Dendreon's Dead Enders Still Blaming Everyone But Themselves
With Monday's Chapter 11 bankruptcy filing, Dendreon's collapse is complete. The stock trades for actual pennies -- 22 of them, when I last checked. Dendron's creditors now control the company's only asset, the prostate cancer vaccine Provenge, which they will try to sell off at a fire-sale price.Â
Wall Street saw the Dendreon debacle coming long ago. But despite all the warnings, a core group of mainly retail investors won't accept the fact  that Dendreon died from self-infilcted wounds: Bad business decisions made by incompetent executives trying to sell a mediocre product which became obsolete too quickly.
Visit certain Internet stock message boards even today, and you'll still see the Dendreon dead enders parrot the absurd conspiracy theories propagated by Overstock CEO Patrick Byrne and his crew of Deep Capture naked shorting bamboozlers. Dendreon was killed by mafia-connected hedge funds! It's the FDA's fault! If it wasn't for a small cabal of jealous prostate cancer doctors, Provenge would be a blockbuster!Â
Nonsense. Crushing debt killed Dendreon.
EP Vantage's Jacob Plieth:
When things are looking up, convertible debt can look highly attractive since – if things pan out – its future repayment looks trifling, and the only near-term pain is a relatively modest interest rate. Plenty of banks pitch this as “non-dilutive financing”, and many biotechs take the bait.
The key phrase, of course, is “if things pan out”; in biotech they rarely do. Development setbacks can take large chunks out of share prices, making the debt burden suddenly look large. At this point conversion often risks diluting equity holders excessively, while raising further equity puts even more pressure on the stock.
And this is how companies end up locked in a spiral of a falling share price and looming insolvency. And, if insolvency does come, the assets are usually sold off at fire-sale prices, with trade creditors, management payoffs and debt holders at the top of the heap, and equity holders at the bottom.
In short, debt financing sometimes works, but if it does the primary beneficiaries are the debt providers, and hardly ever the equity holders. The lesson seems to be not to fall into the temptation to start with.
