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Chelsea Therapeutics International (NASDAQ:CHTP) is attracting interest from investors and traders again as it gears up for its second panel meeting with the Cardiovascular and Renal Drugs Advisory Committee (CRDAC) scheduled for Jan 14, 2014. Chelsea stock has moved up from under $3 in early November to over $4 in later December, reflecting investors' optimism with the outcome of a second panel meeting with a possibly less critical FDA review. In contrast to this general market sentiment, we remain cautious. In this article, we will list a few reasons to be wary. We will also propose trading strategies for this binary event.

In general, the voting result at the end of a panel meeting agrees with the FDA review that is publicized 48 hours before the meeting. This year, we have seen three high profile panel meetings for AVEO Pharmaceuticals (NASDAQ:AVEO), Amarin Corporation (NASDAQ:AMRN) and Vanda Pharmaceuticals (NASDAQ:VNDA), and all three panels of advisers agreed with FDA assessments of the respective drugs.

The FDA review was very critical of the overall survival data on AVEO's drug tivozanib for advanced kidney cancer, and the panel voted 13:1 against it.

Amarin had presented highly statistically significant data for the drug Vascepa for patients of high triglycerides with mixed dyslipidemia. The data from two successful phase III trials for Vascepa seemed promising, but the FDA reviewer's doubt on its clinical effectiveness based on newly published third party trials derailed Amarin's plan. The panel voted 9:2 against it.

In Vanda's case, the panel unanimously voted approval of tasimelteon for Non-24 disorder of the totally blind, surprisingly agreeing with the FDA review yet even the equity market was highly suspicious with the clinical design and effectiveness of the drug.

In the last panel meeting for Chelsea's drug Northera (droxidopa) in Feb, 2012, the voting result diverged from the FDA critical review. The panel voted 7:4 in favor to approve Northera, though members expressed caution on its effectiveness. FDA still rejected the drug in March 2012, and advised the company that ongoing Study 306B was unlikely to provide sufficient confirmatory evidence to support Northera's NDA (new drug application).

Chelsea appealed and the FDA seemed to turn 180 degrees on the approvability of Northera. According to the press release of Feb 20, 2013, FDA may approve Northera based on "the strength of Study 306B and its ability to provide substantial evidence of effectiveness to support approval." And new FDA guidance suggests that short-term clinical benefit is approvable providing a requirement to verify durable clinical benefit post-approval. We believe that the FDA briefing Study 306B will be critical in guiding the panel discussion and voting result. Recently we have seen a few cases displaying the FDA's greater malleability. For example, Amarin Corporation just announced that FDA is considering reinstating the SPA agreement for Vascepa ANCHOR after it was rescinded just months ago, Alimera Sciences (NASDAQ:ALIM) and its partner pSivida Corp (NASDAQ:PSDV) said the FDA had started labeling discussions with them with no new trial required only two months after FDA insisted new trials were needed to establish safety in the third CRL (complete response letter) on the drug Iluvien. The FDA has the final say in drug approval. It will be particularly interesting to follow the FDA review on Northera and panel discussion. We think investors should trade CHTP based on the FDA review disclosed in its briefing doc.

Study 306B Re-Enforced The Lack Of Long-Term Effectiveness

Consistent with previous phase III trials, the data of study 306B showed Northera has no statistically significant effectiveness on Orthostatic Hypotension Symptom Assessment (OHSA) Item 1 (dizziness, lightheadedness, feeling faint or "feeling like you might black out") for the treatment of symptomatic neurogenic orthostatic hypotension (NOH) associated with Parkinson's Disease (PD) after one week. By combining studies 306A and 306B, a meta-analysis does find a strong trend toward improvement in dizziness/lightheadedness at week 8, but only a 0.8 unit difference vs. placebo, statistically the difference is not significant.

FDA Still Requests Longer Term Effectiveness For Final Approval

This month (Dec 2013) Chelsea has started enrolling patients in a new trial study 401 that will evaluate the clinical efficacy and safety of Northera versus a placebo over a 17 week (maximum) treatment period. The primary outcome measure of the study is to evaluate the duration of clinical benefit of Northera as demonstrated by the change in the OHSA Item 1 (dizziness/lightheadedness). This study could be viewed as a requirement of the post-approval trial demonstrating the durability of Northera as agreed with FDA. The problem is that the results of Study 401 may be negative based on previous studies. The thorny question then becomes how the FDA and the panel agree on temporary approval of Northera based on short term effectiveness that is in contrast to the FDA insistence on longer term durability for final approval. Not only did studies 306A and 306B (completed after the last panel meeting) fail to show durability of Northera on dizziness and lightheadedness (OHSA Item 1), but previous study 302 failed to show even short-term effectiveness on dizziness (p = 0.5).

Have The Company And FDA Settled Down On Primary Endpoint?

Changing the primary endpoint after a trial has started is usually viewed with suspicion because it can weaken the power of statistical analysis. For some "new" diseases that lack effective treatments, FDA seems to be lax on primary endpoint changes as a part of learning process to understand the diseases and clinical trial designs. For example, in Vanda's case the FDA allowed the company to choose a different endpoint to test the drug tasimelteon after the trial had started. The design changes and ever-mutating primary endpoints for the Northera clinical trials is dazzling. The following table shows the phase III trials and their design changes.

