Trading Biotechs – Dendreon

I am looking for trades that will take advantage of events like options expiration (next week) or earnings announcements or product events. 

The biotech industry has many product events.  What I mean by that is, investors wait for the companies to give results of tests of drugs that the companies are developing.  Or after the tests are completed there is one panel of experts that decides if the drugs are safe  and another panel votes on the effectiveness of the drugs.  These committee decisions are then passed onto the Food and Drug Administration (FDA) and the FDA decides whether to approve the drug for use or not.

Dendreon

If a drug is approved that is a windfall for the company, which is why biotech stocks trade like lottery tickets.  Dendreon has one drug, Provenge, ending a phase III trial at the end of April.  The drug is being tested to see if it can help men with prostate cancer live longer.   DNDN also has four other drugs in development.

My son did some research on Dendreon (DNDN) so that we could understand the process a little better.  DNDN lost $8.8 million for the quarter ending 31 December 2008.  In the fourth quarter of 2007, the company lost $26.9 million.  For fiscal year 2008, the company lost $71.6 million.  At the end of the year the company had $108 million on hand.

On 11th March, DNDN changed hands at $2.77 per share.  The day after the company announced earnings, on 13th March, the stock rose to $4.05.  Yesterday, it closed at $6.30  So there are believers out there.

At the end of March 2007, the evaluation by the FDA Advisory Committee (independent experts) voted 17-0 vote in favor of its safety and 13-4 in favor of its substantial efficacy.  But the FDA didn’t approve it.  The trials didn’t meet their stated goals.   One problem was that the number of patients enrolled was small and there were issues with the methods of the study.

So the FDA told the company to try again.

The company set up a larger test a year ago, March 2008 and announced interim results last October.  The independent data monitoring committee (IDMC) reported the interim results of the most recent Phase III trial to Dendreon. A 20 percent reduction in the risk of death in the PROVENGE arm relative to placebo.

Hazard Ratio

The hazard ration is an estimate of the treatment effect in the treated versus the control group in a trial.  The hazard ratio reported means that a PROVENGE patient who at the time of the interim analysis has 0.80 times the chance of dying compared to someone in the placebo group.  Its reciprocal, 1.25, means a placebo patient has 1.25 times the chance of dying compared to someone in the PROVENGE group.

This looks promising, but is still short of its proposed endpoint results which was 22%  reduction in the risk of death.

DNDN Options

A week ago, the April options had an implied volatility of 300%.  The straddle at the $5 strike was worth $5 which means that if you sold the straddle and the stock went to zero or ten dollars one would still break even.   I was so focused on the announcement at the end of April that I missed the opportunity here.

Since the April options expire next Saturday,  the 18th of April, nothing much would happen in these two weeks.  So selling such a high implied volatility would have been a good trade.  The stock is unlikely to move any where near as much as the implied volatility reflects.

On the other hand, trading the collapse of volatility in the May options, which covers the announcement period, is much more dangerous.   If the trials go well, the stock could double again.