Late Friday evening, Reuters reported that Dendreon (NASDAQ: DNDN ) has hired JPMorgan to help the company find an acquirer. While this news might create a temporary gains, there are five reasons to believe that this news won't end favorably for shareholders.
1. Growth (or lack thereof)
Back when Dendreon's prostate cancer drug Provenge was first approved, there were many analysts who believed that sales could eventually exceed $1 billion. While sales were rather robust in the first year, Dendreon has seen Provenge's year-over-year revenue decline in both of its last two quarters.
In its most recent quarter, overall revenue declined 8.4%, making Provenge's trailing 12 month sales just $304.3 million. Hence, Provenge has significantly underperformed expectations; this could be a major concern to large pharma.
Last year, Dendreon closed its largest manufacturing facility, Morris Plains, in an attempt to cut costs. Prior to its closing, Dendreon had always said that it would need $150 million of quarterly revenue to reach positive operating cash flow.
Following the close of Morris Plains, the company stated that only $100 million of revenue was needed for positive operating cash flow. But with falling sales, Dendreon has been unable to produce the growth.
Still, the bigger problem is why such large amounts of quarterly revenue is needed just to become operationally profitable. The source of this problem lies in the company's manufacturing process.
For one, Provenge can not be stored, thus patients must undergo a blood draw to harvest monocytes, which is then shipped the same day to a manufacturing facility. It then has to be shipped overnight back to the patient and administered via IV. The patient then has to complete the process for each and every dose.
Newer therapeutics can be stored, and several doses can be created from just one blood draw. This "process" might make Dendreon very unattractive, because in a business that typically has high margins, Provenge could actually hurt the operating margins of a mid-cap pharmaceutical company (such as Baxter or Celgene).
Perhaps Dendreon's biggest problem is new competition, and this also goes hand in hand with its year-over-year sales declines.
There is Johnson & Johnson's (NYSE: JNJ ) Zytiga and Medivation's (NASDAQ: MDVN ) Xtandi. These two drugs both work by halting the production of certain hormones that cause tumor growth. Therefore, Zytiga and Xtandi increase life (like Provenge) but also slow the progression of the disease (unlike Provenge). Hence, physicians find either to be favorable.
In addition, Xtandi and Zytiga can be taken at home in pill form, and both are slightly cheaper. In regards to direct competition by indication, Zytiga competes with Provenge. In J&J's last quarter alone, sales of Zytiga rose 75% year-over-year to $464 million.
Considering that J&J has annual revenue of more than $70 billion, Zytiga is not incredibly important to the company's longevity. However, J&J's combined products in oncology and in development, such as the near launch of ibrutinib (partnered with Pharmacyclics), make the company an industry leader in this particular space.
With Medivation, its phase 3 trial for patients who have not yet had chemotherapy is still ongoing. Therefore, Xtandi is not directly competing with Provenge, but many believe that it soon will be a direct competitor. If so, Provenge could see sales decline even faster.
Moreover, Medivation saw U.S. sales of $82.4 million in its last quarter. Keep in mind, this is the first full-year of Xtandi being available in the market. As Xtandi's label increases to new indications, this spells trouble for Dendreon, and might produce larger gains for Medivation.
It's no secret that Dendreon's future rests on the success of Provenge, and unfortunately, the company has not prepared itself for life after Provenge. The company does have two ongoing phase 2 and 3 trials to expand Provenge, but as explained above, increased competition might make these trials irrelevant in terms of sales upside.
Then, the company has a phase 2 product treating urothelial carcinoma in patients who express the antigen HER2+, and a phase 1 product treating patients with solid tumors. However, neither are anywhere near marketing approval, and it's unknown whether either will succeed in clinical testing.
5. No longer transcendent
Five years ago, many thought Dendreon was one step ahead of the market in developing cancer therapeutics. However, time has passed, and companies are now using approaches to produce results that completely trump Provenge.
In particular, companies are developing anti-PD-1s both alone and in combination. These PD-1s make it difficult for the immune system to identify cancer cells. Therefore, anti-PD-1s "turn off" PD-1s so that the immune system can easily identify and attack cancer.
Anti-PD-1s stole the show at ASCO this last year, and this last Saturday, one of the leading companies in the race, Bristol-Myers Squibb (NYSE: BMY ) announced additional data. Bristol-Myers reported that 42% and 24% of patients with advanced lung cancer were still alive after one and two years post-treatment, respectively. Moreover, this adds to strong data seen in treating advanced melanoma, renal cell carcinoma, colorectal cancer, breast cancer, and also certain types of prostate cancer.
In regards to Bristol-Myers, analysts believe that its anti-PD-1 nivolumab could create $6 billion annually, as it could be used alone, in conjunction, and in treating several diseases. Hence, the development of this program is important to the future performance of Bristol-Myers and those developing anti-PD-1s such as Roche, Merck, and most recently AstraZeneca.
When you add everything up, none of these developers are likely to acquire Dendreon and its old technology. Nor is a company such as Johnson & Johnson with its own product in the space. This leaves a lingering question of: What company might want to take on this struggling biotech?
Dendreon is not Onyx Pharmaceuticals, which was recently acquired and provides a growth opportunity to Amgen. Therefore, who acquires Dendreon? My guess is that it will be tough to find a buyer, and that investors will not get a large sought premium. With debt payments due, cash dwindling, and no profitability in sight, I would not be a buyer at any level.