Monday, February 27, 2012

Dendreon (DNDN) - Stock and Vol Drop on Earnings; But Upside is Now Bid

DNDN is trading $12.28, down 17.3% with IV30™ down 18.3%. The LIVEVOL® Pro Summary is below.


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Dendreon Corporation (Dendreon) is a biotechnology company focused on the discovery, development and commercialization of therapeutics that may improve cancer treatment options for patients.

The news is simple -- earnings. The analysis, is not simple. Let's start with the news -- a bunch of snippets, all from

10:00 EDT Dendreon falls 19.5%
09:59 EDT Dendreon breaks below its 50-day MA, support now at $11.06
09:58 EDT Gappers report
09:32 EDT Dendreon says targeting gross margin of 50% at $500M of revenue
09:20 EDT Pre-market top 5 losers
09:16 EDT Dendreon says will incur a substantial charge in Q1
09:09 EDT Dendreon says sees moderate growth in Q1 in the low single digits
09:08 EDT Dendreon says European PROVENGE application has been validated
08:35 EDT Dendreon reports Q4 EPS 26c, consensus (23c)

DNDN is a fascinating company as it has an approved drug to treat Prostate Cancer. I've actually written about this firm several times, most recently on 1-5-2012: Dendreon (DNDN) - Pre-announcement Sends Bio-tech Soaring; Vol Pops, Upside Skew is Bid.

I posted a quick summary of the rather involved history for this company in that prior post, and have included it again, below:

Starting simple – this is a bio-tech with its major product a prostate cancer drug called PROVENGE®. Obviously the company had massive ups and downs during the FDA review process and ultimate FDA approval. The potential market is enormous for this drug, as, for those of you that don’t know, essentially every male that survives long enough will almost certainly develop prostate cancer. Yeah, all of us…A market that large pushed the stock to over $50, with some claims so extraordinary about the market size in the future that it was… well, it was unbelievable.

The fight wasn’t over after FDA approval though because the drug is extraordinarily expensive – upwards of $100,000 / year. That’s a lot – and well out of reach for the majority of Americans (not to speak of other nationals). Another big news day came when the company won Medicare payment acceptance – in English, it’s on health insurers to pay for this thing which means the market (or potential market) opened up significantly.

Then… not so good news on sales figures – the lofty forecasts were missed, at times dramatically. Doctor acceptance was poor or slow, the stock was in the single digits after being over $50. Then, today happened.

As promised by the CEO, while the initial sales figures were poor, ultimately the drug works, and there really aren’t alternatives. So, it may have been slow to adopt, but, it’s happenin’ now. Here are some details from an article written by Adam Feuerstein of

Provenge gross sales for the December quarter totaled $82 million or 25% growth over third quarter sales, Dendreon said. On a net basis, analysts were expecting Provenge sales of about $70 million in the fourth quarter. Despite the apples-to-oranges comparisons, Provenge sales appear to have outperformed expectations.


"We had a strong fourth quarter that exceeded our expectations," said Dendreon CEO Mitch Gold in a statement. "As we look to 2012, we expect modest quarter-over-quarter growth while we focus on bringing additional clinics on board and converting them into steady prescribers."

Deustsche Bank analyst Robyn Karnauskas spoke to Dendreon management this morning. "They want to caution investors to continue to expect MODEST growth early next year, while still expecting 2Q/3Q uptick," she writes in an email note.

The stock was trading $10.77 as of that post and today it's down to $12.28. It's definitely gotten to the point where it's fair to ask, "when will this company be consistently profitable?"

DNDN did show a nice NI number for the fourth quarter, but then there's a Q1 charge coming per the news today. Let's look at the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

The stock price moves are pretty well documented by digesting the news repeated above. Let's focus on the vol. We can see that with today's vol drop of nearly 20%, the IV30™ is now sitting squarely in the 50th percentile for the year. For a clearer picture of vol, I've included the annual chart for IV30™, alone.

It's as though there are two companies charted on this graph. The one before the insanity of Summer 2011, and the one after. If isolating the analysis to the last six months, the implied is in fact trading near a low. Now look at the stock price fluctuation of late (back in the first chart). Does it feel like the vol should nearing a six-month low? Hmmm....

Let's turn to the Skew Tab.

I've included the weekly options in the skew chart. It's interesting to note that while the stock is down hard today, the front expiries do show an upward sloping skew. In English, the option market reflect greater upside potential than downside risk in the near-term.

Looking back to the skew on 2-10-2012 (below), we can see a different shape to the upside.

The options reflected a flattish skew in the Mar monthly options -- certainly not as bid to the upside as today. So, the drop today has pushed vol down (since earnings are now over), but has elevated the upside vol (potential). Pretty cool...

Finally, let's turn to the Options Tab.

The options expiring this week are priced to 113% vol, while Mar and Apr are priced 84.58% and 77.47%, respectively. Note that the Mar(W) 14 calls are priced to almost exactly half as much as the mar monthly 14 calls. In vol terms, it's ~146% to ~89%.

This is trade analysis, not a recommendation.

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