Study

Initial Primary

Final Primary

Changes

Results

302

Dizziness

Dizziness

(First competed trial;

no change)

Failed (-0.6 unit, p=0.5)

301

Dizziness

OHQ

Change based on study result of 302

Succeed (-0.9 unit, p=0.003)

303

(extension of 301)

Dizziness

OHQ

Change based on study result of 302

Failed (-0.3 unit, p=0.4)

306A

OHQ

OHQ

306A and 306B were split from study 306.

Primary endpoint failed, but found statistical reduction of falls.

306B

OHQ

OHSA Item 1

up to 8 weeks

Primary endpoint changed twice: from OHQ to fall based on 306A result, and later from fall to OHSA Item 1 following end-of-review meeting with FDA

Primary endpoint succeed at week 1 (-1.0 unit, p=0.018), but failed at week 8; numerical reduction of falls, but not statistically significant.

401

OHSA Item 1

up to 17 weeks

on-going

Note: 1) Results of studies 302, 301 and 303 were from last FDA briefing doc;

  1. Results of studies 306A and 306B were from the company's press releases and presentation;
  2. OHQ = Orthostatic Hypotenison Questionnaire composite score;
  3. OHSA = Orthostatic Hypotension Symptom Assessment; OHSA Item 1 includes dizziness, and OHSA Item 1 is equivalent to dizziness/lightheartedness in this article and company's press releases.

As evidenced in the latest trials of study 306B and newly started study 401, it seems the FDA and the company has agreed on dizziness and lightheadedness or OHSA Item 1 as the primary endpoint to measure the effectiveness of Northera, which is in agreement with the FDA CRL letter of March 28, 2012. If this is the case, the lack of durability shown in study 306B in addition to its conflicting results of short term effectiveness in comparison to failed study 302 may raise serious questions on the outcome of ongoing confirmatory trial of study 401 that is specifically designed to show the durability of Northera on dizziness and lightheadedness of NOH patients.

Has The Company Displayed Confidence For The Second Panel Meeting And FDA Approval?

The company appears moving steadily forward following new guidance from the FDA after the successful appeal. In addition to the resubmission of a NDA and scheduling second panel meeting, the company has also initiated study 401 to test the durability of Northera. Chelsea raised over 20 million offering new shares of common stock at $3 per share, on Nov 13, 2013, just a couple of months before the scheduled panel meeting on Jan 14, 2014. It may be wise for the company to raise cash that is needed for new clinical trials when the stock is running up towards the panel meeting but it could also indicate that the company lacks confidence in the outcome of the panel meeting and/or FDA decision by the PDUFA date of Feb 14, 2014.

Our Assessment Of Stock Action

In the light of controversial data and contradictory FDA stance on Northera, the outcome of the panel meeting seems highly uncertain. Contrary to the first panel meeting, we believe that FDA and the panel of advisers will most likely agree on the approvability of Northera, including additional requirements for final full approval, in the second panel meeting. If the additional requirements could be met post-approval, the outcome will be a huge win for Chelsea. Otherwise, any pre-approval trial requirement will be a disaster. The FDA brief doc will be critical to the panel meeting. If FDA remains damagingly critical as seen at the first panel meeting, it would be very likely that this second panel meeting could be negative. If the FDA shows leniency this time, which would be a significant change in stance, we would assume that the panel will approve it with a post-approval requirement, and the stock will soar before the meeting.

We believe that the stock will go up or down dramatically on the FDA briefing doc release that is expected in the early morning of Jan 10, 2013. We remain agnostic about the outcome of the panel meeting. Our analysis has a negative bias that we would assess as a 60% probability of a negative result.

Trading Strategies Using Options

Market data were of Friday, Dec 27, 2013.

Expected market maker move 1.75

Three year stock price range .70 to 8.10

Spreads are used to define risk and reduce exposure to volatility collapse.

1) For negative Outcome

Possible 1 to 1 payout ratio

Call vertical spread: Sell Jan 4 call, buy Jan 5 call for around .50

Max profit .50 below 4 max loss .50 above 5

Possible 2 to 1 payout ratio

Put vertical spread: Buy Jan 4 put, sell Jan 3 put for around .30

Max profit .70 below 3 max loss .30 above 4

2) For Positive Outcome

Possible 1 to 1 payout ratio

Put vertical spread: Sell Jan 5 put, buy 4 put for around .5

Max profit .50 above 5 max loss .50 below 4

Possible 2 to 1 payout ratio

Call vertical spread: Buy Jan 4 call, sell Jan 7 call for around .85

Max profit 2.15 above 7 max loss .85 below 4

The position may be adjusted according to the stock movement after the FDA briefing doc is posted on the FDA website in the morning of Jan 10, 2014.

This article was authored by Nick Zheng and Ted Arhontas.

Source: Chelsea: FDA Panel Meeting And Trading Strategies

Additional disclosure: I long PSDV, and I hold options for CHTP and VNDA. I may update my positions at any time.