Small Cap Chelsea Therapeutics International (CHTP): Look Carefully Before Leaping (IBB & XBI)

The biotech roller-coaster continues for investors into 2014 with small cap Chelsea Therapeutics International Ltd (NASDAQ: CHTP) set to more than double when the market opens today, meaning its time to take a closer look at what in the world is going on with the stocks plus take a closer look at the performance of biotech peers like the iShares NASDAQ Biotechnology Index ETF (NASDAQ: IBB) and SPDR S&P Biotech ETF (NYSEARCA: XBI).

What is Chelsea Therapeutics International?

Small cap Chelsea Therapeutics International is a development stage biopharmaceutical company seeking to acquire, develop and commercialize innovative products for the treatment of a variety of human diseases. More specifically, the company's development strategy is to balance the product development portfolio with early (preclinical) and late-stage (clinical) products through a combination of product acquisitions and partnering with pharmaceutical and biotechnology companies.

Currently, Chelsea Therapeutics International pursuing FDA approval for Northera™ (droxidopa), a novel, late-stage, orally-active therapeutic agent for the treatment of symptomatic neurogenic orthostatic hypotension in patients with primary autonomic failure (Parkinson's disease, multiple system atrophy and pure autonomic failure). In addition, the company's pipeline includes a library of metabolically inert antifolate medications, including a clinical-stage product called CH-4051 for the treatment of rheumatoid arthritis and other autoimmune diseases.

As for potential performance benchmarks or peers, the iShares NASDAQ Biotechnology Index ETF tracks the Nasdaq Biotechnology Index through 123 stocks and has a 75.89% weight in "biotechnology" and a 21.28% weight in Pharma while the SPDR S&P Biotech ETF tracks the S&P Biotechnology Select Industry Index with a 100% allocation in 71 biotechnology stocks.

What You Need to Know About Chelsea Therapeutics International Ltd?

Yesterday after the market closed, Chelsea Therapeutics International announced that the FDA's Cardiovascular and Renal Drugs Advisory Committee (CRDAC) voted 16-1 to recommend approval of Northera for the treatment of symptomatic neurogenic orthostatic hypotension (nOH) in patients with primary autonomic failure, dopamine beta hydroxylase deficiency and non-diabetic autonomic neuropathy. It should be mentioned that Northera was previously granted Orphan Drug Designation and that the FDA is not bound by the CRDAC's recommendation, but will take it into consideration when reviewing the New Drug Application (NDA) for it.

The press release noted that nearly 300,000 patients in the US and the EU combined are estimated to suffer from chronic symptomatic nOH which is caused by an underlying neurogenic disorder, such as Parkinson's disease, multiple system atrophy or pure autonomic failure. Symptoms include dizziness, lightheadedness, blurred vision, fatigue, poor concentration and fainting episodes when a person assumes a standing position – meaning person's ability to perform routine daily activities can be severely curtailed.

However, investors should be aware that back in March 2012, the FDA rejected Northera in what FierceBiotech described as:

…a troubled program that drew regulatory frowns for an absence of long-term efficacy data and troubling safety signals. In handing Chelsea a complete response letter, the agency opted to overlook the majority vote in favor of Northera by a panel of outside experts, where Northera earned some grudging respect. 

The FDA concluded that Chelsea Therapeutics International needed to file positive data from an additional two- to three-month study while CHTP raised the prospect that an ongoing 10-week trial could provide the data it needs – something that did not sit well with investors and shares plunged more than 30% in just a few minutes.

FierceBiotech went on to note that:

Analysts had been kept guessing on the outcome throughout the day, balancing the official stance of the FDA with the 7-4 panel vote and the simple fact that this drug has been available for years in Japan… For some analysts, the first of two Phase III studies was considered something of a cakewalk. But Northera flunked that study. A subsequent Phase III produced positive data, adding to the biotech's reputation for treating investors to a roller coaster ride on its share price. Even if it is approved at a later date, the FDA is already considering a black box warning on safety concerns. FDA reviewers have raised concerns about links to a neurological condition.

This time around, Reuters noted similar confusion or concerns:

Panelists wrestled with gaps in the clinical data which they said made it difficult to determine whether the drug, which appears effective after one week's treatment, is effective over the long term. Most suggested the company be required to conduct a follow-up study to prove a durable benefit… But some panelists expressed frustration that the experience of patients who have benefited from the drug was not clearly backed up by data from the clinical trials.

However, there is an absence of viable alternatives to treat the condition and the FDA will typically follow the recommendation of CRDAC.

Share Performance: Chelsea Therapeutics International vs. IBB & XBI

On Tuesday, small cap Chelsea Therapeutics International fell 8% to $2.30 (CHTP has a 52 week trading range of $0.76 to $4.53 a share) for a market cap of $180.40 million, but the stock is set to rise as much as 123% when it opens on Wednesday. Otherwise, Chelsea Therapeutics International is down 48.1% since the start of the year, up 158.4% over the past year and up 40.2% over the past five years, but its also been a wild ride for investors as the following chart illustrates: 

Here is a look at Chelsea Therapeutics International's performance verses that of the iShares NASDAQ Biotechnology Index ETF and the SPDR S&P Biotech ETF:

As you can see from the above charts, buy and hold investors would have been better off with the iShares NASDAQ Biotechnology Index ETF and the SPDR S&P Biotech ETF, but savvy traders may have been able to make significant profits if they were good at timing Chelsea Therapeutics International's ups and downs.

Finally, here is a look at the latest technical charts for Chelsea Therapeutics International and the two ETFs:

The Bottom Line. Investors with a low tolerance for risk should definitely stay away from small cap biotech stocks like Chelsea Therapeutics International; but given the troubled history surrounding Northera, even biotech savvy investors not already in on the coming surge might want to look closer before they leap.