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di Giancarlo Nicoli

On 1/3/2012 (but news went out on 1/4/2012 after markets closed), Dendreon (NASDAQ: DNDN) granted a grand total of 1,387,000 shares to executives and directors. Quite a big number both in dollar terms ($10,000,000 give or take) and as a percentage of company capital: It’s somewhat less than 1% of total float.
All stock has been granted for free. Exercise price is $0.
Breakdown of stock grants is as follows:

This restricted stock award vest as follows: 25% on the first year anniversary and 6.25% quarterly thereafter:
John E. Osborn, EVP, General Counsel: 150,000
Gregory T. Schiffman, CFO, EVP of Finance & Treasure: 150,000
Mark W. Frohlich, EVP, Clinical Affairs & Chief Medical Officer, 150,000
Greg Cox, VP, Finance, 52,000
Richard J. Ranieri, EVP, Human Resources, 200,000.

All restricted stock shares vest (become sellable) on date of grant:
Richard B. Brewer, Director, 25,000
Susan Bayh, Director, 25,000
Pedro Granadillo, Director, 25,000
David C.Stump, Director, 25,000
John H. Johnson, Director, 25,000
Bogdan Dziurzynski, Director, 25,000
Gerardo Canet, Director, 25,000
Douglas G. Watson, Director, 25,000.

The award will vest ratably over 3 years based upon the achievement of Company performance goals:
Mitchell H. Gold, President & Chief Executive Officer, 460,000.

All restricted stock shares are fully vested (become sellable) on the first anniversary of the date of transaction:
Dennis M. Fenton, Director, 25,000

As if to mitigate shareholders’ anger, the following day Dendreon announced fourth quarter revenues and updated on commercialization. News was good and the stock price reacted accordingly. They almost doubled since.

I have two themes to develop today.

One is: why did management grant itself a so large amount of common shares?

The other is: how much is Dendreon worth?
Well, just start with a tentative answer of the second question.

I prepared a comparison table, as a valuation exercise.
We see that large, stable biotechnology companies have Price to Sales ratios ranging from 3.84 to 6.96; and Price to Earnings ratios from 16.86 to 30.79.

Company P/S P/E
Dendreon Valuation Table
Amgen Inc. (AMGN)  3.84  16.86
Gilead Sciences, Inc. (GILD)  4.12  13.32
Celgene Corporation (CELG)  6.96  30.79
Biogen Idec Inc (BIIB)  5.72  24.34

I also want to add some spice here.
On Saturday, January 7, 2012, Bristol-Myers Squibb Company (NYSE:BMY – News) and Inhibitex, Inc. (Nasdaq:INHX – News) announced that the companies have signed a definitive agreement under which Bristol-Myers Squibb will acquire Inhibitex for $26.00 per share in cash pursuant to a cash tender offer and second step merger. The transaction values Inhibitex approximately $2.5 billion.
Inhibitex, Inc. is a biopharmaceutical company focused on developing products to prevent and treat serious infectious diseases. It does not have any single product on the market to date.

So, back to our question: How much is Dendreon worth?
Dendreon said:

  • At the end of the fourth quarter, completed in-servicing for more than 840 total sites, of which:
    • More than 590 sites have infused PROVENGE, which represents the greatest growth in infusing sites quarter over quarter; and
    • Approximately 615 sites have either infused the product or have their patients scheduled for their first PROVENGE regimen.
  • Improved PROVENGE reimbursement landscape for customers and patients:
    • Reported average time to payment is less than 30 days for physicians, which is better than industry standard, reflecting an improved reimbursement landscape due to a national coverage decision and activation of a Q-code that accelerates electronic adjudication of claims.

Dendreon also said:

  • EU application filed. Discussing partnering.
  • “compelling” data to be presented at AUA and ASCO on both effect of Provenge at tissue level pre-surgery AND further analysis of Frovenge effect and “true” clinical benefit of Provenge.
  • EU application filed. Discussing partnering.
  • Sequencing study for Provenge and Zytiga.
  • Discussing Japan with regulatory authorities.
  • Projects underway to reduce COGS with automation.
  • Special sales team for urology practices and with key aim of making large urology practices big prescribers.

I think we have enough data in place to try some “what if”.
What if Dendreon reaches $500 M within twelve months for now?
Valuation would range from $2B to $3.5B if it were a mature biotechnology. But, since DNDN is in “growth mode”, it think it might get an even higher price.
It all means a price per share (pps) in the $14-$28 range.
What if we add the $2.5B “acquisition premium” Bristol-Myers Squibb Company paid to gain control of Inhibitex? Then pps would be in the $30-$42.

Now, you see, I think I can give an answer to the first question: Why did management grant itself a so large amount of common shares?
In my opinion, management knows that current DNDN stock price is low and that a high enough offer (say, in the mid $30s) would be impossible to resist and would also still be a bargain for the acquirer.

I want to close this article with another “What If”, to see if, say, a hostile offer of $40 per share would be a bargain for the acquirer.
What if, in 2015, Dendreon reaches $1.5B in sales in the USA, $1B in Europe and $0.5B in Japan?
Dendreon would then have $3B in sales and we know from management that Dendreon would enjoy a 50% earnings margin. That would mean earnings of $1.5B. A reasonable Price-to-Earnings ratio might be 20. Just multiply $1.5B x 20 and we get $30B.
It would mean a pps of $210.

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