Will Dendreon’s Stock Skyrocket Again?

With shares of Dendreon Corp. (NASDAQ:DNDN) trading around $4.46, is DNDN a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

DNDN is a tricky stock. If you were to relate it to a human condition, you could say it suffers from manic depression. The highs are tremendous, but you will have to pay for them with extreme lows. This shouldn’t come as a surprise for a biotech company, but Dendreon does seem to take it to another level. All of this rollercoaster-like movement has a lot to do with Provenge, which treats (not cures) prostate cancer.

As stated above, Provenge is not a cure, but it has been shown to improve and prolong the lives of those suffering from prostate cancer. Dendreon has been around since 2002, but it really burst onto the scene in 2007, when an FDA panel gave the go ahead for potential approval of Provenge. The stock skyrocketed on this news. It was later revealed the panel was swayed by emotion. At that point, there was much confusion amongst investors. As the stock bounced between $19 and $21, the potential was as high as $60 with FDA approval and as low as $4 without approval.

After suffering a huge decline and hitting $2.77 on March 6, 2009, DNDN peaked at $54.58 on April 29, 2010 after FDA approval for Provenge. This is also when analysts jumped on the bandwagon and began recommending the stock. Analysts tend to be late to the party when it comes to biotech. They fear giving Buy recommendations when there is so much at risk prior to FDA approval.

Currently, DNDN is trading at around $4.46. There are still passionate longs and shorts. In regards to the latter, the Short Percentage of the Float is a whopping 31.30%. A large short position is normal for a biotech stock. The shorts are usually correct, but when they’re incorrect, there will be a huge short squeeze that will lead to massive profits for longs. It’s imperative to reiterate that this is a high risk/high reward investment.

The longs are arguing that Provenge hasn’t met its potential yet, despite a recent decline in sales. Some of this has to do with Europe. If the EMA follows the FDA with approval, which it usually does, then there is an untapped market that can bring great results. Another long argument is that Dendreon could be bought by a larger company because of the potential for Provenge if it was marketed on a grander scale.

The shorts have several arguments. One is that the debt greatly outweighs the cash position and that bankruptcy is a possibility within a few quarters. Another argument for the shorts is that one of three manufacturing facilities has already been closed, which is rarely a good sign. Yet another argument for shorts is that Dendreon has been laying off employees to cut costs. This is another red flag…

E = Debt to Equity Ratio is High

Dendreon has a debt-to-equity ratio of 10.01, which is enormous as well as a big part of the problem. That said, it shouldn’t lead to panic since this is normal for the industry.

Dendreon has $390.22 million in cash and $578.95 million in debt. This is not good news, but there are much worse debt problems in biotech. For example, Agenus (NASDAQ:AGEN) has $24.76 million in cash and $35.46 million in debt. These are smaller numbers, but they’re relative in nature. Northwest Biotherapeutics (NASDAQ:NWBO) is another competitor to Dendreon. It has a serious debt problem with $111,000 in cash and $22.16 million in debt. As you can see, the situation can always be a lot worse than Dendreon.

T = Technicals on the Stock Chart Should Be Taken With A Grain of Salt

As of November 26, Dendreon has outperformed the S&P 500 over the past month. Dendreon has gained 15.71% while the S&P 500 has dropped 0.02%. That said, Dendreon has underperformed the S&P 500 drastically over the past three years.

Year-to-date, Dendreon is down 41.38% while the S&P 500 is up 14.32%. Over the past calendar year, Dendreon is down 43.25% while the S&P 500 is up 24.37%. When you look at three-year returns, Dendreon is down 83.91% while the S&P 500 is up 35.13%.

Dendreon is currently trading a few cents above its 50-day SMA of $4.39. It’s trading below its 100-day SMA of $4.91. It’s trading significantly lower than its 200-day moving average of $7.31.

Dendreon hasn’t been a good stock to own over the past few years. However, don’t put too much weight on technical analysis when it comes to biotech stocks. A stock like Dendreon can go up or down almost 100% overnight…

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

E = Earnings Are Steady Year Over Year

Dendreon’s earnings make this story even more intriguing. As you can see, revenue is clearly on the rise on an annual basis. This is a good sign because it simply shows a lot of potential. The problem is the cost of that revenue.

2007 2008 2009 2010 2011
Revenue ($) in millions 0.743 0.111 .101 48.06 341.61
Diluted EPS ($) -1.20 -0.79 -2.04 -3.18 -2.31

Once again, biotech companies are different. With a relatively young biotech company like Dendreon, you shouldn’t pay too much attention to quarterly earnings, which are listed below. There are other factors that can act as hints for future potential, which we will cover soon.

9/30/2011 12/31/2011 3/31/2012 6/30/2012 9/30/2012
Revenue ($) in millions 64.29 202.14 82.07 79.99 77.97
Diluted EPS ($) -1.00 0.26 -0.70 -0.65 -1.04

T = Trends Support the Industry, But Not the Company

Over the past few years, Dendreon has found itself with a great deal of competition. The FDA has approved other drugs somewhat similar to Provenge, which is great news for the industry as well as patients. It’s bad news for Dendreon, which missed a great opportunity to take control of the market in 2009 and 2010. Instead of focusing on marketing at that time, they were focused on building the operation that would market the product. For example, they build three manufacturing facilities (one has since closed.) Many people would argue that they should have built one manufacturing facility and used the majority of their remaining cash flow to market Provenge. From there, they could have built from strength…

Conclusion

Dendreon has made several managerial errors over the years. However, there is one trait about Dendreon that most other biotech companies don’t have: it never quits. Every time you think DNDN is down for the count, it surprises with good news.

It is difficult to determine if good news will come out in the near future. We do know two important facts, though. One, unlike many biotech stocks, Dendreon isn’t a one-trick pony. They have four other cancer-related drugs in the pipeline. Two, we haven’t seen much insider buying or selling recently. With biotech stocks, insider buying and selling can be a good indication of future events. On July 31, 2010, Director Gerardo Canet bought 10,000 shares at $4.38. That’s not a significant investment, but he also sold 5,000 shares at $41.38 on June 3, 2011, which turned out to be a good move. The point here is that despite this being a small purchase, Gerardo has a good track record.

Dendreon definitely has its share of negatives. This is a company facing an uphill battle, but it would be difficult to believe Dendreon would disappear when it has so much potential. If this company can’t survive on its own, it’s likely to form a partnership. Though not as likely, it could even be bought by a big player.

Based on all the factors listed above, Dendreon is a WAIT AND SEE. Owning this stock is a big gamble, but if you’re a gambler, then it’s a gamble that can pay off handsomely.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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