Manufacturing Sold Separately? Dendreon's Plan B.

If it ain't broke, don't fix it. If it is broke, sell it to someone who knows how to fix it. That's the approach being taken by struggling biotech Dendreon (NASDAQ: DNDN) as it attempts to sell itself. While the market sent shares higher by as much as 19% when the plan was announced, many have questioned whether anyone actually wants to fix the multitude of efficiency problems at the company.

Provenge, its only FDA-approved product, is bleeding cash and losing market share to competing prostate cancer therapies from Johnson & Johnson (JNJ -1.15%), Medivation (MDVN), and Bayer. The outlook for Provenge isn't very exciting and its value may be limited, but Dendreon does own something on every biotech's wish list: manufacturing facilities. Can those alone add enough value to spur a deal? Do they provide an adequate plan B if no buyer emerges?

Provenge problems
How bad are things at Dendreon? The company recorded $73.3 million in revenue on operating expenses of $128.5 million in the second quarter -- not exactly sustainable. And analysts pointing to Provenge's lack of profitability as a "fixable" problem are missing the bigger picture. First, as a cancer vaccine, Provenge is tailored to each individual patient, which heightens the cost of manufacturing. That would be true for any company producing the drug. Second, the therapy is losing market share to newer, more convenient (oral), cheaper, easier-to-manufacture prostate cancer drugs.

Source: SEC filings.

Don't develop analysis paralysis with the rest of Wall Street. Sometimes it really is that simple.

Bloomberg analysts project sales of Provenge to reach $538 million by 2017, although I think it's safe to say that estimate is quite optimistic given how the drug's current sales trajectory compares to its peers. Keep in mind that the drug is on pace for just $280 million in 2013 sales. Sure, a larger company could throw money around to improve operations and solve Dendreon's financial obligations, but with about $100 million more debt than assets that seems unlikely. Why buy such an inefficient business to get your hands on a fading product?

The company does hold some interesting pipeline immunotherapy candidates, but not every buyer will be interested in keeping expensive clinical programs afloat on top of Dendreon's business as a whole. Thus, investors should temper their expectations of seeing a large premium if and when an acquisition does occur. 

Of course, a buyer could emerge if the price is right. Potential suitors -- if there are any -- would have to tailor an acquisition to their individual financial flexibility and growth plans. Could the company's manufacturing facilities be the wild cards needed to make a deal possible?

Manufacturing facilities to the rescue?
In an effort to cut costs at the end of last year, Dendreon sold its 173,100-square-foot manufacturing facility in Morris Plains, N.J., to Novartis (NVS 0.72%) for $43 million. The transaction worked out for all parties involved: The 100 employees at the facility kept their jobs, Novartis acquired a biomanufacturing facility on the cheap for developing high-value pharmaceuticals, and Dendreon got a pile of cash. Surely the industry would also be interested in the company's two remaining facilities: a 160,000-square-foot plant in Atlanta and an 180,000-square-foot plant in Los Angeles.

DNDN data by YCharts.

Let's assume there is about $80 million-$100 million in tangible value in the two plants, which makes sense looking at Dendreon's $239 million in property and equipment assets before depreciation. That doesn't sound more valuable than Provenge at first glance, but consider the following.

The rise of biologic drugs has led to a bottleneck in biomanufacturing capacity throughout the industry. Companies are attacking the problem through a combination of new investments and contract manufacturers, and active facilities don't go up for sale very often. Retrofitting a facility -- complete with licenses and permits -- around a process would be much cheaper than new construction. Can the intangible value of the facilities, or what they could represent if utilized profitably, be enough to make a company desperate for manufacturing capacity (and crazy enough to absorb the troubled Provenge) pull the trigger and buy Dendreon?

Don't count on it. Dendreon's financial woes seem too great to overlook. And, of course, Dendreon didn't hire JPMorgan Chase to just shop its facilities, so it will be pretty difficult to wrestle away the assets individually in the near term. If a buyer doesn't emerge the facilities could be sold separately, although that would spell the end of Provenge and the business. In this scenario, Plan B equates to bankruptcy. 

Awash in questions and red ink
Dendreon's manufacturing capacity would attract a lot of interest from the industry. A potential buyer could produce higher-margin, higher-value biologic drugs than Provenge at Atlanta and Los Angeles after some retooling, and still come out ahead compared to building a new facility elsewhere. Unfortunately, I think the only way investors will see such a sale would be at an auction, which isn't what investors want. That said, I am not advocating purchasing shares or attempting to support a bull thesis -- I still think the outlook for the company is pretty dismal. There are simply too many question marks and too much red ink to involved to get involved.