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Back in March the Food and Drug Administration issued Chelsea Therapeutics (Nasdaq: CHTP ) a complete response letter asking for data demonstrating a durable response of two to three months for Northera, its treatment of symptomatic neurogenic orthostatic hypotension, characterized by low blood pressure on standing that can cause dizziness and fainting.
After meeting with the FDA, the company believes it'll only need data for two weeks after patients have reached their correct dose, which you'd think would be good news. Instead shares fell 12%.
While the data might come sooner than expected, I think investors are right to be worried. According to management, the FDA is now more concerned that one of the clinical trial sites in its pivotal study enrolled a disproportionate number of patients and the data from that site was better than the average.
The FDA takes the integrity of clinical trial data very seriously. The agency rejected Johnson & Johnson's (NYSE: JNJ ) antibiotic ceftobiprole essentially because of problems with its clinical trial sites. Pfizer (NYSE: PFE ) got a warning letter from the agency for failing to adequately monitor its clinical trial testing its antipsychotic Geodon in children. There were rumbling about MannKind (Nasdaq: MNKD ) having issues with its ex-U.S. sites, but I don't think anything came of it.
There's no evidence of improprieties here. Chelsea did two independent reviews of the site before turning in data to the FDA and the agency reviewed the site as well. None of the audits resulted in any issues.
I think the bigger issue here is the sudden change from when the CRL was issued to now. Did the company misread the important aspects of the letter, or did the agency suddenly change its mind? It doesn't really matter which. Both inept management and/or an agency that doesn't know what it wants are signs of a very risky drug approval.
Chelsea plans to use the patients in a clinical trial that's currently enrolling patients to get the data the FDA requested, but it'll have to change the primary endpoint of the trial. That's another big red warning flag, although changing it because it's what the FDA wants is better than changing it hoping to get a better result.
The FDA hasn't signed off on the plan yet, but assuming the agency does, Chelsea thinks it'll be able to complete the trial by the first quarter of next year, which would put a potential approval in the third quarter of 2013.
Chelsea had $52 million in the bank at the end of the first quarter and expects to burn through more than half of that this year, leaving just $17 million to $20 million. Once the trial is complete, the spend should go down, so Chelsea estimates the cash should allow it to get into the second quarter of next year. Clearly it'll need to raise more cash to get through the FDA decision and launch, but if the new study is positive, shares should go up, and it won't be as costly. Chelsea also has a phase 2 rheumatoid arthritis drug that could be out-licensed to raise cash.
Chelsea might be a good long-term buy here, but only for the most risk-tolerant investors. There's still a lot that could go wrong. Everyone else should look elsewhere for their high-growth kicks. Analysts at the Motley Fool's Rule Breakers have a suggestion.