The Questionable Dendreon Buyout Incentive

A report on Bloomberg shows that Dendreon may be seeking takeover offers, with J.P. Morgan leading it. What is amazing is that Dendreon always was considered a buyout candidate, yet the company always acted as though Provenge would be the next Holy Grail of cancer treatments.

What investors and speculators will want to consider here is that Dendreon’s market cap was less than $400 million as of Friday’s closing bell. It used to be around $7 billion at the peak. Its Provenge is incredibly expensive, and the long controversial “on again off again” FDA approval process helped the company post endless losses.

Provenge was supposed to be a blockbuster drug. We have seen estimates in the past that its sales could reach well over $2 billion in the years ahead, and some estimates were close to double that. That was then. Doctors have been very slow to adopt Provenge, and frankly we have been disappointed that Provenge has not been shown to treat as many other types of cancer as we hoped for in the past.

Credit Suisse has keyed in on the possibilities of a Dendreon buyout on Monday. The firm calls it a plausible and sensible move as the company seeks a way out of the $647 million convertible debt noose tied around its neck. The firm does have a key warning here: investors should not expect an outsized premium.

Credit Suisse further warns that it does not expect a bidding war as Dendreon faces notable commercial and financial struggles. The warning also includes that there are very few clear alternatives for the company and investors might be satisfied at any price because a debt restructuring was said to be one that could wipe out the equity holders entirely.

A final warning from Credit Suisse is that an acquirer likely would be unable to manufacture Provenge any more cheaply than Dendreon. This implies that a buyer would not be able to drive the cost down to a more mainstream treatment price.

Credit Suisse has only a Neutral rating on Dendreon, and the discounted cash flow target is only a $3.00 stock. Shares closed at $2.53 on Friday, against a 52-week range of $2.23 to $7.22. Shares were indicated up 17% at $2.96 in the early trading Monday. Dendreon’s stock price was trading above $40 back in 2010.