Wednesday, May 9, 2007

Dendreon (DNDN) - A Quick and Rough Around the Edges Take

Front and center is Dendreon (DNDN). When I bought protective puts last week, I had not been expecting to make money on them, but the FDA has issued the 'approvable letter' which means the company will need to provide more information about its prostate cancer treatment, Provenge before bringing it to market. As a result of getting just the approvable letter and not all out, immediate approval, DNDN is down about 60% this morning.

Says Mitch Gold, president and ceo of Dendreon in a PR Newswire release, "Given our strong belief in the survival benefit and safety profile ofPROVENGE, coupled with the positive outcome of the Advisory Committee meeting, we are disappointed that this decision will cause a delay in the availability of PROVENGE for patients who suffer from advanced prostate cancer."

"Delay" is the key here. At this point we don't know exactly how long the delay will be, but its not a stretch to imagine the delay will be at least a year, if not two to three. The company says it is seeking a clarification "from the FDA as to the nature of the data that is being requested."

The outcome is going about as expected from a market reaction perspective, with the stock losing more than 50% of its value on this "delay". Had the FDA rejected, we'd be burying DNDN right now and its shares would be trading under $2.

I remain a big believer in DNDN and Provenge but I have no choice but to completely unload my November options strangle position at the open and then regroup once more information is available. The very good news here is that Provenge didn't get rejected, the bad news is that it didn't get fully approved. My initial impression is that DNDN will fight on and eventually get Provenge to market, but will eventually be forced to do a secondary offering at a far lower share price as it deals with the FDA. Does the delay leave DNDN vulnerable to a takeover 'on the cheap' as it works to the provide the data? Again, unknown since even DNDN doesn't seem to know exactly what the FDA wants. Is the approvable letter enough for DNDN to receive investment interest from a friendly larger biotech company? So many questions this morning, too few answers.

DNDN is once again a lesson in options market psychology. As I had noted, the long side of my position in Dendreon was pure profit (house money) from the rally on panel approval more than a month ago. I had not decided to protect it with November 15 puts until last week (even did some shifting yesterday from a lower strike to a higher strike) when I saw people buying May 50 calls en masse. May 50 calls? That was mania pure and simple and a dangerous contrarian signal that the nutty crowd would find itself losing money, and lots of it. They will this morning.

Position disclosure: about to unload a strangle

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