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by Andrew Vaino
Vaino's Biotech Corner



Dendreon (DNDN) is really a biotech gift that just keeps on giving. In advance of an FDA advisory panel a few weeks ago I was mildly bullish Provenge would be recommended for approval, and suggested a prudent play would be a bullspread. This turned out to be a good play. I suggested after approval that the inevitable short squeeze that had to occur (short interest on DNDN was 25%) was a good buying opportunity, and was happy with the 56% return in just over a week (I wrote in The Blog on April 10 that I thought it was time to sell) this afforded. Now, with the FDA set to rule on whether Provenge should be approved by May 15 there’s yet another opportunity to make some money from Dendreon. It just doesn’t get any better than this!

There’s no shortage of opinion about whether or not Provenge will get approval from the FDA. Arguments in favor of approval are based on survival benefit and recommendation of the advisory panel. Arguments against approval are based on less than straightforward statistics that were used to establish the survival data.

I think both opinions have merit and that it’s far from clear what the FDA will decide. My guess is odds of approval to an approvable letter are about three to one. Please note, I use the term ‘odds’ as this is still very much a gamble. Given that the market had written Provenge off barely a month ago, there isn’t as much downside to an approvable letter as there is upside to outright approval. With the FDA advisory panel having said the drug is both safe and effective, I would expect a drop to no lower than $10 to $12 on approvable. Upside on approval will be at least up to the 30s, probably higher.

DNDN has really been a fun stock since March 30th. For example, DNDN has a float of 81M shares. In the 23 trading days since March 29th (when trading was halted in anticipation of the FDA advisory panel recommendation), 768,229,500 shares of DNDN have traded: that is, each stock has been traded almost ten times. The average daily fluctuation in price of DNDN for the past 23 days has been 7%. The same average for the S&P 500 has been 0.4%. In the past week the stock is up 22%. Looking only at stock price it almost seems the market is convinced Provenge will be approved.

Options, on the other hand, suggest any such clarity is misplaced. Implied volatility for May in-the-money options is approaching an astronomical 450%(!). If the stock market is saying the drug will be approved, the options market isn’t as convinced. This high implied volatility makes a straddle unfavorable.

I’m more bullish on DNDN than I was before, but I’m still not 100% certain. Again, in cases like this a bullspread (simultaneously buying a call and selling a call at a higher strike price) can be a good play: I’d go with options expiring later than May for more breathing room. I particularly like the August 17.5/30 bull spread. While May 15 is the stated “deadline” for the FDA’s decision, a ruling could come earlier or, as was the case with NRMX a few weeks ago, the FDA could announce they will delay.

With implied volatility so high, I also like covered calls. DNDN closed Friday (May 4) at $19.39. Ask for May 20 calls was $5.60. So, buying the stock and selling the call gives an automatic profit of 32% if Provenge is approved: 32% profit really isn’t that bad for eight days. In the event the drug is not approved outright, and the stock price falls, well, then your cost basis is only $13.79, and you have the stock if and when Dendreon complies with whatever the FDA requests. I do believe Provenge will eventually be approved, and this will still be a good buy. If the FDA decides it needs more time (trading in anticipation of this is unwise) you get to keep the $5.60 and you still have the stock.

The stock will be highly volatile over the next week, so timing will be important and impossible to gauge perfectly. I would look to enter on weakness Monday or Tuesday. For those seeking more adventure, perhaps using some of the profit from past DNDN trades (?), straight calls or May bullspreads are good but riskier plays. Dendreon is definitely going to be a fun stock!


Source: PeterNavarro.com



RELATED READING:
- Dendreon's New 'Hold' Rating at A.G.Edwards
- Dendreon: Countdown to FDA
- Cramer Looking For the Next Dendreon
- Out of Dendreon; Another Chance in May

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