Dendreon Grasps for Bid as Main Drug Burns Cash: Real M&A

Dendreon Corp. is facing an uphill battle in its search for a buyer willing to take on the steep expenses and disappointing sales growth of its prostate-cancer drug Provenge.

Dendreon is working with JPMorgan Chase & Co. to find a suitor, Bloomberg News reported last week, as high costs for the company’s only product drain its cash and analysts reduce revenue forecasts. The drug’s sales are projected to jump 65 percent to $538 million by 2017, according to analysts’ estimates compiled by Bloomberg, far short of the more than $4 billion they were forecasting three years ago.

The $423 million company, which already has the highest debt-equity ratio in the biotechnology industry, may struggle to find suitors because of intensifying competition among prostate-cancer drugs and less cash available to repay borrowings, Barclays Plc said. Maxim Group LLC said Dendreon’s treatment could be profitable in the hands of Johnson & Johnson or Astellas Pharma Inc. and justify a $10-a-share offer. If an acquirer does emerge for the $2.68 stock, Credit Suisse Group AG cautions investors to expect a lower takeover premium.

A buyer “would be taking on a lot of hairy issues,” Joseph Pantginis, a New York-based analyst at Roth Capital Partners LLC, said in a phone interview. “It would have to pay a lot of money to try to fix the business. There are still many hurdles to overcome.”

A spokesman for Dendreon declined to comment on any sale process.

$93,000 Therapy

Provenge is a $93,000 therapy that trains the body’s immune system to attack cancer cells as it would a virus. It involves extracting white blood cells from a patient, mixing them with vaccine components and delivering the combination as an infusion.

Provenge competes with the oral drugs Xtandi, for which Astellas and Medivation Inc. split profits, and J&J’s Zytiga.

Marketing Provenge has been a challenge for Dendreon because the process of administering it is more cumbersome than a pill or injection and requires training doctors. The infusion also is more expensive to produce than pill treatments.

Dendreon is burning through its cash and has $546 million of convertible bonds coming due in January 2016, according to data compiled by Bloomberg. When Dendreon offered the debt two years ago with a conversion price of $51.24 a share, its stock price was about $37. The shares closed yesterday at $2.68.

Today, the stock fell 2.6 percent to $2.61.

Cash Decline

Dendreon’s total debt was almost 17 times its shareholders’ equity at the end of 2012, a higher ratio than all other biotechnology and pharmaceutical companies with market values larger than $100 million, data compiled by Bloomberg show.

It had $207 million of cash and equivalents as of June 30, down from $432 million the prior year, the data show. Dendreon also had long-term investments of $73 million as of that date. The company’s cash has dwindled for six straight quarters.

“We view the hiring of JPMorgan and solicitation of bids for a possible sale as an act of desperation,” Joel Sendek, a New York-based analyst at Stifel Financial Corp., wrote in an Oct. 28 report. He doesn’t expect the company to succeed in finding a buyer.

The stock surged as much as 19 percent on Oct. 28, after Bloomberg News reported the sale process, citing people familiar with the matter. The shares were still down 49 percent this year through yesterday.

‘Breakthrough Product’

Despite Dendreon’s struggles, an acquirer would gain a drug approved in both the U.S. and Europe that may have sales of $370 million next year and $538 million by 2017, according to analysts’ estimates compiled by Bloomberg.

Provenge is a “breakthrough product” and can be successful in the hands of the right acquirer, according to Jason Kolbert, a New York-based analyst at Maxim. He pegs Dendreon’s stand-alone value at just $3 a share, or $10 if it were bought by a larger maker of oncology drugs.

Dendreon’s cost of goods sold was 64 percent of sales in the past 12 months, data compiled by Bloomberg show. That far exceeds costs at other biotechnology companies, which are typically about 10 percent, Kolbert said.

A larger drugmaker such as J&J or Astellas, which already have sales forces and promotional systems in place, could lower Provenge’s costs to 40 percent of sales and achieve profitability, he said.

Tax Benefit

“Provenge is a good product, but Dendreon lacks the resources, quite honestly, to promote it,” Kolbert said in a phone interview. With the right acquirer, “you could see significant free cash flow generated from the sales of Provenge.”

Ernie Knewitz, a spokesman for New Brunswick, New Jersey-based J&J, said the company doesn’t comment on takeover speculation, when asked whether it’s considering a bid for Dendreon. Akiko Tanabe, a spokeswoman for Tokyo-based Astellas, also declined to comment.

While it makes sense for the company to attempt a sale given its deteriorating financial position, investors shouldn’t expect a large premium or bidding war, said Lee Kalowski, an analyst at Credit Suisse in New York. He said a buyer would probably only be interested because Provenge faces little risk of generic competition or because Dendreon’s net operating losses could be used to reduce the acquirer’s taxes.

“The bottom line is, I don’t think any other company could make Provenge more cheaply,” Kalowski said in a phone interview. “There are major commercial hurdles that anyone selling this product would be facing.”

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