Dendreon Is Not A Great Short

| About: Dendreon Corporation (DNDN)

On Tuesday, April 17, Jim Cramer said that Dendreon (NASDAQ:DNDN) is too speculative for him right now. Cramer's comments were the latest in a series of neutral to bearish comments issued by market commentators over the last several weeks with regard to Dendreon. One has to wonder why.

A Blast From The Past

Possibly the most striking attacks of late usually reference commentary published in the Journal of the National Cancer Institute authored by Marie L. Huber, Laura Haynes, Chris Parker, and Peter Iversen. Titled "Interdisciplinary Critique of Sipuleucel-T as Immunotherapy in Castration-Resistant Prostate Cancer," it posits, but curiously does not reference, an immunodepletion theory previously raised at the CMS Medicare Evidence Development & Coverage Advisory Committee on Provenge in 2010 by Dr. Bart Classen. The theory was debunked at that meeting by Dr. James Gulley, director of clinical trials at the National Cancer Institute.

More recently, Philip Kantoff, MD, told Medscape Medical News in an email: "Many were surprised that this commentary was published since it has no scientific basis." Dr. Kantoff was a principal investigator of the pivotal trial -- the Immunotherapy for Prostate Adenocarcinoma Treatment (IMPACT) study -- and is chief clinical research officer at the Dana-Farber Cancer Institute in Boston, Mass. Dr. Theodore J. Cohen also addressed the Huber et al. commentary in a recent article, "Dendreon Goes On The Offensive."

Not surprisingly, the Huber et al. paper was seized upon by the shorts, who repeatedly used it as a rally cry for their attacks.

Shorts Attack

Let me share with you an article I found informative and thought-provoking. Excerpts are from a post titled "Update On ARNA Trade" by Howard Hill that dealt with his position in Arena Pharmaceuticals (NASDAQ:ARNA):

Bulls need other investors knowing the trade idea and joining them, but bears don't.

Beyond the obvious, what Hill is saying here is that there is a fundamental difference between being long a stock or being short it. The difference is that a trader hoping to profit from a long position always needs other investors to become interested in buying the stock. Without other (new) buyers, the trader on the long side is unable to make his or her profit. In fact, to maximize his or her profit, the trader needs as many buyers as possible:

When selling short, however, the key to maximizing profit is to have as few people as possible joining you on the short side of the trade.

Here's why:

Every stock has a limited amount of stock available to borrow and sell short. If too many people want to sell the stock short, the stock becomes hard to borrow, and the seller has to pay a premium interest rate to the owner of the stock to borrow it. That premium can and does run as high as 50% per year for widely hated stocks.

And then:

So I am doubly skeptical about hedge fund managers sharing their wonderful short ideas. They really don't need anyone else in the trade with them if they are correct in their analysis. In fact, others entering the trade makes it more expensive for them, and limits their profits.

Unless, of course, the stock goes up after they put on the position, and they need some help to limit their losses.

I thought that what might be true for Arena might also apply in the case of Dendreon. The above reasoning by Hill is what makes me think that the downward pressure is partly orchestrated by party or parties unknown for the purpose of amassing a large short position, to be covered at a price to be determined. Daytraders and mo-mo (momentum) players, of course, will pile on. And there's always the possibility that someone looking to build a long position in Dendreon is helping the shorts pursue their agenda on the downside. Life in the markets is, if nothing else, complex.

Hints For A Valuation On Dendreon

Just as an example, Provenge providers on Aug. 1, 2011, were 859. On March 28, 2012, there were 999. An expanding number of Provenge providers bodes well for Provenge acceptance and product sales. Add to that the fact that during his most recent interview, Dendreon CEO John Johnson did not hint, in any way, of concerns relative to lagging sales.

Fourth-quarter revenue was $77 million. If we annualize the data ($77 million x 4 quarters = $308 million) and round up the number under the assumption of no-to-slow growth (which seems to be the order of the day on the Street), we get $320 million. This is a very conservative number because CEO Johnson guided for growth in the high single digits.

Dendreon currently is holding above $10, with a market cap of $1.48 billion, and is selling at less than five times revenue. I consider this cheap. Furthermore, on a takeover the stock should be worth something in the low to mid-$20s. Consider the following: Human Genome Sciences (HGSI) recently received an unsolicited offer from GlaxoSmithKline (NYSE:GSK) and is valued at $2.58 billion at the time of this writing, and it had fourth-quarter revenues of $45.5 million.

In sum, I consider Dendreon a buy.

Disclosure: I am long DNDN and will not alter my position within 72 hours of the time of publication of this article.