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Biotech stocks have a history of volatile moves, but the swings in this issue could make the calmest trader seasick. Between April 2009 and April 2010, biotech stock Dendreon (NASDAQ: DNDN) surged nearly 2,000%, from a low near $2.60, to a peak near $54.
By July 2011, as management cut sales estimates of its flagship product, the stock had given up 80% of its value and fell to a low near $10.40. There was a countertrend rally to the mid-teens, but after falling to the mid-$3 range, shares can now be picked up in the low $6 range.
Here's what makes me excited now about the stock technically. It has broken a major downtrend line going back to mid-2011. In December, DNDN stock cut through resistance just above $5 like a knife through butter. True, there is some resistance in the $7.80 area, but if this barrier can be exceeded, then the stock could move quickly to between $10 and $12. The shares are volatile, but in this case, volatility would be the trader's friend.
Dendreon's extreme moves are driven by trader speculation about the promise of its drug pipeline in general -- in particular its flagship prostate cancer drug, Provenge. The 2009 to 2010 rally was based on traders' anticipation and then the formal FDA approval of the drug. However, following approval, the stock paradoxically stalled, and then sank because adoption by the medical community was slower than the company anticipated.
However, sales of Provenge are slowly ramping up, as the medical community becomes more comfortable with it. In 2011, revenue from Provenge was about $228 million. Last year, sales of the prostate cancer drug increased to about $240 million. Sales could also get a big boost from European approval, which could take place in the middle part of this year. Dendreon management anticipates this approval, although management can be wrong.
The technicals certainly paint a renewed bullish picture for DNDN stock.
In late July 2011, shares were trading near $40. At that time, management sharply cut revenue estimates for Provenge, and the stock was slammed. Within weeks, it plummeted to below $10, rebounded slightly, and then sank as low as $6.46. A rally brought shares back to around $17, which provided a second point on the major downtrend line. But by October 2012, they reached a low of $3.69.
Since hitting this October low, shares have steadily climbed, and a minor uptrend line has formed. In early January, the major downtrend line was broken, a highly significant bullish signal.
Shares are now creeping up toward important resistance near $7.80. If $7.80 resistance can be broken, then the stock will bullishly complete a base. According to the measuring principle for the basing pattern, calculated by adding its height to the breakout level, shares could reach a target of $11.91 ($7.80-$3.69 = $4.11; $4.11+7.80 = $11.91). At current levels, this target represents 91% returns.
The bullish technical outlook is supported by solid fundamentals. For the full 2012 year, analysts project revenue will surge 52% to $323.8 million, compared with $213.5 million last year. Analysts anticipate first-quarter 2013 revenue will increase 2% to $83.7 million, from $82.1 million in the comparable year-ago period.
As often the case with high-risk, high-reward biotech stocks, the earnings outlook is not as upbeat. Analysts expect full-year 2012 earnings will be -$2.81 per share compared with -$2.31 per share in 2011.
However, by the first quarter of 2013, increased demand for the company's leading cancer fighting drug should help push earnings to -$0.43 per share, compared with -$0.70 per share in the year-ago quarter. For all of 2013, the analysts who follow DND stock expect a significant narrowing of losses from -$2.81 to -$1.34.
Risks to consider: Dendreon is highly volatile stock. If Provenge fails to receive approval in Europe, the stock could take a beating. While management anticipates European approval, on more than one occasion I have known company officers to be overly optimistic. My strategy will therefore be to set a relatively tight stop allowing for a loss of about 10%, but if the stock fulfills the measuring principle, profits of about 90%. That's a very attractive risk/reward ratio of about 9:1.
Recommended Trade Setup:
-- Buy DNDN at the market price-- Set stop-loss at $5.68, just below support represented by the minor uptrend line-- Set initial price target at $11.91 for a potential 91% gain
The tech giant can't seem to do much right in investors' eyes lately, but the charts tell a different story.
The best of the best know something that most average investors overlook.
As bearish trends take hold, this pick has become an overpriced company in a struggling sector.