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Is Dendreon Immune to Risk?


Or will its health fail, too?

I must admit that I generally try to stay away from the speculative biotech space. I do rigorous due diligence for my trades - some of it's built into the selection criteria and uses quick-and-dirty fundamental analysis, and the rest is in the questions I ask before placing a trade.

But over the course of many years, I realized that some biotech companies had too many "unknown unknowns" built into them: There might be a good fundamental story and a great technical picture, but the stock would suddenly gap down after the revelation of patient deaths. In the spirit of sanity, I decided against taking trades in most of these companies.

However, I did mention Dendreon (DNDN) about a month ago as a long play -- when the stock was at $22.90 -- after the company stated that its experimental treatment drug, Provenge, extended the lives of prostate-cancer patients by 4 months. Here are some additional thoughts.

Short interest has declined from the earlier-mentioned 23% of the float to about 9%. Understandably, some of the rise in the stock has come from short-covering. I also believe that the rise in price is a sign of institutional activity, given the floor this stock found after its secondary offering,

There are some acquisitions going on in this space. Recently, Johnson & Johnson (JNJ) acquired Cougar Biotechnology, Inc. (CGRB) for $900 million.

The company raised a $221 million secondary offering recently, leading me to hypothesize that the company would be positioned to launch the drug in the US market, develop staying power, and play hard-to-get with any potential acquirer. (The price would have to be right for an acquisition.)

The broker upgrades are starting. Yesterday after the close, Deutsche Bank (DB) started Dendreon with a buy and a target of $36

The technicals look as good as they can for any stock that's gone up sevenfold in a matter of 3 months.

It's important to remember, however, that Dendreon is a speculative stock, with most of its future based on a promise. Just check out the huge up-and-down gaps this stock has seen since the company went public in 2000.

Additionally, if we get an up-close here today, the stock would have gone up for 9 consecutive trading sessions and might be ripe for some profit-taking. The FDA approval remains the next hurdle, and there's always the risk of some unexpected, adverse patient news.

In the interest of being prudent, I'm taking a small part of my position off the table. For the remaining position, I'm keeping this positive outlook and bullish perspective balanced with the right dose of fear of the unknown.

Come to think of it, doesn't that apply to all trading?
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Position in DNDN

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