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Dendreon (Nasdaq: DNDN ) closed below $10 per share yesterday for the first time since 2009. More shockingly, if you bought the IPO back in 2000, you're now sitting on a slight loss some 11 years and one drug approval later.
How is it possible that the investors are valuing the biotech the same now as they were when it IPOed at $10? The short answer is that they aren't.
Welcome to Biotech Math 101
IPO investors who didn't sell along the way haven't made a dime, but the company has a higher value because there are more outstanding shares now than when the company first went public. Each share purchased at the IPO represents a smaller portion of the pie.
In this case, take that slice and cut it into more than six pieces. At the end of its first quarter as a public company, Dendreon had 21.6 million shares; by the end of last quarter, that number had ballooned to 145.9 million.
Dendreon isn't the only company that's funded its drug development through secondary offerings. Vertex Pharmaceuticals' (Nasdaq: VRTX ) share count has nearly tripled over the last decade. Human Genome Sciences' (Nasdaq: HGSI ) share count has gone up a more modest 70%.
The disparity between the three biotechs has to do with varying degrees of rights to their recently approved drugs they've given up. Dendreon has held onto the rights to its prostate cancer drug everywhere. Vertex brought in some cash by licensing the rights to its hepatitis C drug in Europe and elsewhere to Johnson & Johnson (NYSE: JNJ ) but kept the U.S. rights. Human Genome Sciences took it a step further and brought on GlaxoSmithKline (NYSE: GSK ) to help pay for the phase 3 trials of its lupus drug, giving up half the rights to the drug in the process.
Human Genome Sciences, for instance, has a lower market cap than it would if it had all the rights to its drug, but each share represents a larger fraction of the company. Different funding options, same eventual result.
Which brings us to the obvious question: At a market cap of $1.5 billion, is Dendreon a better buy than it was in 2000 at just more than $200 million? Despite its problems, it sure looks that way, and my fellow Fool, Jim Mueller, thinks so, too. At a price/sales ratio of 3, that's only $500 million in sales baked in. If you're willing to give it a more generous P/S of 5, sales of $300 million seem obtainable relatively short order.
The current market cap, of course, doesn't factor in any additional secondary offerings the company might need to make before becoming cash flow positive.