Quoted from their official description, Dendreon Corporation (NASDAQ: DNDN) is a biotechnology company whose mission is to target cancer and transform lives through the discovery, development and commercialization of novel therapeutics. The Company applies its expertise in antigen identification, engineering and cell processing to produce active cellular immunotherapy product candidates designed to stimulate an immune response. Dendreon is also developing an orally-available small molecule that targets TRPM8 that could be applicable to multiple types of cancer as well as benign prostatic hyperplasia. The Company has its headquarters in Seattle, Washington.
The encouraging news about Provenge boosted the confidence of many investors. Now I don’t know much about the future prospects of that cure but the from the buzz, I know that it gives patients affected with cancer an average 4 months prolongation of the survival of the patients, which is similar to a product that is currently approved by the FDS but Provenge has fewer side effects. What I know now is that the stock price of the company is currently too inflated to ensure a margin of safety on an investment. The only persons who have been able to make a satisfactory profit on the recent rise are long term shareholders and insiders.
What intrigued me are the strange events that have happened since the announcement that sent the stock skyrocketing and they are usually the type of things that send value investors running away from a company like a plague.
Insiders are dumping shares
My first red flag is that management has been dumping their shares for a quick profit. For example, since april 17th, Mitchel S. Gold CEO of Dendreon Corp. (NASDAQ: DNDN) has sold over 500000 of his own shares for an average price of about 20$ that he had acquired throughout Q4 2008 and Q1 2009 for less than 5$ a share. That looks like a quick 7 million $ profit on a single good news. He is not the only one, his chief financial officer and many directors took advantage of that price jump, as it can be seen on Reuter’s website. People more courageous will take a look at Dendreon’s SEC filings. Over 337 million shares of Dendreon have changed hands from April 13th to May 8th and the company currently has 98 million shares outstanding, that is way more than enough liquidity to convince someone let go of his shares for over 20$ when they were worth 4$ just three months ago.
The common stock offering
With their stock price in a comfortable position, the management of the company did exactly what anybody would had done in their place: they are issuing more shares, about 11 million of them based from their press release. It is the perfect time for them to do it and they will probably make enough money from it to finance their capital needs and the marketing of Provenge. This will probably dilute the control of some shareholders but, the benefit of increased capital is attractive.
As a value investor, I remain sceptical about who will benefit the most from the commercialization of Provenge. Will it be the management or long term shareholders? One thing is clear in my mind, those two groups have a bigger margin of safety on their investment than investors who bought their shares after April 14th because they were following the crowd on a hot rising stock.