Dendreon: There and Back Again

Today you can buy Dendreon (DNDN) stock, with an FDA approvable letter for Provenge, for less than it sold for a couple of months ago when most analysts thought that an approvable letter was a very optimistic outcome; they expected outright rejection of the therapy. Why?

Dendreon stock volatility over the last 3 months is a great illustration of emotionalism, greed, fear, failing to do research, crowd pursuation, and the dangers of pricing by auction systems.

This morning when I went jogging there was a dead fox about a half-mile down the country road I live on. Unlike most road kill, its body was intact; it had died from a head wound. I had never seen a fox up close. It had a magnificent tail and fine grey fur. The mouth was open, and its teeth were terrifying even though it was dead. After some hesitation I picked it up by the tip of the tail and threw it to the side of the road, thinking of those Dendreon investors who tried to make a lot of alpha by dashing across a dangerous road at the last minute.

With hindsight we can all appear geniuses. I saw at least one blog, maybe two, that clearly, after the facts, claimed to have foresight that was not there. It is a temptation for an analyst.

Let's review the history and try not to read more likelihood for outcomes that was actually available before the dice were rolled. After all, a key component of biotechnology is understanding biostatistics, which sometimes go against ordinary, common sense.

Yesterday Dendreon's management held a conference for analysts (and open to anyone to listen to) which began to restore a feeling of rationality to the situation. If you read my summary of the conference you should pay close attention to management's statement and the Q&A portion [See summary]. What we have today is a drug therapy that is likely, but not guaranteed, to be approved as a therapy for prostate cancer, the second most common cancer in the U.S. It is how we got to this, combined with the relatively small number of shares of Dendreon stock outstanding, that led to the recent price gyrations, including the current buying opportunity.

Back in January of this year only Dendreon's management and a few brave cohorts thought there was any chance Provenge would be approved by the FDA given that the Phase III trials did not meet their pre-designated primary endpoints. They did something better: they significantly increased patient survival time. But the FDA is famous for being hard on those seeking drug approvals. So you could buy DNDN in the $4 per share range; it traded in very small volumes.

Dendreon's management said they were talking to the FDA and thought the Advisory Panel would recommend approval of Provenge. A few days before the panel's vote date, towards the end of March, the stock began to move, even though nothing had changed. Most of the stock is owned by long-term investors, and there are only 81.7 million shares outstanding.

The panel voted to recommend approval of Provenge. The stock started up. Momentum investors jumped in and the options market heated up. Those who expected a denial went short. Those who expected approval went long. Not too many people were betting on an approvable letter.

When the approvable letter came out all the short-term guys liquidated their longs and shorts. That process mostly ended this morning. So in a few short weeks the stock hit a high of $25.25 and a low of $4.95. This was driven by news that changed the probabilities of the real value of the company in the future, but exagerated by the auction system of pricing and leveraging provided by options.

Road kill? If no leverage was involved, the stupidest investor lost 80%. Sad, but it beats the returns on many Internet stocks bought in 1999.

Even with the approvable letter and the low price to future promise ration, Dendreon is a speculative, risky stock. Until Provenge is approved and is generating income, this stock should be held only as part of a portfolio created by people who have a good understanding of risks.

Please note that I have been a Dendreon investor since 2004.

See my Dendreon (DNDN) page
See Dendreon's web site