Build a better mousetrap and the world will beat path to your door. Cure cancer and everyone will cheer you. Dendreon didn’t cure cancer, but it did develop a cancer treatment that was better than the competition. In 2013 they made over a quarter of a million dollars and treated hundreds of prostate cancer patients. The company is filing for bankruptcy. Shares of DNDN are at less than a tenth of my last sale; and my last sale was at less than a tenth of the stock’s peak. Investing is risky, but Dendreon and DNDN are a cautionary tale for a possibly shifted investing environment. Rewards continue to exist, but the risks may be higher.
It has been over two years since I blogged about Dendreon. The company and the stock fit many of my criteria. I bought DNDN when Dendreon was unknown by most of the investing community and laughed at by much of the rest. The company was developing a cancer treatment that relied on teaching the body how to defend itself. It was a pricey treatment, but it was cheaper and better than the conventional competition. If the technology succeeded, the potential would exist to treat many of the other major cancers. Finally, it was approved and the company switched roles from unproven to approved.
As an investment, DNDN was following a path I’ve experienced enough times before to encourage me to buy such small companies. In less than a year and a half it went from below $3 to over $50. The valuations seemed conservative because most estimates were based on one cancer treatment; but the potential was far greater. Regardless, I was about to sell about 10%-20% after it rose another 20%. Then, a less than stellar earnings report. Instead of going up 10%-20% it went down 40%. Reality was less than expectations; so, even making hundreds of millions of dollars was not enough and the stock continued to slide. I continued to sell out of necessity and sold my last shares at about $4. Friends who held shares saw the business grow and the shares sink. Some still have theirs and I can understand that pain.
Dendreon should’ve succeeded. DNDN should’ve succeeded. The reasons they didn’t are various. The most obvious reason is that the company got into too much debt to build out the appropriate capacity. After a few years without sufficient growth a balloon payment that would’ve been trivial for a multi-billion dollar corporation was too big to meet.
FDA delays, a flash crash, and surprisingly negative media pressure are events and circumstances that are each explicable, yet when combined suggest a decrease in trustworthiness in investing. None, that I’m aware of, have been credibly investigated and appropriately prosecuted.
The FDA delays made bureaucratic sense, but not business or humanitarian sense. The FDA treats novel treatments with great caution; but a three year delay to raise their assurances also meant denying tens of thousands of men the treatment. Death by bureaucracy is bad enough, but enough doubts were raised about conflicts of interest that suggest the delays were designed to the advantage of the existing competition. A three year delay would mean a three year continuance of profits.
The investing community frequently commented on trading activities that would normally draw the attention of the SEC; but, the flash crash surprised everyone, including one of the anchors at CNBC. DNDN went from over $24 to under $8 in less than two minutes. No news. Shareholders with Stop Loss orders were tripped out of their shares. The stock was halted, then rebounded. I was told that the three day settlement period involving each trade is there to provide a buffer in case the trades were suspect. The trades were left unchanged. The NASDAQ Market Maker wasn’t publicly criticized or investigated. The SEC and the system effectively did nothing.
In the media, suggestions, insinuations, and speculations were raised that bolstered the existing treatments rather than cheering a major advance against cancer. The data were rarely mentioned. The patients were ignored. One suggestion was that the media collectively decided to chastise Dendreon for trying something new. Another suggestion was that the industry’s immune response was powerful. An upstart that would be profitable at less than a billion dollars in revenue was a serious challenge to a multi-billion dollar industry. A few percent of a multi-billion dollar income stream is enough to fund major media campaigns, direct or not.
(The best discussion I’ve found is over on Investor Village.)
Or, Dendreon’s bankruptcy is due to one CEO overextending the company. That’s the easier story that fits nicely into a 15 second sound bite or a three inch newspaper column.
I don’t expect to learn if the conspiracy theorists are right. I doubt that they all are, but so many forces were in play that I also wouldn’t be surprised to find that at least one was correct.
The cautionary tale regarding investing is partly the classic risk / reward tradeoff. The other cautionary tale that has changed my perception of the stock market is the lack of a response from the FDA and the SEC. Whether through budget cuts, internal policies, or external forces, my government didn’t seem interested in even investigating abnormalities so many of us witnessed in public. Maybe that’s why they didn’t investigate and why I have less confidence in the system – the abnormalities are becoming normal.
Friends are encountering hardship because they also bought DNDN. My hardship started with the drop in DNDN in August 2011. Such hardships are dismissed by many because either their investments succeeded or they don’t invest. Investors do have to be prepared to weather such upsets, setbacks, and failures in silence. But, with wages stagnant, and hard work insufficient to get ahead, investors are at least trying to avail themselves of avenues. Those roads were rough before, but they seem a bit darker and dangerous now.
Dendreon will probably be a profitable company after it recovers from bankruptcy. Its main disadvantage has been its debt. Without that, the company has good prospects. Whether the shareholders will have to lose then buy back in, I don’t know. But, I would be curious to learn how much the new managers make in the meantime, and how they’ll be compensated throughout the proceedings. There are many perspectives on how a company can be viewed as profitable.