He who would Valeant be
Following the master plan to acquire assets and strip costs has worked reasonably well so far for Valeant, though how its purchase of Provenge will protect the Dendreon asset against all disaster is less clear. The acquisition is so strange that it is hard to know where to begin.
One of the few things in Valeant’s favour is that, given the purchase out of chapter 11 bankruptcy protection, Dendreon’s debt will no longer come into play. But Valeant is new to oncology, and Provenge hardly seems ripe for its unique brand of ruthless cost-cutting.
Of course, it hardly needs to be said that Dendreon equity is still worthless. This point will doubtless be ignored by some speculators trying to extract a short-term gain from others’ lack of understanding of Dendreon’s capital structure: holders of Dendreon’s $620m of convertible debt plus some $50m of short-term liabilities have first call on any asset sale windfall.
Valeant’s proposed purchase price of $296m will make a relatively small impression on such a mountain of obligations. Indeed, under Dendreon’s plan of liquidation it was already specified that equity holders would get “no recovery” (Lessons from Dendreon’s slow-motion car crash, November 10, 2014).
Equity holders’ interests aside, what is Valeant thinking? The fact that the group is buying Provenge as a clean asset – the debt obligation remaining with the liquidators – is important.
Umer Raffat, an analyst at Evercore ISI, said if the $50m or so of interest expense associated with the debt is removed from the income statement, Provenge starts to approach breakeven at the $300m of sales it did last year. Thus all Valeant has to do is cut some costs, and profitability could be around the corner.
This, however, will be easier said than done. The notorious complexity of Provenge manufacturing will continue to hit gross margins, even with increased automation; since Valeant is not an oncology player, sales force synergies – of the sort it had envisaged in its failed move on Allergan – will be negligible.
On the topline, growing Provenge sales is another long shot. There is little to drive uptake of an expensive product with cheaper alternatives in the shape of Xtandi and Zytiga; Europe, where Provenge was recently approved, is even more averse than the US to costly drugs with borderline efficacy.
That leaves manufacturing; Provenge is produced at facilities in California and Georgia, after a third plant, in New Jersey, was sold to Novartis in 2012 to form the basis of the Swiss firm’s commercial effort behind CAR-T therapies. Mr Raffat stressed that the two plants were included in Valeant’s $296m proposal.
The opportunity here could be for Valeant to provide manufacturing to one or more CAR-T companies seeking commercial capacity.
However, the main players like Juno and Kite Pharma will likely want to own the relevant plants rather than relying on a contractor – let alone one that, like Valeant, has no experience of complex cell manufacturing.
And can the Dendreon plants be adapted for use with CAR-T therapies? Novartis thought so, and that is probably good enough for Valeant.
For now Valeant’s $296m – barely above the $275m that Dendreon’s liquidators had set as the reserve in the fire sale – is only the preferred bid for Provenge, and others can come forward before February 12. Still, most if not all relevant big pharma and big biotech companies will already have cast an eye over the Dendreon assets and passed.
Whether $296m represents a bargain or a waste of money is anyone’s guess. Valuing an asset on a sales multiple alone is nonsensical, especially if it is one that has never yielded a profit and looks unlikely to do so any time soon.