Volatile Biotechs Are Always a Gamble

Skeptics believe the panel, whose members are chosen in large part by the company, was biased and does not reflect the FDA's point of view. They point out that Dendreon's chief executive sold 200,000 shares of stock soon after the panel's decision, suggesting he did so with the understanding that FDA approval was no slam-dunk. They say the only way the company will be able to prove that Provenge demonstrates a true "survival benefit" will come at the conclusion of the 2010 trial.

Still stinging from its misjudgments on the recalled Merck(MRK Quote - Cramer on MRK - Stock Picks) pain medication Vioxx, the FDA does not want to rush to judgment on a drug that is not without risks. Although three years sounds like an eternity to investors who have already seen Dendreon burn through almost $400 million in research funds, it's really a short time to wait to determine whether the therapy works well enough to justify its costs and potential dangers.

It all amounts to a fascinating dilemma: Should the FDA approve the drug because it appears to have met its "secondary" goal of prolonging a patient's life by a few months, or should it reject the drug because it failed its primary objective of blunting the disease? In most similar cancer-drug cases, the FDA has rejected the drugs, but optimists believe it could take a new path with Provenge because the drug's unusual attempt to harness the immune system to fight disease may justify a different regulatory approach.

A Speculative Last Resort

These sorts of intractable, almost metaphysical issues play out all the time in biotech-land, which is what makes the sector such fun for speculators and often a nightmare for investors.

Personally, I recognize the limits of my ability to make these calls and stay as far away from the group as possible. But if you want to have some fun with it, here's a suggestion from veteran options trader Terry Bedford: Strictly play May 15 as a high-volatility event, and don't try to call the direction.

To do so, buy an equal number of at-the-money Dendreon calls and puts, which are highly leveraged bullish and bearish bets. On Tuesday, the $15 May call cost $5.30, while the $15 May put cost $4.60. When the stock breaks in one of the two directions after the FDA decision, immediately close the losing side. You will typically make more on the winning side than you lose on the failing side, and will collect the difference as profit.

« Previous Page

1 2 3 4

Next Page »