Biotech Superstar: Dendreon Corporation

May. 2.11 | About: Dendreon Corporation (DNDN)

Dendreon (NASDAQ:DNDN) has one of the most beautiful set-ups I've seen in the biotech sector. A recent move by Vertex (NASDAQ:VRTX) on its cancer drug approval was one that I missed, but in my opinion DNDN has greater potential and the cleanest trade setup I've seen in a while. I outlined the details in the charts below as well as the vehicles to profit from on the trade, which I'll discuss in a moment.

There are four major investors (billionaires) who are backing your trade. Here's who owns what in DNDN:

  • Ken Griffin of Citadel Advisors: $15,000,000 of DNDN shares.
  • Steve Cohen of SAC Capital: 1 Million shares of DNDN acquired last quarter of 2010.
  • George Soros: 4 Million shares of DNDN.
  • David Shaw of DE Shaw: 1,300,000 shares of DNDN.

Even if we can't track exactly when and at what price, the third chart below clearly shows volume accompanied accumulation over the last year. I circled the volume bars in the yellow ovals.

Here's a recent Forbes article about the above investors' holdings.

As far as recent events are concerned, as most of us know, DNDN received FDA approval for late stage prostate cancer treatment, causing the initial meteoric rise. Another notable recent event is the approval of Medicare to sponsor the expensive $93,000 treatment. Earnings will be reported after hours on May 2. The action in the stock price is hinting progression on the revenue growth as well as revenue projections going forward. I'm more into DNDN currently for the chart setup, but it's important to know the underlying fundamentals as well.

Analyst Consensus for revenues & sales are as follows:

Consensus estimates for DNDN: Revenues grow from $370M in 2011 to $1,883M in 2014 (2011-2014 CAGR: 72%) and $2,331M in 2015 (2011-2014 CAGR: 58%). It is also expected to have $2.3B in revenues in 2015.

On to the charts. The first one is my favorite. When Johnson & Johnson (NYSE:JNJ) and VRTX announced their competing drug's approval, DNDN tanked around 15% after hours. This was a an impulsive-shock type of move, as someone panicked and let go shares for cheap. When DNDN opened the very next day, it quickly shrugged off the news like JNJ/VRTX were not even in the picture. In other words, the market doesn't consider their drug as a threat to Provenge.

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The second chart shows a pretty little bull flag that should deliver a 12-point move, once it breaks overhead resistance between 44 and 45.

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This third chart is the most informative, describing events and price movements over the past year. Notable are the near-cross about to occur on the 50/200-SMA. The blue rectangle indicates the consolidation and accumulation range that big buyers have been acquiring over the past year. The volume bars below are respective of the moves on the big green candles and gaps up. We also have a decisive break on the descending trendline. I do see signs that DNDN has been kept within this trading range as big money has accumulated. Upcoming earnings are the perfect catalyst to propel DNDN out of its current bullish formations.

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I own DNDN since $36 and $37, where it confirmed the breakout from the year-long descending trendline and crossed over its 50-SMA. Notice below, on the May options chains, that the open interest is owned in high volumes all the way up to the $50 strike. What's interesting is the activity on the $45 strike, where Friday's volume was nearly 50% of the current open interest.

Similar activity is noticeable in the later-dated contracts, especially the August contracts. I personally own Aug. 45 calls, as well as the shares. The options I'm holding are currently a double from where I've held them. In my opinion, since options have a clearly defined risk, that is the best way to play DNDN, since you can only lose your committed capital. I own the shares, but I'm prepared to let those go with a tight stop if things turn south quickly. This does not eliminate the risk of a gap down.

Option chains from Yahoo! Finance from 04/29/2011


35.00

DNDN110521C00035000

8.45

Up 1.15

8.45

8.60

156

3,339

36.00

DNDN110521C00036000

7.65

Up 1.38

7.50

7.65

36

2,835

37.00

DNDN110521C00037000

6.70

Up 1.15

6.60

6.70

62

1,848

38.00

DNDN110521C00038000

5.80

Up 1.30

5.65

5.80

304

2,220

39.00

DNDN110521C00039000

4.90

Up 1.05

4.75

4.90

136

1,076

40.00

DNDN110521C00040000

4.05

Up 1.00

3.95

4.05

626

4,687

41.00

DNDN110521C00041000

3.20

Up 0.81

3.20

3.35

637

3,611

42.00

DNDN110521C00042000

2.63

Up 0.71

2.54

2.64

500

2,764

43.00

DNDN110521C00043000

2.10

Up 0.60

1.98

2.06

942

3,269

44.00

DNDN110521C00044000

1.60

Up 0.51

1.50

1.58

480

1,670

45.00

DNDN110521C00045000

1.20

Up 0.36

1.14

1.22

1,720

3,946

46.00

DNDN110521C00046000

0.90

Up 0.25

0.87

0.92

698

2,062

47.00

DNDN110521C00047000

0.67

Up 0.27

0.64

0.70

418

976

50.00

DNDN110521C00050000

0.30

Up 0.06

0.27

0.30

436

3,524

Click to enlarge

Disclosure: I am long DNDN.

Additional disclosure: Shares and Calls