s drug have difficulty identifying patients, and that they are not fully educated on how to get reimbursed.
Dendreon has created a new, revolutionary therapy for the plague of the 21st century that is good enough to have the approval of the FDA and Medicare and they can’t sell it? Not only can they not sell it, they can’t even adequately explain the process of reimbursement. Do you believe an experienced sales team from a large pharmaceutical firm would have made the same mistake?
Dendreon wanted it all and didn’t want to partner (pay) for any help. Their inefficient sales team is one of the direct consequences of the greed they showed from the beginning. The repercussions of this greed can get worse. For example, there are still unfortunately many patients out there that need treatment and as long as the doctors remain uneducated there are a plethora of other options. They could prescribe Johnson & Johnson’s drug Zytiga and soon maybe even Stimuvax, Oncothyreon’s (ONTY) innovative cancer vaccine which is in late-stage trials.
Looking at the stock technically, it’s a mess. The massive gap down this August has breached all support levels on large volume. Their moving averages are much higher and falling lower. Worse, the stock has created a new range at this basement level. Fundamentally, it might be worse. Fears of additional capital raises and layoffs are already rumored. The lack of certainty of growth has and will continue to plague the stock’s multiple and the overhead resistance of underwater longs will prolong any rally.
The game isn’t over yet; Dendreon is still in control of its own fate. It has the only approved cancer vaccine on the market, a vaccine that impressed the FDA enough to approve it and Medicare enough to cover the costs. Management has to prove to the market that not only are they brilliant scientists but brilliant businesspeople; they have to sell, sell, and sell! The next few quarters of earnings will tell the market if they can. The truth is, Provenge is a proven success, but its financial success is solely in the hands of a greedy management that so far has failed its shareholders.
An investment at these levels may look very appealing but the uncertainty that surrounds Dendron is large. Staying on the sidelines at these levels, waiting for management to prove themselves over the next few quarters will lower your risk. You will be rewarded by waiting; your risk will be lower even at a higher price. For those investors that can’t wait or have already bought, you need to remind yourselves that biotech investing is risky and you must stay aware of risk and limit any losses. One can bottom-fish at low trading costs for awhile if they want. Just either keep protection maintained via stops or stay aware of risk. SmartStops.net still views Dendreon at an “Above Normal” risk state. On July 18, 2011, SmartStops’s first exit trigger was published at $37.53 which was quickly followed by multiple follow on exit triggers. This alert had it been acted upon would have saved investors up to $26.57 a share! Currently the SmartStops short term exit trigger is $9.66 and the long term exit trigger is $9.59.