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Decoding Dendreon's Wild Ride

Shares of the developer of Provenge, a vaccine that targets prostate cancer, have set a new standard for volatility. Time—and the FDA—will tell where they land

Stocks in development-stage biotech companies set a high bar for their volatility. But even in that rarefied category, Seattle-based Dendreon (DNDN) is a standout. In the last three months, the cancer-vaccine developer has seen its shares trade below $4 and at a high of $25.25. On June 1, shares were trading around $8, down almost 40% from the previous day's peak of $13.

Take a deep breath, there's more. The June 1 price was almost double the close on May 30 (see the accompanying chart for the stock's recent moves).

What gives? Like all biotech companies without any sales, Dendreon's stock is wildly susceptible to any news regarding its flagship experimental drug. In this case the product candidate is Provenge, a new class of drug called an active cellular immunotherapy designed to spur a patient's immune system to combat a disease. Dendreon's vaccine is designed to target late-stage prostate cancer, extending life in patients who have not responded to more conventional therapies. But it has not yet demonstrated its efficacy sufficiently to get the FDA's green light.

Ups and Downs

As the stock's history can attest, the development of Provenge has received close scrutiny from Wall Street. In March, shares soared almost 150% after a Food & Drug Administration panel voted that Provenge was safe and effective—normally a very strong sign that the drug will receive approval (see, 3/30/07, "A Dramatic Day for Dendreon").

But Dendreon isn't the poster child of biotech volatility for nothing. The shares dropped back to earth in May after the regulator requested additional clinical data on the medicine (see, 5/9/07, "A Dreadful Day for Dendreon").

The latest spike came after Dendreon said the FDA will accept for consideration data from an ongoing clinical trial, but the gains largely disintegrated after analysts pooh-poohed the announcement as old news. With the company's future hinging on its ability to win approval for Provenge, and concerns that the company is burning cash too quickly, in May Dendreon jettisoned 40 of its staff, about 18% of the total. Dendreon didn't return calls requesting comment for this story.

With so much uncertainty, the company has seen a slew of downgrades from Wall Street analysts. Short sellers have also moved in. As of Apr. 10, when the stock peaked at $25.25, about 34 million Dendreon shares had been shorted—an incredible 40% of its total outstanding. The short sellers, who are betting on a stock to fall, made a smart move. Since, the stock has dropped more than two-thirds.

Belle of Biotech?

Even with a reasonable chance that Provenge could win approval next year, analysts are bearish on the stock. Liisa Bayko of Next Generation Equity Research says she believes the stock price has been pushed around by retail investors ebbing and flowing with every bit of news on the drug's progress. It's not being chased, in other words, by the smart money.

Institutional investors continue to hold large chunks of the company. Significant stakeholders include HBK Investments, with more than 7.8% of shares, and Barclays Global Investors (BCS), with a 4.2% holding.

There are scores of development-stage biotech companies with volatile stocks and uncertain futures, so why has Dendreon received so much attention? Several factors may provide clues. First, Provenge is aimed at one of the most common cancers, which gives it a huge market potential. Some watchers have said the drug could be worth $1 billion a year in sales—Bayko says the likely market is less. Bayko has a $5 price target on Dendreon shares.

Also, the drug would be the first approved cancer vaccine that pushes the body to fight the disease. This differs from Gardasil, Merck's (MRK) approved cervical cancer vaccine, which is actually a preventative vaccine against a virus that can cause cervical cancer.

There's no telling whether Dendreon will be able to will its therapy into hospitals, but given the last few weeks, investors who move in on the stock should expect a bumpy ride.

Halperin is a reporter for in New York.

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