Biotech companies rarely go bankrupt. Sitting where I sit, that bit of conventional wisdom comes around every so often, although it doesn’t generate quite the same buzz as Halley’s Comet or a wardrobe malfunction. Bankruptcy just doesn’t get America jawing over the water cooler on Monday morning. (I can’t imagine why.)
If your cooler is filled with Pacific Northwest spring water, however, you might have Dendreon’s recent bankruptcy announcement on your mind.
After all, the Seattle biotech with its pioneering prostate cancer treatment sipuleucel-T (Provenge) once seemed to be the next homegrown cornerstone of that city’s life sciences community.
Key bankruptcy meetings between the various parties are scheduled next week, and by early February, Dendreon as we know it could be gone, even as the company continues to produce and supply Provenge. Its creditors are pressing for a quick auction after the New Year.
There are precedents for bankrupt biotechs recouping at least something for their stakeholders, as we’ll see a bit later. But whatever Dendreon’s fate—sold for a fraction of what it was once worth, reorganized under new ownership, or wound down altogether—the company will always get kudos for bringing the first cancer immunotherapy to market and making the complicated logistics of it actually work.
It just didn’t work well enough for patients. “It was difficult to see a clear and compelling efficacy signal,” says Rob Johnson, an immunotherapy specialist with biopharma consultancy Alacrita in Cambridge, MA.
As Dendreon fitfully moved Provenge through late-stage clinical trials, the prostate cancer field shifted beneath it, and rivals caught up to it. By the time the FDA approved Provenge in 2010, patients and doctors expected more dramatic results for the $93,000 price, says Johnson: “The headache is only worth it if you’re delivering real clinical benefit to patients.”
A lot of what Dendreon did turned out to be bad business: misjudging the market, miscommunicating with doctors, and leaving key management positions unfilled. It also had an extremely complicated technological system that, in part, extracted and fused a patient’s own immune cells to an engineered antigen—a protein from a tumor cell that is key in triggering disease—outside the patient’s body.
“If you had to pick the hardest way to do cell therapy, that’s Dendreon,” says Bob Nelsen of ARCH Venture Partners, who has invested in the field for years (but not in Dendreon). “Almost every other thing in cell therapy is easier, but that doesn’t mean it’s easy. Dendreon proved you could do it even with the hardest [method],” says Nelsen, citing the company’s reliability rate of “making the product they wanted out of the cells.”
That’s a big reason why Seattle-based Juno Therapeutics, with Nelsen and ARCH as the lead investor, chose Dendreon’s former head of operations Hans Bishop as CEO. So when you hear news of Juno, Novartis (NYSE: NVS), Kite Pharma (NASDAQ: KITE), bluebird bio (NASDAQ: BLUE), and others doing cell-based immunotherapy—perhaps even at the upcoming American Society of Hematology conference in San Francisco—remember that Dendreon was the pioneer.
And pioneers often are the ones with arrows in their backs. The signs of a possible Dendreon bankruptcy have been piling up for a year or two: Massive debt—$620 million—coming due in 2016. Disappointing sales for Provenge, and getting worse at a time when early drug launch wrinkles often get smoothed out. No takers for the company during an earlier attempt to find them.
Dendreon’s move into Chapter 11 was perhaps inevitable, and definitely rare—but not quite as rare as conventional wisdom would let on. It’s a pre-recession notion: From 2000 to 2008, the year the world plunged into financial crisis, there was roughly one bankruptcy per year among public life science companies.
In the seven years since, however, there have been 46. In other words, 82 percent of all the biotech bankruptcies since 2000 have been filed after 2007. Well, sure: recession hits, capital dries up, and it stands to reason a bunch of companies are left grasping for a life line.
But here’s an odd thing: Most industries showed the opposite effect. I examined a bankruptcy database that listed 1,929 companies across 28 industry sectors, and only 39 percent of the bankruptcies were filed after 2007. The 82 percent in the life sciences after 2007 were by far the highest proportion of any sector. Only five others (mining, oil and gas, paper and packaging, publishing, and real estate) were above 50 percent.
(A note about sourcing: I’ve used a database from New Generation Research that compiles all U.S. public bankruptcies, but not private companies. The database also uses the broad Healthcare/Medical category, which means I had to comb through and use my best judgment to identify the biopharma, device, and diagnostics companies.)
Biotech, proportionally speaking, was hit much harder by bankruptcy after the recession than every other industrial sector, and I’m not sure why. There was no consensus among the bankruptcy lawyers and bankers I spoke with, but my conversations brought up several potential factors.
There was a lot of fundraising during the genomics bubble of 1999-2000, and it might have taken several years for those companies to get public and fizzle out. If true, that shakeout has taken years. There was a big spike in 2008-2010, but then eight more bankruptcies in 2012 and six more in 2013. This year, Dendreon is only the second biotech bankruptcy, so perhaps the unprecedented public-market access of the past couple years is having a positive effect.
