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Sell Dendreon Stock and Use ETFs to Play Biotech

Tom wrote the InvestorPlace.com Facebook page to ask, “I own Dendreon (DNDN), should I sell and eat my losses?”

My short answer: Yes.

Chances are Dendreon stock will likely never come back. And if DNDN stock does recover, it will never revisit the peak valuations it saw just a few years ago. Any move to the upside will be fraught with volatility and more headaches for you — to say nothing of the missed opportunities along the way — so you’re better off selling Dendreon stock now and moving on.

Dendreon is a case study in the volatile world of biotech stocks. They are speculative, insanely volatile and make as many paupers as they do millionaires.

Consider that in April 2009, Dendreon saw an intraday range between $25 and 7.50 a share — and saw a swing of over 65% in just a few minutes of trading.

Or consider that DNDN went from under $3 a share in March 2009 to a peak over $50 in April 2010 — and then crashed to a low of about $7 by the end of 2011.

When you are on the right side of a trade like this, it can make you rich, but the downside is just as dramatic. And the biggest problem of all is that you are basically just guessing whether the stock is going to move in your favor.

Dendreon has a controversial prostate cancer vaccine, Provenge, that went through the arduous process of FDA approval. Like all biotech stocks, it was bleeding cash while banking on the hopes of an effective treatment that would start raking in sales and eventually lead to a big-ticket buyout from Big Pharma players like Merck (MRK) or Pfizer (PFE). After approval, the stock took off like a rocket.

But it wasn’t enough. Dendreon has struggled with restructurings and layoffs, missed sales targets and other issues. After all, this vaccine has a price tag of more than $90,000.

You read that right: This vaccine is the cost of a single family home in the Midwest — and while that’s admittedly cheaper than surgery and chemotherapy to treat prostate cancer, it’s no easy sell to either doctors or patients. So the company keeps bleeding red ink as sales remain anemic — and worse, continue to fall.

I know the allure of biotech stocks is that you ride a winning cancer cure to amazing heights … but this is not shaping up to be the Dendreon story at all.

For the record, I don’t pretend to be an expert in medical devices or innovative new treatments — but frankly, that’s why I do not dabble in individual biotech plays.

Retail investors are better off in diversified funds that spread your risk around. This generally applies to any sector of the market, but is particularly true in the volatile biotech space where, by most industry estimates, roughly 90% of drugs in development wind up falling flat.

So if you’re thinking of joining the party in biotech, consider funds like the iShares Nasdaq Biotech ETF (IBB), Biotech SPDR (XBI) and PowerShares Dynamic Biotech & Genome Portfolio (PBE).

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Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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