Why I'm Selling Dendreon Today

It was a fair investment choice, but it didn't work out.

Nine months into running the real-money portfolio I manage for The Motley Fool, I invested a small amount in Dendreon (NASDAQ: DNDN  ) , seller of prostate cancer treatment Provenge. I bought shares after bad news came out and the stock price got pummeled, back in the summer of 2011, buying a bit more shortly thereafter. It shouldn't have taken too much, I argued, for the company to recover, grow sales, and succeed against reduced expectations.

Unfortunately, in the two years I've owned shares, the company hasn't managed to meet those reduced expectations, and I'm now sitting on a loss of 68% or so.

In the most recent quarter, sales of Provenge actually fell 8.4% year-over-year to $73.3 million. A year ago, management said cash flow breakeven would be at a level of $100 million in sales a quarter, but today that goal is even further away. Selling into Europe might help, but it might be a matter of too little, too late.

One might argue that management is improving the business. For instance, cost of goods sold was 60% of revenue this past quarter, down from 77% a year ago and on the way to a 50% target. And SG&A expenses are down 17% year-over-year , on the way to a 35% reduction target, both targets called out by management after the second quarter last year.

However, I don't think the company will have time to get where it needs to go. Or if it does, it's going to be really close and particularly painful for shareholders. The balance sheet is much worse today than a year ago, with unpalatable decisions facing management.

The big worry is $620 million in convertible notes due Jan. 15, 2016, less than two and a half years away. Given that the conversion share price is more than $50 per share, I doubt holders will go that route, and instead insist on cash. With rising interest rates and (so far) declining sales, refinancing those notes at a reasonable rate looks iffy.

Further, the company has only $207 million in cash and short-term investments today,  and it spent more than $155 million in cash over the past year. If it wants to survive, expand sales into Europe, and pay for the various drug trials it is running, it must raise more cash. Shareholders should expect either massive equity dilution or a slug of expensive debt.

Given these prospects and increased competition from Johnson & Johnson's Zytiga and Medivation's Xtandi, both of which are seeing growing sales, I'm selling my remaining position in Dendreon.

A 68% loss is painful, especially as the money isn't mine, but it's time to lick my wounds and move on. Overall, the portfolio is very much in the green, and this move will let me focus on finding another company with messed-up expectations to drive it further forward.

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Read/Post Comments (15) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On August 19, 2013, at 12:35 PM, sammievee wrote:

    In painting a picture of Dendreon's dismal future you sure use the word "might" a lot.

  • Report this Comment On August 19, 2013, at 4:42 PM, TMFGebinr wrote:

    How else? "Will" isn't correct when talking about an unknown. I think it *will* struggle and *might* not survive -- <grin> -- thanks to its worsening balance sheet and cash flow.

    Thanks for reading.

    Jim

  • Report this Comment On August 19, 2013, at 5:30 PM, vireoman wrote:

    Good article. I'm facing a decision regarding dumping this stock myself.

  • Report this Comment On August 20, 2013, at 12:08 PM, trytostayafloat wrote:

    If you are selling today, can I then presume you only expect the share price to further deteriorate near term? If you are already looking at a 68% loss after holding for two years and the stock is at a 4 year low, isn't it worth the risk of holding to see if there is a minor pop following a possible EU approval later this year? While there may be little chance to recoup all or most of your losses in the short term, isn't the potential to sell in say a couple months at possibly just a 50% loss (or anything under 68%) or so worth holding? Just my two cents. It may turn out to be smart for selling today but it seems like a reactionary move. Good Luck.

  • Report this Comment On August 20, 2013, at 1:41 PM, TMFGebinr wrote:

    Hi afloat,

    I don't know what the share price will do near term, but the bump it saw when CHMP gave Provenge a thumbs up didn't last very long. It might or might not see a similar bump when (if) it announces launching in Europe, probably dependent on whether it gets a sales partner or not.

    There's also a bit of a delay in this particular process, as I have to write and publish the article first, then wait until the next trading day (24 hours minimum) before executing a trade, so taking advantage of a bump is riskier in that I might not get it.

    I had $586 invested in the company (58 shares) out of a portfolio worth a bit over $50,600, so waiting around for a $100 gain to get to a 50% overall loss probably isn't worth it.

    I don't know if the sale is reactionary or not. It has made improvements (called out in the article) and management might be able to pull the company through, but it's the worsening balance sheet that's driving most of this decision. It has less than half the cash it had last year and is going through it at a rate that will let it last only 5 more quarters before pretty much emptying the till. It has to do something about those convertible 2016 notes, and if it wants to survive, it must come up with another product besides Provenge (which is expensive to do) or sell a lot more Provenge (which it's struggling to do).

    The product is pretty good, but as a business it's turned out to be not so good. While there's a chance it will turn around, I think there's a greater chance -- today -- that it won't, either drowning under its balance sheet or being bought really cheaply (say at $1 billion market cap or $6 per share) for a drug that is barely selling $300 MM in a year. Or current shareholders will get massively diluted when it's forced to raise equity or the company will leverage itself further to raise debt -- both not good scenarios.

    Anyway, I thought it would work out, but today I don't think it has and I think its chances of doing so are not very high -- at least not high enough to continue holding.

