SEEKING ALPHA June 29, 2011
Dendreon Corp (DNDN) is one of the biggest story stocks in the biotechnology industry and it has become a favorite of smart money investors. Valuations are rich, but it is hard to argue against the company's potential. In addition to promising drugs in the pipeline, its prostate cancer treatment Provenge could really drive revenues in the medium term as production capacity increases. The company even has a near term catalyst. It is expected to receive FDA approval for its Orange County production facility by June 30, 2011.
Still, despite the great selling points of the stock, there is a potential downside. Management interests may not be completely aligned with those of average shareholders. Executive officers and directors have modest stock ownership. In addition, their payouts from a change of control are relatively modest compared to market convention. Make no mistake, we are not making excuses for management. The executives get paid millions of dollars and this should be enough of an incentive to do their jobs, but other factors do come into play.
Modest Stock Ownership
According to the company's latest proxy statement, executive officers and directors beneficially owned 1,555,125 shares, or 1.07% of the company's stock outstanding. This amounts to nearly $61 million in stock. Make no mistake, in absolute terms, this is a lot of equity but divided by 14 persons, the stock ownership is likely modest relative to each person's net worth. Or worded another way, for a risky stock like Dendreon, which insiders could have purchased for very low prices during the financial crisis, the stock ownership is much less than we would like.
Change of Control Payment
Executives almost always receive a predetermined payment in the event of a change of control, especially if it leads to termination. The reason for this payment is to ensure that management is fully willing to explore a sale of the company if it is in the best interest of shareholders. In the absence of such a payment, managers may do their best to avoid a sale since it would likely lead to their termination.
Dendreon has a relatively modest change of control payment scheme. Once again, while the absolute dollar amount is significant to anyone, relative to management's compensation, the current change of control payments may not be enough to truly align their interests with shareholders.
Executives 2010 Compensation Change in Control Payment
Mitchell H Gold M.D. $5,254,373 $6,420,200
Gregory T Schiffman $2,037,302 $2,391,000
Hans E Bishop $4,929,116 $3,874,150
Mark W Frohlich M.D $2,060,798 $2,496,000
Richard J Ranieri $4,947,310 $3,841,200
Summary
The concerns raised in this article are problematic but easily addressed. Going forward, the company can pay a much larger percentage of compensation in the form of fully vested stock. In addition, the company can also impose a higher minimum stock ownership clause in the executive management employment contracts. In addition, the company may want to consider increasing the change of control payment to a larger percentage of trailing compensation.
Dendreon Corp (DNDN) is one of the biggest story stocks in the biotechnology industry and it has become a favorite of smart money investors. Valuations are rich, but it is hard to argue against the company's potential. In addition to promising drugs in the pipeline, its prostate cancer treatment Provenge could really drive revenues in the medium term as production capacity increases. The company even has a near term catalyst. It is expected to receive FDA approval for its Orange County production facility by June 30, 2011.
Still, despite the great selling points of the stock, there is a potential downside. Management interests may not be completely aligned with those of average shareholders. Executive officers and directors have modest stock ownership. In addition, their payouts from a change of control are relatively modest compared to market convention. Make no mistake, we are not making excuses for management. The executives get paid millions of dollars and this should be enough of an incentive to do their jobs, but other factors do come into play.
Modest Stock Ownership
According to the company's latest proxy statement, executive officers and directors beneficially owned 1,555,125 shares, or 1.07% of the company's stock outstanding. This amounts to nearly $61 million in stock. Make no mistake, in absolute terms, this is a lot of equity but divided by 14 persons, the stock ownership is likely modest relative to each person's net worth. Or worded another way, for a risky stock like Dendreon, which insiders could have purchased for very low prices during the financial crisis, the stock ownership is much less than we would like.
Change of Control Payment
Executives almost always receive a predetermined payment in the event of a change of control, especially if it leads to termination. The reason for this payment is to ensure that management is fully willing to explore a sale of the company if it is in the best interest of shareholders. In the absence of such a payment, managers may do their best to avoid a sale since it would likely lead to their termination.
Dendreon has a relatively modest change of control payment scheme. Once again, while the absolute dollar amount is significant to anyone, relative to management's compensation, the current change of control payments may not be enough to truly align their interests with shareholders.
Executives 2010 Compensation Change in Control Payment
Mitchell H Gold M.D. $5,254,373 $6,420,200
Gregory T Schiffman $2,037,302 $2,391,000
Hans E Bishop $4,929,116 $3,874,150
Mark W Frohlich M.D $2,060,798 $2,496,000
Richard J Ranieri $4,947,310 $3,841,200
Summary
The concerns raised in this article are problematic but easily addressed. Going forward, the company can pay a much larger percentage of compensation in the form of fully vested stock. In addition, the company can also impose a higher minimum stock ownership clause in the executive management employment contracts. In addition, the company may want to consider increasing the change of control payment to a larger percentage of trailing compensation.