Why Chelsea Therapeutics Could Enjoy Arena-Like Gains

| About: Chelsea Therapeutics (CHTP)

Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) has become one of many examples of the highs, the lows and then highs again, of biotech investing. Arena has been working on a weight-loss treatment for years, and the shares plunged late last year to about $1 when new FDA issues and delays caused many investors to panic sell. The selling momentum and shorts took the stock to levels it never should have been at, and investors who were forced into selling due to margin calls, and those who sold out of fear and disgust, are probably even more disgusted at themselves now, as the stock recently topped $11.

The recent rally was due to the FDA approval of the weight-loss treatment developed by Arena. In just about six months, investors who were willing to buy into fear at about $1 per share, have been richly rewarded with gains of about 1000%. There will be more stories like this in the future, and one to watch and consider buying now is Chelsea Therapeutics International, Ltd. (NASDAQ:CHTP).

Chelsea Therapeutics has been developing a drug called Northera (Droxidopa), which is for the treatment of dizziness and falling spells that often occur in people that have Parkinson's and other diseases. This treatment has been approved and successfully marketed in Japan for over 15 years. However, Chelsea was recently told by the FDA that it recommends another trial for Northera. This news caused the stock to plunge to new lows, below $1 per share. Here are three reasons to consider the stock now:

1. Investors who are dumping the shares now might be overreacting because the company has nearly $52 million in cash, and no debt. Based on about 67 million shares outstanding, this works out to be about 77 cents per share in cash, and the stock now trades just barely above that level.

2. Chelsea has a significant level of short interest, and according to the latest data, almost 7 million shares are short. With average trading volume of around 987,000 shares per day, it could take about 7 days worth of average volume for shorts to cover.

3. Not everyone is so bearish on Chelsea shares and analysts at Wedbush called the shares "oversold" and it has an outperform rating and a $9 price target on the stock. If this price level was reached, it would give investors who buy now returns that are similar to the gains Arena has seen in the past few months. A recent article summarizes the optimism at Wedbush. It states:

"We believe Chelsea has a chance to convince the FDA to accept a modification of the ongoing '306b trial design and a new trial conducted post-approval."

With the shares trading near cash levels, many shorts are still in the stock, and since the company could surprise to the upside, I believe most investors will soon see that the shares are undervalued. Forget the past several months and look at the glass half-full and towards the future: If a biotech with a solid chance of approval from the FDA within the next 6 to 24 months or so was going public today at close to cash levels and it had no debt, many investors would probably jump at the chance to buy for about $1, and yet investors focused on the short-term setbacks are possibly making the same mistakes Arena investors made by selling near $1 per share just months ago.

At current valuations, investors are completely ignoring the many millions of dollars the company has spent in research and development and the prospects that still exist for the company. Buying now, while the stock is trading cheap and with significant investor pessimism and frustration, could lead to solid gains in the short term for traders, and potentially incredible gains for those willing to hold for the possibility of an eventual FDA approval of Northera.

Key Data Points For Chelsea Therapeutics From Yahoo Finance:

  • Current Share Price: $.90
  • 52-Week Range: $.70 to $6.06
  • Dividend: none
  • 2012 Earnings Estimate: a loss of 76 cents per share
  • 2013 Earnings Estimate: a loss of 65 cents per share
  • P/E Ratio: n/a due to losses

Key Data Points For Arena Pharmaceuticals From Yahoo Finance:

  • Current Share Price: $11.35
  • 52-Week Range: $1.23 to $13.50
  • Dividend: none
  • 2012 Earnings Estimate: a loss of 33 cents per share
  • 2013 Earnings Estimate: a loss of 17 cents per share
  • P/E Ratio: n/a due to losses

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I am long CHTP.