    Thanks for your comments.

    Jim

  • Report this Comment On August 20, 2013, at 1:45 PM, npush318 wrote:

    To be honest, I don't think a $300 loss is worth even writing an article over.....

  • Report this Comment On August 20, 2013, at 1:49 PM, TMFGebinr wrote:

    Heh. I agree, but those are the rules we have to follow for these portfolios. Public announcement and then wait a day before executing. In the long run, probably better that way.

    Jim

  • Report this Comment On August 20, 2013, at 4:13 PM, trytostayafloat wrote:

    Jim,

    I appreciate your response and for disclosing what was at stake share-wise.

    My initial feeling in calling it reactionary was due to the fact that if you feel/felt this way today, (or a few days ago :) ) why not sell when it was up over $5.30 around two weeks ago and take a much smaller hit. Now knowing there wasn't a whole lot to risk, it makes much more sense.

    I am very new to investing (started buying stocks around the same time you made your first purchase in DNDN). I had beginners luck by buying some shares in established biotech companies like BIIB, AMGN, CELG, GILD all around the time SNY made it's initial bid on GENZ. Unfortunately I sold those shares a lot earlier than I wish I had, as I don't think anyone anticipated what has transpired thus far, especially in the case of BIIB.

    As you can tell from the stocks purchased above, I'm not a big gambler and those were intended to be long term holds but I couldn't resist selling.

    In terms of DNDN, as I've admitted I'm new to investing so I'll take your word that they're in a bind with debt, inconsistent sales, competition etc.

    I do however follow the biotech industry quite closely and all I read and hear about is immunotherapy drugs ad nauseum...that are still in Phase II.

    Here you have an FDA approved cancer drug being made in licensed facilities that doesn't require chemotherapy. I can't help but see the upside in already having the infrastructure and staff to manufacture the drug along with potentially another immunotherapy drug candidate from the outside that has a similar manufacturing process.

    I think what everyone can agree on is that if DNDN had JNJ selling the drug then sales would be a bit higher :)

    Which leads me to my question. What is keeping a big pharma or bio company from offering to buy the company dirt cheap ($5 or $6 per share) even if sales flat-lined just over $300 million annually? Especially when you hear what RHHBY might pay for ALXN. Please excuse my investing naivety.

    Thanks for your respectful response earlier.

  • Report this Comment On August 20, 2013, at 11:25 PM, Givemeusefulinfo wrote:

    What is keeping big pharma from buying them out, you ask? How about absolutely horrible margins? It's not about revenue, it's about profit. And there is none to be had.

  • Report this Comment On August 21, 2013, at 4:58 AM, adumfraudstain wrote:

    Everyone who played our Dendreon Bear Raid Game back in Summer 2011 prior to stock crashing all got out above $35... now we are nibbling back into DNDN while you motley fools sell for massive losses. Lol!

    When Provenge pricing comes down competition from JNJ + MDVN will then be knocked out. Nothing works better than Provenge but $93K is too high.

  • Report this Comment On August 21, 2013, at 10:06 AM, trytostayafloat wrote:

    Usefulinfo,

    I assume BP would be buying them for their drug and the people who manufacture it. They would not be buying them for their finance dept, HR dept, R&D, sales team, executive team and other redundant areas of cash burn.

  • Report this Comment On August 21, 2013, at 12:32 PM, TMFGebinr wrote:

    Hi afloat,

    Good to hear the immunotherapy drugs are considered a good thing -- I especially like the difference in side effect profiles compared to chemotherapy. For Dendreon, the trouble is, as you said, they're all in Phase II trials and there's a lot of room for failure (and a lot of time) between that and FDA approval. Dendreon might not have the time.

    For big pharma, maybe they're waiting for other immunotherapy drugs to prove out, letting others take the risks and then swooping in later to capture the profits. How specialized the manufacturing equipment is, I don't know, so buying Dendreon at the end may or may not be worth it.

    Cheers,

    Jim

  • Report this Comment On August 21, 2013, at 1:20 PM, SpiderJack wrote:

    I did the same. held dndn since the 5's and sold it on just too frustrating and disappointing a position after the last quarterly. They just can't make any $ on it and if provenge gets approved in EU, it looks like they'll just lose $ twice as fast or even faster.

    my new hope is in some BIOD, although I am not pumping it, I think they have a good chance to beat the market in the huge diabetic treatment space, jmo after looking into it.

  • Report this Comment On August 22, 2013, at 10:49 PM, CER4040 wrote:

    To be frank they don't have much of a chance if you are counting on Provenge to bring them back to profitability. The reason is it's questionable efficacy and astronomical cost. Combine that with competition from Medivation and J&J for far cheaper and effective treatments and it's like getting punched in the face right after barely getting up from a mandatory 10 count.

  • Report this Comment On September 17, 2013, at 7:59 PM, ScoopHoop wrote:

    I once took a loss in DNDN. I learned big lesson: Never invest in something that is not already making money. DNDN is filled with pipe dreams and no profits. Biotech is complex industry. I have made way more money from stocks in peanut butter, chocolate, beer and railroads -- industries that I can understand. DNDN is a loser's stock.

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