More Biotechs Belly-Up These Days but Dendreon Still “One of a Kind”

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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.

The company entered Chapter 11 last fall with $250 million in debt. In an auction, creditors were able to double the original bid, with Savient going for $120 million.

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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4 responses to “More Biotechs Belly-Up These Days but Dendreon Still “One of a Kind””

  1. John says:

    Great article Alex – Would you be able to tell me where I can find the list of bankrupt biotech companies?

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  3. Bill says:

    Dendreon took on massive debt to buy and build out massive facilities that it owned in an expensive, unproven, difficult market space for their products. Few in biotech understood why they took on debt. Even fewer understood why they decided to own their facilities. Most in biotech choose to start by having their manufacturing done by contract manufacturers, who benefit from scale, experience and both physical and regulatory/GMP infrastructure. It is often a little more expensive per unit to use contract manufacturers but it avoids the massive capital outlays that ultimately sunk Dendreon.

    Mitch Gold made a bunch of big bets that were really bad decisions. And happened to sell his stock at just the right time on multiple occasions right before the stock tanked. Biotech investing is all about high risk, high reward. Dendreon took massive risks and failed completely at every risk it took.

  4. JimInAuburn says:

    Dendreon’s competitors in that market space pretty much cost just as much, just spread over time instead of all in one month. Their competitors usually have more side effects and require other treatments to minimize the side effects. Their competitors also require you to take a pill every day for years, whereas Dendreon’s treatment takes one month to complete. Their competitors have pretty much the same life expectancy extension.