An amateur investor's 65-page critique of cancer-drug maker Dendreon (DNDN), which paints the company as a nest of leaks and insider deals, is a good example of why lack of transparency in management is always a false economy.
On the surface, DNDN holders have absolutely nothing to complain about. The stock floundered at under $10 until April 2009, when its $93,000-a-course prostate cancer product Provenge was approved, despite years of conspiracy theories circling the company and concerns that the drug might not work. Management has ostensibly triumphed over adversity: Dendreon now trades at about $40.
Then, along came Brad Loncar (pictured), owner of just one share of Dendreon (he previously sold thousands), who ran out of patience earlier this year when the company failed to meet the low end of its revenue guidance, one of a string of misleading statements he claims management made over the years. He wrote to Dendreon chairman Richard Brewer on Feb. 22 and on March 14, asking the board to consider tightening its oversight of CEO Mitchell Gold and his team. The company didn't respond to his letters, so he posted his treatise on the internet and on March 29 started a Twitter stream. Five days later, Loncar's proposals are all anyone who follows Dendreon is talking about.
Loncar's critique is a classic act of citizen journalism. It's not that he uncovered a major new scandal at the company. Rather, he combed publicly available information and put together a series of disparate events that paint a picture of a company that has been anything but forthcoming with its investors. Some examples:
- Aug. 11, 2009: CFO Gregory Schiffman told investors, "We do not have a need to access the capital markets." Four months later, Dendreon issued 17.25 million new shares, raising $409.5 million.
- Feb. 22, 2010: Gold said he expected $60 - $120 million in revenue from Provenge for the first six months. Total revenues for first eight months turned out to be less than $48 million.
- April 8, 2010: Dendreon hired Varun Nanda as svp/global commercial operations. On Nov. 18, 2010, Nanda left the company. No explanation was given.
- Sept. 16, 2010: Dendreon paid $16.5 million to settle a shareholder lawsuit that claims Gold sold 24 percent of his DNDN holdings ahead of a critical FDA approval date while in possession of negative information indicating that the FDA was unhappy with one of Dendreon's manufacturing facilities. The settlement was announced on the same day that the company disclosed revenue for the quarter was just $20 million. The company has not put in place policies that would prevent a recurrence of this event.
- April 13, 2009: shares closed up ahead of an positive clinical trial announcement.
- Feb. 22, 2010: In a conference call, Cowen & Co. analyst Eric Schmidt referenced an FDA inspection that had not been disclosed.
- April 29, 2010: Dendreon shares traded up 15 percent ahead of FDA approval for Provenge.
Ironically, Loncar's document has attracted so much media attention precisely because Dendreon has done nothing about one of Loncar's main criticisms: The company is lousy at responding to non-scientific criticism. When journalists and other outsiders beat up on the company -- and get their facts wrong -- "it is hard to tell if the company even has a PR department or a spokesperson ... Management's silence has been deafening," Loncar wrote.