Macro Tsimmis

intelligently hedged investment

SELL Dendreon (DNDN) puts and calls

Posted by intelledgement on Fri, 30 Mar 07

WOW!! Grandslam, out-of-the-ballpark homerun!

In the wake of yesterday’s dramatic and overwhelming advisory committee recommendation to the FDA that Provenge be approved (17-0 vote that the product is safe and 13-4 that it is probably efficacious), the stock opened this morning at $17.92 and has been north of $18. We were hoping for a price in the $10-to-$12 range before the 13 Apr option expiration date and as today’s enthusiasm far exceeds our expectations, we are taking advantage and cashing in all our options positions (nine UKODA $5 Apr call options and five UKOKA $5 Apr put options).

Yesterday’s advisory committee meeting recommendation was surprizingly favorable. We were particularly surprized that a limited label recommendation—e.g., to provide Provenge for terminally ill patients with no alternative pending the completion of the currently-enrolling Phase 3 study—was never even discussed. The key turning point was after the 17-0 vote that the product was safe and the roll was being called on efficaciousness. The first three votes were “no” and at that point, some panel members expressed bemusement at the wording of the question, which bluntly asked if Provenge was effective. The wording of the question was changed to ask if there was “substantial evidence” of efficacy—which apparently is the normal way to ask the question—and the vote was taken again…all three “noes” switched to “yes” and the final vote was not close.

As there are still ten more trading days (after today) until expiration, we considered holding off on selling these options to see if we can get a better price, or alternatively selling half now and holding onto the rest. We are disinclined to be watching the ticker every minute, as would be advisable to effect such a tactic, so we are just cashing the whole thing in here. However, if you bought these calls, depending on your situation, you may quite reasonably decide to be more aggressive and hold onto some or all of them for a few days longer. If the FDA does approve Provenge for use by all prostate cancer patients on 15 May, this is probably a $30-to-$40 stock, at least. Who knows what that translates into over the next couple of weeks but a price north of $19+ is certainly not out of the realm of possibility.

FWIW, we are most definitely holding onto our long DNDN position here! We do think Provenge will be approved, probably with the requirement that Dendreon complete their presently enrolling Phase 3 study as a Phase 4…and possibly with a label limiting usage to terminally ill patients with no alternatives. The FDA usually takes the advice of advisory committees, and while they are not required to, given the likelihood that Provenge is efficacious and the lack of safety concerns, it is hard to see the agency refusing at a minimum to make it available to the tens of thousands of prostate cancer victims who would otherwise die in the next three years while this study is running. For anyone looking to get in here long term, however, we would advise holding off until after the short squeeze/volatility abates. You are likely to see prices below $15 in the next few days and may even get lucky and have a chance at $10 before 15 May.

One more admonition: situations such as this one with Dendreon and the binary event are very unusual. We were lucky to have it and luckier still that it played out ideally in our favor. We started this speculative portfolio primarily to gain intelligence and secondarily to illustrate the risks of investing in individual equities. It’s a little embarrassing to have the portfolio be so successful so quickly: please consider that it is not the norm for a spec portfolio to be up 75%+ in one month…and don’t be expecting us to do it again anytime soon!


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