Chelsea Therapeutics: Caution Warranted
On February 18th 2014, Chelsea Therapeutics International, Ltd. (CHTP) that the U.S. Food and Drug Administration (FDA) granted accelerated approval of NORTHERATM (droxidopa) for the treatment of symptomatic neurogenic orthostatic hypotension (NOH). NORTHERA represents the only therapy approved by the FDA, which demonstrates symptomatic benefit in patients with NOH. This autonomic disorder manifests with symptoms including dizziness, lightheadedness, blurred vision, fatigue, poor concentration and fainting episodes. The pathophysiology of NOH is caused by an endogenous insufficiency to produce and release sufficient levels of norepinephrine upon standing. The disorder affects an estimated 80,000 to 150,000 individuals in the United States. While this is a major accomplishment for Chelsea shareholders and patients with NOH, there remains substantial development and commercialization risk in the stock. Chelsea's press release features the following risks remaining:
"The NORTHERA approval was granted under the FDA's accelerated approval program, which allows for conditional approval of a medicine that fills a serious unmet medical need, provided additional confirmatory studies are conducted. The package insert indicates that effectiveness beyond 2 weeks of treatment has not yet been demonstrated, therefore the continued effectiveness of NORTHERA in patients should be assessed periodically."
NORTHERA's FDA submission was based on results from Study 306B and Study 306 in 225 patients, to improve both dizziness/lightheadedness and standing systolic BP at Week 1 (p=0.018 and p=0.032) in patients with NOH associated with Parkinsons Disease compared with placebo. In addition, there was a lower rate of falls and fall-related injuries in patients who received NORTHERA compared with placebo, although it was not statistically significant. Based on these results, the FDA's Cardiovascular and Renal Drugs Advisory Committee recommended NORTHERA for approval 16-1.
A confirmatory multi-center, placebo-controlled, randomized study, which includes a 4 week randomized withdrawal phase preceded by a three month open label run-in phase, designed with the goal of definitively establishing the durability of the clinical benefits of NORTHERA, has been preliminarily agreed to with the FDA. Based on the contemplated study design, the trial would include approximately 1,400 patients, which the FDA has agreed may be enrolled over a six-year period.
Chelsea estimates NORTHERA could see peak sales of $375 million within 5 years. Chelsea's current market cap is currently $437 million, with $20M in cash and zero debt. Obviously, there are some doubts with investors on Chelsea's estimates. This could represent an opportunity, however in this case doubts are warranted. There have been no previous approvals for this indication to date, thus for analysts and investors alike there is no comparison for modeling a sales trajectory with any great confidence. Therefore, Chelsea's shares may remain in a proverbial "purgatory" remaining in between shareholder enthusiasm reliant upon management's estimates and shareholder doubts based on concerns over the long-term safety and efficacy. This stock will be especially sensitive to any data releases on NORTHERA prescription trends by management or other sources (IMS, Bloomberg). Critically, I find it hard to believe Chelsea's shares could reach escape velocity until 1 full year of post-marketing surveillance is completed.
Chelsea plans to launch NORTHERA in 2H14. In order to justify its current market capitalization, I estimate that NORTHERA needs to achieve in its first full year sales in excess of $30M in 2014 giving it a P/S multiple of 14.5. Certainly not cheap, but also well below other stocks in the sector. Perhaps it's a sign of the growing bubble concerns in healthcare, but based on other single product companies, a P/S ratio of 14.5 is not out of the norm. Therefore, it is critical to monitor the progress in sales growth with NORTHERA in coming quarters, while remaining ever cautious for headline risk of a reported adverse event to the FDA.
NORTHERA is an orally active synthetic precursor of norepinephrine, a critical and ubiquitous neurotransmitter in the C.N.S., its mechanism of action is to increase the concentrations of norepinephrine within noradrenergic neurons in the C.N.S. Based on its mechanism of action increasing norepinephrine levels, implicitly it is conceivable that certain long-term safety issues could emerge, particularly intracranial ischemia (stroke), seizures, and neuroleptic malignant syndrome (NMS). This creates substantial headline risk for the next year at least, any uptick in safety events could limit NORTHERA to short-term use versus chronic use. This would obviously result in a substantial sell-off in its shares, and diminish any hopes in achieving the estimated $357M in sales within 5 years. That being said, NORTHERA's labeling was rather favorable not limiting duration of use, and although it has a black-box warning for supine hypertension, the language appears to be less severe than with midrodrine (an off-label medication used for NOH). Due to the limited size of the patient population studied, clear labeling that safety and efficacy beyond 2 weeks has not been demonstrated, I expect a fairly slow sales launch over the first year as physicians gain comfort with the drug, but if no serious safety events are reported, 2015 could see rapid adoption and accelerated sales ramp.
One key issue, that is likely to restrict Chelsea shares over the long term is that their confirmatory Phase III trial is to enroll over 1,400 patients over 6 years. This is a significant amount of time to endure headline risk, with possible clinical holds reminiscent of Iclusig. In my assessment, this will likely restrain major multiple expansion above what the sell-side is estimating currently, which is around 5x 2018 sales of $330M. Moreover, Chelsea indicated they are open to strategic options with partnering NORTHERA, Deutsche Bank (DB) analysts estimate that if 20% of economics are partnered their fair value would drop to $6 per share, despite their peak sales estimates at $460M. I tend to agree with Deutsche's assessment, Chelsea has to begin a large Phase III trial and would have to hire 100-150 person sales force to launch in the US, which would likely represent at least a 50% reduction in their cash hoard from $20M currently, this would certainly require additional financing through debt or equity issuance at some point in 2015. As a reminder, Chelsea did a $21.4M secondary in November 2013.
Surveying the Consensus Estimates
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Sell-side analysts don't blatantly state it, but the basis of their Buy recommendations are centered on acquisition hopes, or an attractive licensing deal. I don't see a strong investment case beyond these hopes, and am generally unenthused about this company. There are many landmines in the future to avoid: great uncertainty in sales growth, lack of resources to maximize commercial potential, and headline safety risks. If inclined to trade it, stay small, Chelsea has a liquid options market that should be used over common equity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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