I wondered if the large wave of bankruptcies was in part fueled by cash raised during the recession, or just after, when debt was incredibly cheap. Big drug firms with sterling debt ratings borrowed to finance massive takeovers and for more general purposes.
In 2011, Dendreon took on the debt that is now sinking its ship. (If you’re looking to borrow a few billion, debt is still cheap, by the way.)
But one leading biotech banker not affiliated with the Dendreon debt issue, who asked to remain anonymous, cautioned that Dendreon’s big debt load was a “one of a kind” situation. Most bankrupt biotechs haven’t gorged on debt the way Dendreon did to fuel the Provenge launch and build infrastructure, the banker said.
In biotech, the tipping point into bankruptcy isn’t often debt but product failure, says Robert Eisenbach, bankruptcy counsel at the law firm Cooley. And if it’s the only product, whether it’s in the clinic or on the market, there’s often little to do but liquidate.
Two other launch-disaster stories stand out in recent memory. One included a lot of debt and ended in bankruptcy: Savient Pharmaceuticals won FDA approval in 2010 for pegloticase (Krystexxa), a twice-monthly treatment for severe gout, and executives had dreams of selling the company on a high note. But Savient bungled the launch and called off the search for a buyer; it completely misread the market for pegloticase (it was 9,000 U.S. patients, not 120,000) and tried jacking up the price to compensate.
Another drug firm recently avoided bankruptcy and gave shareholders at least a small fraction of value for their holdings. Transcept Pharmaceuticals of Point Richmond, CA fought for years to get its Ambien-like sleep aid zolpidem tartrate (Intermezzo) on the market to help people who wake in the middle of the night. After FDA approval in 2011, however, the drug was a complete flop, and amid hostile fire the publicly-traded Transcept was left contemplating liquidation if no buyer stepped up.
This summer, antibiotic developer Paratek Pharmaceuticals agreed to merge into Transcept to take over its public listing. Transcept owners saw every 12 shares converted to one new share, and they emerged with about 10 percent of the new company.
Salvaging a little value for Dendreon shareholders is highly unlikely unless a huge, unexpected bidding war erupts. Creditors want to move quickly to an auction by the first week of February, but only if they find a bidder (a “stalking horse” in bankruptcy parlance) to set the minimum price of $275 million. Is Dendreon worth even that much?
To its credit, the firm does have European Union approval of Provenge. When Hans Bishop, now CEO of Juno, joined Dendreon in early 2010, he told Xconomy that “that the opportunity [for Provenge] outside of North America is probably three times bigger than the opportunity in North America. The rest of the world opportunity is very important.”
But that was before Provenge brought in only $284 million in 2013 U.S. revenues, with $224 million more in the first nine months of 2014.
If a buyer steps up, it’ll likely be for Dendreon’s employee expertise and infrastructure. Novartis, which is developing a T-cell immunotherapy product it licensed from the University of Pennsylvania, bought Dendreon’s New Jersey manufacturing plant for $43 million in 2012.
Dendreon has two more plants in Orange County, CA and Atlanta, GA, and the firm’s employees have valuable expertise. But Alacrita consultant Johnson is skeptical of the minimum asking price the creditors seek. “You can build a lot of clean rooms with $275 million,” he says.
If employees—about 700 at the time the bankruptcy papers were filed—start to walk, they could take valuable expertise with them. Dendreon counsel Robert Crotty included in the bankruptcy filing a standard Chapter 11 caveat that “any disruption from employee resignations or lack of morale could have devastating effects on the debtors’ restructuring efforts.”
Dendreon employees might take some comfort, says Cooley’s Eisenbach, because companies are typically “aggressive in seeking protections for their employees”—except for stock-related benefits, which get wiped out. (U.S. bankruptcy law also says employees’ back wages, covering half a year before the bankruptcy filing, get priority during the proceedings, but they’re only protected up to $12,475 per employee.)
There will likely be no comfort at all for Dendreon’s current shareholders—BlackRock (8.1 percent) and Vanguard Group (5.8 percent) are the only ones with more than 5 percent. But for buyers at bankruptcy auctions, there is precedent of spinning gold from straw. In November 2009, Icelandic genetics firm deCode Genetics declared bankruptcy with $314 million in debt on its books versus $70 million in assets; it couldn’t even pay the rent on its Reykjavik headquarters or Illinois R&D site.
A financing group put together for the occasion extended an $11 million loan, then added $3 million to buy deCode out of bankruptcy. Saga was mainly backed by Polaris Partners and ARCH Venture Partners. They went on to sell the new deCode to Amgen for $415 million in 2012 and spin out yet another company, NextCODE Health, based on deCode technology.
For Dendreon employees, the best way forward could simply be to hope that Juno, Celgene—which is opening its immuno-oncology center in Seattle—and other immunotherapy companies in the area are hiring as fast as possible.
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