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DNDN is a $7 stock - beware

|Includes:Dendreon Corporation (DNDN)

DNDN is committed to raise money. Judging by the annual data of their financial statements, they burn around $70m - $100m per year. That is $25m per quarter. The company has no revenues and they are increasing their job postings. The company right now is probably technically bankrupt as it has only $12m in assets as at 31st March 2009, and despite having a huge cash balance they are all due to be repaid, unless they manage to "convert" the debt into shares which is the idea of the bondholders. Someone has to pay for all this. And thanks to you "long" stockholders, they manage to do this very easily.

The very recent "Provenge news" pumped up the price so high that the debt holders went short of the stock and cashed out on 2.1m shares (they can never lose, because the conversion price was set at $10, so they only had to play the exact price so as to profit wisely, i.e. by selling over $20). They cover the short by paying $10 per share. The shares are now in public hands. The company raised $21m from this issue, just enough to survive 1 more quarter. Read their SEC filing 8-K dated 4th May.

Secondly, insiders managed to distribute stock over $20 last week and they unloaded over 1.4m+ shares again, the shares are now in the hands of the public, again! At an average cost of $5-7 the insider profited over $21m at the expense of the public. Dr. Gold benefited most. He has secured his financial freedom with a small piece of news, which is difficult to interpret, it's rather a play on words.

Thirdly Friday's announcement of a public offering is the string that broke the camel's back. They are going to further dilute the longs, but once again, someone must have taken a net short position between $24-27, just after the news broke out. This short position will be covered at the offer price, again here the shares will be immediately transferred to the public. There is no big institution who is willing to buy the stock, not at this price! Big retail investors who have big money always work in collusion with market makers to increase their capital and profits, and they rarely lose, they distribute stock they don't own before they buy it back! Some uninformed press leaked out the news that the offering was priced @ $19.20 so MMs worked their way to hold that price in a tight range. Longs are holding the stock since the mid-20s and are hopeful that this is the ceiling. They read every piece of news and are so scared of their and want to believe every piece of positive news? Why? Because there is lack of news, momentum traders have already left the stock. Now its in the hands of the MMs who are controlling. The analysts have done their work by getting everyone interested and pumping it. Why was no one pumping the stock when it was at $5. It has traded for a year at that price but no one seemed interested, it was building the base for this news. The really good analysts would have recommended you to buy shares when they were cheap! Not after they are 500% up! 

Selling was obvious during the whole week particularly on Friday 8th, as MMs were mostly sellers on the day, but they supported the market on purpose at $19.20+ and gave false hopes of an impending ceiling. But I tell you it was another day of manipulation. Because bottoms dont occur with volumes of 7m+ shares. Volume should have dried up by 80%, but the day of Friday shows clearly that the market was feeding shares. If you have watched the ticker on Level 2, you will have noticed big buys at $19.20 and big sells as the stock went above $19.50. The MMs were buying and selling but on balance, they were distributing shares to the public.


What about the offering price? What will it get? The company does not care about its shareholders. Now that insiders have sold, their interest now is to secure their financial future, i.e. their monthly salaries and bonuses. Since the company has no trading history, and the FDA still is 1+ years away (ability to generate cash flows is very far away), the company cannot survive without raising capital. So they will accept any price pre-conditioned by the short-sellers. Obviously they will negotiate the highest price possible, but they will accept any price even if it is below the market price.


In my opinion, the future will emerge differently (ugly for stockholders) as the stock is priced for an FDA, which I do believe it is possible although no one has any clues on their % success rate to get the approval, no one questioned that so far.

I am sure the company can work to improve their chances prior to applying for the FDA next year, but then again the company is a research company and the management has no experience on production or logistics and sales? So the only choice for the company is to be bought out. To get the $2bn in peak sales per year it will take years for that to happen, so I do not believe any big pharma company will pay more than $2bn now for something that cannot be commercialized for quite some time. Not at this time of the market, not without an FDA approval. Who wants to buy a company with so many shares in the hands of the public? What is the interest of the directors to get bought out? If that happens they end up without a job, because they earn their money from DNDN's cash coffers.  

Just try to figure out the chances of the longs to make money now that the company will have over 115m shares outstanding of which 112m+ (over 98%) in the hands of the public from this and previous offerings. Net book value per share will $2 after the offering, and if you give the Provenge "hope" a more realistic value of $500m (at this stage, because their is no FDA), so Provenge value per share would be $4 per share, therefore I would give the company a fair value of $7 at maximum.

The technicals are clearly showing that the stock has lost its recent support, and is now back on a downtrend. A picture is worth a thousand worths, so I let you judge by support. In my opinion unless some huge positive news is out next week (which is very unlikely), the support looks deep below.
 
Technical Analysis showing one month chart which shows rally is over and stock is in downtrend with no support until the early teens, click on link: static.seekingalpha.co...;
  
 
Now, please tell me how you can expect to make money. Now that's what I call a diluted company.

Disclosure: I trade for myself, I am not involved in the hedge fund industry, I do not represent any firm, and the article above is not a recommendation to buy or sell shares. Please do your own research before you enter any position. I own May and June puts in DNDN.

 

 

Stocks: DNDN