Earlier this year, a Dendreon investor named Brad Loncar took the maker of the Provenge prostate cancer vaccine to task for what he believes are basic managerial shortcomings and criticized the board for failing to provide sufficient oversight and advice. The sort of complaints he expressed (read here) are familiar to investors in many stocks - repeatedly missing forecasts, failing to disclose important info and ignoring worthwhile suggestions. Irked that his missive to the Dendreon board was ignored, he went public ( see this) and generated some heat, but faded from view again after the Centers for Medicare & Medicaid Services endorsed reimbursement. But last week, his criticism seemed all the more relevant when Dendreon shocked investors by disclosing that sales were slower than planned, guidance was revised and layoffs were planned ( see this). The stock plunged 60 percent. Meanwhile, Dendreon ceo Mitch Gold and other insiders had been selling stock. We spoke with Loncar, who owns just 1 share, about his reaction to these latest developments...
Pharmalot: You’ve been complaining about Dendreon for months, but did anything happen after you sent your letter last February? Loncar: They invited me out to Seattle after my letter became public (which was in April). They were really nice about it. They listened and I had the opportunity to talk about all these things. I could kind of tell that nothing would come of it. For the most part, we were just sitting down and I was saying my piece. They were very accepting of what I had to say. It seemed my points were getting across. It was a very amicable meeting. And a month later, I went to the annual shareholder meeting in Chicago and I had an informal conversation with Richard Brewer (the Dendreon chairman). But no, nothing happened.
Pharmalot: So what was your reaction to the news that was just disclosed? Loncar: Like everyone else, I’m surprised by the extent to which the forecast fell. But I’m not surprised they missed expectations. A large section of my original paper was about how they were missing expectations before. If you go over all their old conference calls, for example, they were originally saying in 2010 they would do between $60 million to $120 million in sales, and they ended up doing $48.1 million. I think Wall Street kind of missed that for a couple of reasons. Number one, it was such small potatoes that people cut them slack. But the fact is that it was well below expectations. Look at their proxy statement for this year, the board grades the executive team on accomplishments from the previous year and they acknowledge they didn’t hit the sales target. There was an 80 percent rating. Well, $48 million out of $60 million is 80 percent.
Pharmalot: What was the impetus for your campaign? Loncar: Things started to not seem right. The story started to not turn out as they originally said it would. They gave guidance for 2011 – basically, we’re going to have a slow ramp up and a massive fourth quarter. Half of all revenue would be in the fourth quarter. But it didn’t pass the smell test. I could see scenarios where they could. But they didn’t hit previous marks and you’re going to have all your revenue in the fourth quarter? It’s like a football team telling you they’ll score all their points in the fourth quarter. For a company that didn’t have a track record, it was an uncomfortable position.
Pharmalot: Can you offer another example that irked you? Loncar: When Provenge was approved in 2010, they said they’d treat 2,000 patients in the first year. And then what happened? As the fall arrived and sales were not as high as they thought, they pushed back on the 2,000 number and said we’ll do it by mid-year 2011, maybe July or August. But what some people missed that was significant was when they changed guidance – maybe to some it sounded like they were just bumping back a few months. But look closely and it was more significant than they let on. What they meant was they could achieve that (goal) with using only the capacity in their New Jersey plant, the only plant they had. And they had only 25 percent of that plant capacity to draw on. The numbers have been much lower than they thought. But the additional 75 percent of New Jersey came on in this spring. And if you look at the number of patients actually treated, divide revenue by the charge back and you get an idea of number of patients they treated….Well, they still haven’t gotten to 2,000. It’s taking them more time and it’s taking significant more capacity than they originally said it would take to get them there.
Pharmalot: You’ve just sent another letter to the board and, again, one of the criticisms you make is that Dendreon settled shareholder lawsuits (read the letter here). Why does this trouble you? Loncar: It’s concerning for several reasons. One is the allegations contained in the lawsuit that executives put their interests ahead of shareholders…I’m not taking any position. I wasn’t part of them. But they alleged they sold stock before disappointing news was disclosed. Look at what happened this week. It’s kind of perplexing that such a dramatic drop could happen overnight and so a lot of people are wondering what kind disclosure practices this company has. The lawsuits were (filed) as a result of actions by executives. It’s discouraging when a company pays $16 million to settle actions of one or two individuals. Maybe insurance pays but is that fair? And why are there no consequences? I’d like to see the board come out and say something like that would never happen again.
Pharmalot: What’s your view on the recent stock sales by insiders, particularly ceo Mitch Gold? Loncar: In their defense, a lot of their sales are automatic sales that are scheduled to happen during the year, to give them the benefit of the doubt. On the flipside of that coin, this was a catastrophic event. The stock lost 60 percent. It’s a really big deal. Their explanation was this came about at the 11th hour and they’re just as surprised as everyone else. That may be true, but a lot of people are having a hard time understanding that. I will say the board of directors is responsible for protecting shareholder value. If I place any blame, it’s on the board. It’s confusing and very alarming that something like this happened overnight and it does make you wonder if there were warning signs and how could a group of industry experts on the board not have the thought of the possibility of something like this happening. There’s really no good answer either way. Either way, they were oblivious and didn’t see it coming, which is concerning, or cracks started to show and they didn’t disclose it. Either way, it’s a bad thing for shareholders…More than any investment I’ve ever had, I feel like I’m on the outside looking in and no one is looking out for the shareholder.
Pharmalot: Why would one or two independent shareholders make a difference? Or why not more? Loncar: One or two would be a good start… There are lot of questions to be answered and a lot of problems to be solved over the next year. I’m not saying it’s the answer to everything. But it could solve both problems. If you have a shareholder on the board looking out for all shareholders, that person will be much more forthcoming and more likely to get the truth out sooner rather than later. …They are too uniform. They all come from biotech and health care, basically the same mold. My suggestion is they need somebody from a different industry or completely different background, someone who comes with a different perspective. If they’re oblivious, they may be guilty of groupthink and looking at the same things the same way. I think there’s a lot of scientific thinking going on at Dendreon among the management and the board, but not enough business thinking. Maybe somebody from a different industry and had experience building a product or a brand.
Pharmalot: Do you think they have the right management? Do you think (ceo Mitch) Gold should go? Loncar: My beef is with the board, not the management…. As for Mitch Gold, he’s brought the company very far. And Dendreon right now is drinking from a fire hydrant. They were a small research organization and the day this drug was approved, overnight they became a big manufacturing company. There’s an explosive growth that comes with that… It’s very hard to manage and I sympathize with them. The question I don’t know is how much oversight he and the entire management team are getting right now. It’s impossible to know that without being there. To circle back and answer the question about why he shouldn’t go, I don’t have enough information to say. I don’t know what kind of advice he’s getting from the board. I think the management team has done some good things. They got the drug approved. It’s the first immunotherapy, which is pretty impressive. They have accomplished a lot. That being said, I disagree with many things they’ve done. And I think they’ve not seen a lot of the business side.
Pharmalot: Such as? Loncar: For example, they were asked last year if they will advertise to patients. He knocked down the idea and said patients already know (about Provenge), but anyone with a business sense would know that they need to establish a brand name and recognition and get the word out there. Not every patient will know. That’s the sort of decision that needs more business sense. To me, it’s a no brainer, especially when you consider how much negative publicity Dendreon and Provenge have received.