Lessons from Dendreon’s slow-motion car crash
A factor that made Dendreon’s fall from grace particularly painful was the illogical support given the stock by the market in the face of a crippling debt repayment deadline speeding towards the company like a juggernaut.
Thus when the crash of Chapter 11 bankruptcy protection finally hit this morning it was particularly hard, sending Dendreon’s shares down 70%. There are immediate lessons here for lossmaking biotechs being pitched debt financing, as well as for all developers of immunotherapies that involve complex inpatient procedures.
It is easy to say in hindsight, but a rational market should have marked Dendreon equity down to near zero some time ago; it has long been obvious that, because of its unfortunate capital structure, Dendreon was effectively owned by its convertible debt holders.
This is one of the key problems with choosing debt to finance a lossmaking enterprise, as Dendreon had done. While there clearly was value in the company’s technology and product offering, the group was no longer investable through the equity route (Dendreon fiddles while Rome burns, March 4, 2014).
When things are looking up, convertible debt can look highly attractive since – if things pan out – its future repayment looks trifling, and the only near-term pain is a relatively modest interest rate. Plenty of banks pitch this as “non-dilutive financing”, and many biotechs take the bait.
The key phrase, of course, is “if things pan out”; in biotech they rarely do. Development setbacks can take large chunks out of share prices, making the debt burden suddenly look large. At this point conversion often risks diluting equity holders excessively, while raising further equity puts even more pressure on the stock.
And this is how companies end up locked in a spiral of a falling share price and looming insolvency. And, if insolvency does come, the assets are usually sold off at fire-sale prices, with trade creditors, management payoffs and debt holders at the top of the heap, and equity holders at the bottom.
In short, debt financing sometimes works, but if it does the primary beneficiaries are the debt providers, and hardly ever the equity holders. The lesson seems to be not to fall into the temptation to start with.
Yet some Dendreon speculators continued to hope, prompting a 14% share price rise on Friday before today’s 70% collapse. Yes, the Provenge business might well attract a buyer, but the likely low price – a paltry $275m has been set as the reserve – will surely never drip as far down as equity holders.
The second aspect of the Dendreon saga is Provenge: a revolutionary prostate cancer immunotherapy that ultimately proved overpriced and cumbersome to administer.
Should the backers of companies like Kite Pharma and Juno Therapeutics, which are working on CART (chimaeric antigen receptor therapy) treatments, also now panic? After all most CARTs also comprise a complex modification of a patient’s own cells – though in CART this is T-cells versus Provenge's dendritic cells – which is inconvenient and expensive.
The short answer is probably not. Even if manufacturing is difficult, the fundamental difference is that, while Provenge barely offered a four-month survival benefit, most CARTs are generating astonishing results; then there is Cellectis, which is developing an allogeneic CART.
And Provenge was assaulted on multiple fronts, the terminal blows being struck by the launch of more efficacious, more convenient, oral drugs like Zytiga and Xtandi. The path for CART is unlikely to be plain sailing, but there is no reason to despair just yet.
Moreover Kite and Cellectis already have endorsement from big pharma – something Dendreon failed to achieve. And neither is funded significantly through debt.
This story has been corrected to describe the Cellectis CART as allogeneic.