Is Dendreon Finally Cheap Enough?


At some price, everything is a buy.

Whether Dendreon has finally reached a price where a big pharma might be willing to step in and buy the beleaguered biotech is debatable.

On one hand, it has a market cap of a drugmaker that's waiting for phase 3 data -- like it was in 2009 -- not one that has a drug on the market -- like it does now.

DNDN Market Cap Chart
DNDN Market Cap Chart

DNDN Market Cap data by YCharts.

But the market cap only tells part of the story. And doesn't tell you anything about how much it would cost a pharma to purchase Dendreon. An acquirer's true cost is the acquiring price minus Dendreon's cash plus Dendreon's debt that it'll have to assume. That value, called the enterprise value, stands at around $750 million based on Dendreon's cash and debt.

With a sales run rate of $280 million per year, based on first half sales, Dendreon is being valued at a price/sales ratio of about 2.7. Normally that wouldn't be a bad pickup for a pharma, but Dendreon has a couple of things working against it.

For Dendreon to be a good buy above its current price, an acquirer would have to be convinced that it could increase sales of Dendreon's prostate cancer treatment Provenge. While some marketing muscle from a big pharma could help, increasing sales substantially is going to be difficult.

Provenge ran into trouble when Johnson & Johnson's Zytiga came on the market. Zytiga is now competing directly with Provenge for the same types of prostate cancer patients. And given the easier-to-administer pills, Johnson & Johnson is winning with sales of $464 million in the third quarter. Dendreon isn't going to have that level of sales for the full year.

And the competition is only going to get more intense with Medivation and Astellas having recently completed a trial in the same population that Johnson & Johnson and Dendreon are targeting. Some doctors were already prescribing Medivation and Astellas' Xtandi to those patients, but now there's evidence that it's helping the early-stage patients arguably better than Zytiga and Provenge, Xtandi should start to take market share.

When a pharma buys a biotech, it typically bases the valuation on sales rather than earnings, which are fairly useless as a valuation because the pharma can eliminate a lot of the redundant costs after the acquisition. Not to mention that many biotechs aren't even profitable because they're plowing cash flow back into research and development.

But ultimately the earnings from the drug still matter to pharma acquirers. The typical price/sales ratio assumes a certain profit based on a certain gross margin. Unfortunately, Provenge is very expensive to make, requiring a discount on the price/sales ratio to get the same profit.

Cheap enough?
Some pharma might come and snatch up Dendreon -- Bloomberg reports it's taking bids -- but investors shouldn't expect much of a premium. It's hard to argue that's a good investment thesis.

If you're going to buy Dendreon, I think you have to be convinced that the company can turn it around on its own. Unfortunately with the large debt -- about $550 million -- due in 2016, Dendreon doesn't have much time to turn things around.

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Originally published