Chelsea Therapeutics: Likely to Double on Safe, Proven Asset

| About: Chelsea Therapeutics (CHTP)
Chelsea Therapeutics (NASDAQ:CHTP) is a specialty pharmaceutical company with 62 million shares outstanding that trade at $5.08 each, resulting in a market capitalization of $315 million. The firm has $66 million in cash with no debt, so the enterprise value is about $250 million. I think shares will at least double by the end of the year.
I’ve had a long history with Chelsea. Whenever I’ve been in an investment for years and it hasn’t really worked, I am skeptical and worry that I have "impaired judgment" regarding the details of that investment. Nevertheless, I feel this is a great idea for new money, and it is one of the largest investments in my hedge funds.
Chelsea has two main assets: droxidopa and CH-4051. Droxidopa is easy to understand. The drug is a prodrug of norepinephrine, one of the main neurotransmitters humans use to regulate everything from mood, blood pressure, heart rate, pain and who knows what else. The drug has been approved for decades in Japan and millions have used it over there. It’s one of the safest drugs I’ve ever seen in my career following pharmaceutical stocks. This isn’t too surprising, I guess, as the drug metabolizes into a safe endogenous peptide. You can’t really overdose on it (not that I’d recommend trying to).
I initially got into Chelsea as a financial arbitrage. Sales of droxidopa are so high in Japan (80,000 people take the drug) that I reasoned Chelsea, with U.S. and European rights to droxidopa, should have an easily calculated value. Our country has 2-3x the people Japan does, so even with 150,000 patients taking the drug here, at $10,000 per year, droxidopa can do $1.5 billion in sales. Three-times sales translates into $4.5 billion in future value, or around $80 per share. I don’t think that will happen though. Value calculations are more complex than I just let on. Nevertheless even with a full analysis of the asset (non-impaired/”right scale” sales force, appropriate life cycle/asset life considerations, conservative ramp, etc), Chelsea’s rights to Dainippon Sumitomo’s droxidopa should be worth at least $20. Our fund trades Dainippon Sumitomo actively but currently has no position.
The good thing about droxidopa is it seems to work in a lot of diseases. I think this is why it’s used so aggressively in Japan. Dainippon doesn’t even promote droxidopa anymore in Japan, but I think folks there know the drug helps with pain, depression, ADHD and other maladies. It’s a more or less “all natural” pharmaceutical, which is uncommon, and a lack of norepinephrine explains a lot of diseases. After all, SNRIs (serotonin norepinephrine reuptake inhibitors) raise norepinephrine too.
The next asset, CH-4051, is a minor call option. Some of you might love it. I only like it. A safer methotrexate sounds very sexy. Methotrexate is a nasty drug with all kinds of toxicity. Some of this toxicity can be explained by its metabolic lineage. Chelsea thinks they understand how to make a derivative of methotrexate that keeps the good profile and eliminates the toxic effects. We’ll see what happens. Needless to say, a branded methotrexate would generate billions in sales. It’s still hard to convince people to switch using an old cheap drug, and I am generally nervous when I hear about a company thinking they can eliminate the bad from a drug and keep the good. These usually go hand in hand. If it somehow worked well, I think Chelsea stock would respond favorably. I don’t think you’re “paying for it” at these prices, but I wouldn’t get too worked up over CH-4051.
The real risk to Chelsea is the FDA refusing to approve droxidopa for neurogenic orthostatic hypotension. We’ll know in six months or so. Chelsea has had successful and not so successful data for droxidopa. The failure of the company to execute on generating flawless droxidopa data is frustrating. Droxidopa works. That doesn’t mean much to the FDA. They need to see pristine data sets and really believe that a single pivotal study is enough to support FDA approval. I think they’ll get it. Either way I bet the stock goes up as investors realize it’s a relatively high probability approval.
So Chelsea is a high-risk, high-reward situation. The risk doesn’t stop with FDA approval. Execution of sales on a drug is difficult. No drug (no, not even Lymphoseek) is a guaranteed big seller. There have been a number of disappointing duds for drugs in large markets like schizophrenia and overactive bladder marketed by large companies. The good thing about droxidopa is it will be indicated for a severe side effects related to Parkinson’s disease. The FDA probably thinks this is an underserved disease with no great treatment alternatives. I think they’ll receive approval and the stock will go to $15 on that news.
Disclosure: I am long CHTP.
Additional disclosure: I may liquidate, hedge or modify my investment in Chelsea therapeutics any way I see fit without any notification to SeekingAlpha or its users.