Dendreon Corp (DNDN)

One of the winning themes in the current market uptrend has been small, profitless biotech stocks nearing approval for blockbuster drugs, which in turn has spurred share price appreciation. Human Genome Sciences (HGSI) is probably the most prominent example but there are others and DNDN is among them.

Based on Phase 3 trial data DNDN is all but certain to receive approval for their prostate cancer drug Provenge. The company, which has never turned a profit, now has forward EPS projections of 32c in ’11, $1.19 in ’12 and $2.23 in ’13.

In addition to seeing their share prices appreciate because of anticipated profitability, companies like DNDN are takeover candidates as pharmaceutical companies with skimpy pipelines seek new blockbuster drugs. Indeed HGSI’s latest gallop to the upside is on just such speculation.

Bear in mind that Provenge has not been approved and the drug extends life by only 4 months. It’s not a cure. Healthcare reform could well limit the use of drugs such as this.

But for now the market does not seem too concerned. Price has formed a double bottom base and today has advanced more than $3 off the first low of the pattern. O’Neil refers to this as a “Shakeout Plus 3” and considers it a valid early entry point for a break out from such a pattern.

With price having taking out the $25 level we seek entry at the market with a stop under $24.