On Reflection: A Valuable Lesson

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When Dendreon announced in July that it would close its Morris Plains, New Jersey, factory and lay off 600 employees, the decision represented the unraveling of yet another high-flying biotech company struggling to make the transition from product development to commercialization. But Dendreon’s troubles also offer an object lesson in the dangers of government providing direct subsidies to individual companies.

Speaking before a breakfast gathering of the Washington Biotechnology and Biomedical Association two years ago, Dendreon’s then-CEO, Mitch Gold, argued that Washington state should provide financial incentives to biotech companies to encourage them to establish operations in the state. He pointed out that Dendreon was establishing a plant in Union City, Georgia, in part because of more than $10 million in incentives offered by the state of Georgia.

Dendreon had promised to create 550 jobs in Georgia in return for those subsidies. But soon after opening the plant in late 2011, the company laid off 117 workers. It’s unclear whether the company will be forced to lay off more workers at that site. It’s also unclear how much of the subsidies Dendreon will actually receive from Georgia since the incentives depend on the jobs being in place for at least a year. And even though the plant remains open, Georgia has to be disappointed with the outcome of its effort to lure Dendreon.

It's also pretty clear that if Washington state had provided subsidies to Dendreon, as Gold wanted, there’s a good chance that money would have also provided a poor return on investment. By contrast, grants provided by the Life Sciences Discovery Fund, which Gold suggested were a waste of money, continue to provide a range of potential returns. (The fund primarily benefits universities and research centers.)

Dendreon says recent spending cuts will help make the company viable over the long term. But the investor community remains skeptical. The company’s stock price, which shot above $50 in the spring of 2010, was recently trading at less than one tenth of that. Investors were initially impressed by laboratory results for the company's prostate cancer treatment, Provenge. Seattle Business wrote about the company in February 2010, when Dendreon seemed likely to emerge as an important player in Seattle's biotech sector. But the $93,000 cost per patient for Provenge proved high, given that it could extend a patient’s life by about five months and many doctors remained reluctant to recommend it.

Dendreon ended up overestimating demand for its drug while underestimating the potential for lower-cost competitors, which soon emerged in the form of a promising drug from Johnson & Johnson.

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