Even by the liberal standards of biotech, Chelsea Therapeutics (NASDAQ: CHTP) has given its investors a wild ride as the stock has bounced around on exceptionally mixed data on lead drug Northera. Investors have already faced both the ecstasy of FDA panel approval, and the agony of FDA rejection. Now the shares are rocketing again, jumping almost 100% on Wednesday in the wake of a convincing panel vote in favor of Northera despite a decidedly negative FDA stance in its pre-meeting briefing.

What happens next is anybody's guess. The FDA approves almost 90% of the drugs that are recommended by its panels, and the 16-1 vote on Tuesday would normally be seen as a strong endorsement. Chelsea's data package is one of the messiest I've seen in a long time, but orthostatic hypotension is a significantly under-served market and it doesn't take particularly bold assumptions to derive an appealing target price.

Northera – A Tricky Drug For An Undertreated Condition
Northera is an orally active synthetic precursor of norephinephrine (a pro-drug), intended to relieve the symptoms of neurogenic orthostatic hypotension (NOH). NOH causes a sudden, significant fall in blood pressure upon standing, causing a lack of blood to the brain and dizziness, syncope (fainting), and falls.

There are multiple, relatively uncommon, conditions that are often coincident with NOH, including Parkinson's, multiple systems atrophy, and pure autonomic failure. In the Parkinson's population, about 20% of the 60,000 or so people with the disease also experience NOH, but the overall size of the NOH market has been estimated at as many as 300,000 people per year.

Unfortunately, it is not inarguable that Northera is an effective treatment for the condition. The first Phase III study (301) showed a statistically significant improvement in a questionnaire score, but the results for the 302 Phase III study were not statistically significant and the FDA objected to a non-normal distribution of response from one trial site in 301, the removal of which resulted in study failure. Even though an FDA panel voted 7-4 to approve Northera despite the iffy data package, the FDA rejected the drug in March of 2012.

Now there's another study and another shot on goal. The 306B study in Parkinson's patients showed a statistically significant (p=0.018) one-point improvement in mean dizziness at week one (a slightly smaller improvement than seen in the original 301 study). More than 50% of Northera users saw a better than 50% improvement in their dizziness score (p=0.007), and there was a statistically significant improvement in standing systolic blood pressure. There was also an improvement in the rate of falls, but it was not statistically significant.

Even here there are still questions, including the durability of the effect as the 306B study was not designed to confirm long-term efficacy and 8-week data showed a positive trend, but not statistically significant, supporting ongoing dizziness reduction. The 306B study also had two major changes to its statistical analysis plan, including a change in the primary endpoint. Chelsea also excluded patients from the final analysis who dropped out during titration; include them, and the study fails.

Still A Chance, Though
Even though there are real questions about the Northera data, I side with the panelists who voted in favor of the risk-benefit of the drug. There are some serious potential adverse events for Northera, but the event rates for midodrine (a generic often prescribed for NOH) are even worse. If I were the FDA, I would definitely insist on seeing long-term efficacy data on a post-marketing basis, but I would grant approval on the data seen so far.

If the FDA approves Northera, what then? Judging from management's prior statements, it would seem that management expects to charge $12,000 a year for the drug (midorine costs about one-tenth of that, but it is a generic drug). If Chelsea can get 50% share of just the Parkinson's population, that would lead to $72 million in revenue. If the company can get one-third of the patients currently taking midodrine and/or fludrocortisone for NOH (which includes many other contributing conditions beyond Parkinson's), the addressable market approaches $600 million.

Normally I would assign an 85% to 90% chance of approval for a drug in the same position as Northera, but the FDA clearly has issues with this drug. A 50% chance of approval and using only 50% penetration of the Parkinson's patient subset would lead to a fair value of nearly $3/share assuming peak revenue in three years, an 8x sales multiple, and a 13% discount rate. Bump the approval odds to 75% and the target price jumps to $4.25.

I'm going to split the difference and assume a two-thirds chance of approval, but an addressable off-label market that is 50% larger than the size of the Parkinson's market (at 50% penetration). That leads to a $5.65 target, or almost 30% above today's price.

The Bottom Line
Clearly Chelsea has not had an easy path to this point, and there is still a very real chance that the FDA rejects Northera on or before the February 14, 2014 PDUFA date. Northera has been a troubled drug for a long time and I do not believe investors can say unequivocally that it adequately treats NOH. Even so, biotech often comes down to playing the odds and it would seem that the odds still point to upside in these shares for investors who can take on the considerably above-average risks.