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Secondary Gamble


By announcing the "intention" of the offering DNDN is gambling with shareholders' money.


Last night biotech Dendreon (DNDN) announced the intention to offer 10 million shares in a secondary offering. That's the equivalent of 16% of the current shares outstanding. I do not take issue with DNDN's decision of raising capital. Dilution from new offerings is a necessary evil of biotech investing. It is puzzling though that DNDN announced its "intention" to sell 10M shares as opposed to announcing it had "sold" 10M shares.

In my humble non-investment-banking opinion, when a company knows that its stock is a darling of short-sellers (29% of the float is short), "announcing" a secondary is an invitation to pile on: a) the stock is going to be under pressure from the dilution; and b) shorts can cause more pain by shorting now, and covering into the secondary later.

Pinging with Prof. Miller last night, he suggested that perhaps this secondary will go off as well as the last one, where demand was so high that the stock actually went up. Maybe he is right. But if it does not turn out that way, DNDN's management should not be given a free pass for this maneuver.

If they want to sell 10 million shares fine, but announce the offering once it has already been sold to the underwriters. Does it mean that it will have to go at a discount? Yes, but it will be a one time hit and perhaps the "shorts" might actually prop up the stock if they use the secondary to cash in some profits. By announcing the "intention" of the offering DNDN is gambling with shareholders' money.

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Position in DNDN
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