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Chelsea Therapeutics (NASDAQ:CHTP) nearly doubled in price on Wednesday upon the news that its drug droxidopa (commercially known as Northera) received a strong recommendation of approval from the FDA's Cardiovascular and Renal Drugs Advisory Committee. With a 16-1 vote, that tips the scales greatly in favor of Northera being approved for commercial sale during its hearing on February 14.

This excellent article goes into detail over the merits of Northera, its potential market size as well as CHTP's institutional holdings, led by the Baker Brothers with 5.8M shares held or about 8% of the stock's float. A more recent glance at the institutional holdings shows that since the article on December 16th, large players have continued to buy shares, led by First Midwest Bank Trust Division with an increase of 282K shares reported on December 31.

The strong institutional support, especially that of the Baker Brothers is indicative of CHTP's potential as it sits around $300M in market cap. CHTP's Interim CEO Joseph Oliveto stated that upon approval, Northera may be commercially available in roughly six months. That means CHTP could be generating revenues before the year is up. Droxidopa has orphan drug status and in 2013 five newly approved orphan drugs were priced in excess of $150K per patient per year.

CHTP could begin commercialization of Northera in September of this year according the CEO. If Northera treats only 100 patients throughout all of 2015 at an average of $150K, $15M in gross revenue could be achieved. A thousand or more in the years following and revenue figures exceed the market cap of today.

A look at the balance sheet shows that the company had $21M in cash and $3M in payables as of September 2013. Since then, CHTP completed a 7.7M share offering which raised between $18.6M to $21.4M with the expressed goal being to use the cash to get through the regulatory approval and to fund initial commercialization activity.

While CHTP has spent a lot of cash in the past to get to this point, a restructuring effort in 2012 has left the company running at minimal cash burn as it tries once again to get Northera approved. Recent burn rates have been less than $4M a quarter. With the proceeds from the share offering, the company should have approximately $35M in cash at this point in time which looks to be enough to get through its stated goal.

The nature of the drug and its orphan status would make it an attractive buyout candidate. From the Reuters article in 2012, Wedbush Securities analyst Liana Moussatos stated:

"This niche market may make Chelsea an attractive takeover candidate for pharmaceutical giants, including Pfizer Inc and Sanofi SA.

Orphan drugs are very profitable and popular now in the pharmaceutical industry, so I don't think they would have too much trouble finding someone, especially with their current market capitalization".

As the final hurdle for commercialization comes on February 14 and the panel already gave its recommendation for support, it looks increasingly likely that CHTP will become a revenue-generating company within the year. Once that begins, several possibilities exist for the company to maximize shareholder value. If the stock price warrants it, the company could choose to dilute and pursue mass commercialization on its own. It could seek a partner to keep the share float as is, or it may be a target of a takeover bid. In this bullish environment for the health care sector and considering how many companies are hoarding cash, I agree with Wedbush Securities that this orphan drug Northera will make CHTP an attractive buyout candidate.

Disclosure: I am long CHTP. 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.

Source: Chelsea Therapeutics May Be A Revenue Generating Biotech By The End Of 2014