Tuesday, February 11, 2014

Chelsea Therapeutics (CHTP) - FDA Ruling is Coming; Is the Option Market Understating Risk?

CHTP is trading $$5.19, down small with IV30™ down 4.7%. The Symbol Summary is included below.

Provided by Livevol

Chelsea Therapeutics International, Ltd. is a development stage pharmaceutical company that focuses on acquiring, developing and commercializing products for the treatment of a variety of human diseases.

This is a note on a bio-tech with a ridiculously weird recent past and an FDA decision due out Feb 14. It's risk time...

UPDATE 2-18-2014:
UPDATE (2-15-2014): Bad weather has pushed the FDA decision to Tuesday per a press release from the company on Friday.

"The U.S. Food and Drug Administration today approved Northera capsules (droxidopa) for the treatment of neurogenic orthostatic hypotension (NOH). NOH is a rare, chronic and often debilitating drop in blood pressure upon standing that is associated with Parkinson's disease, multiple-system atrophy, and pure autonomic failure."
FDA approves Northera to treat neurogenic orthostatic hypotension

As far as I see it, there is only a wwarning about the 1-2 week usage, no constraints. My initial take ont his is a huge win for CHTP, although the firm's cash position is troubling, they will require further post approval tests and simply must find a partner or acquirer to survive.


First the recent news:

What: Shares of clinical-stage pharmaceutical company Chelsea Therapeutics skyrocketed as much as 151% shortly after the opening bell following a positive recommendation from the Food and Drug Administration's advisory panel on the symptomatic neurogenic orthostatic hypotension drug, Northera.

So what: Chelsea Therapeutics said in a press release after the closing bell yesterday that the FDA panel voted 16-1 in favor of recommending Northera for approval.

Source: The Motley Fool via Yahoo! Finance Why Chelsea Therapeutics Shares More Than Doubled

Why is that weird?... Well, here's why.

This news comes in stark contrast to fears last Friday about the panel's decision, based on briefing documents that alluded to a complex decision based on Northera's significant short-term effectiveness and iffy long-term effectiveness. Although the FDA isn't required to follow the panel's advice, it does more often than not, giving Northera a better than 50-50 chance at approval at this point.

Source: same as above

If we look to the Charts Tab, you will see the absurdity. The Charts Tab (two-years) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

Look how the stock collapsed from $4.44 to $2.50 on the original news that the approval was looking "complex," and how literally, right after the low, the stock ripped to $5.78 (from $2.50) when the FDA panel voted 16-1 in favor of recommending Northera for approval.

Talk about misreading the tea leaves...

For those of you that aren't familiar with FDA approvals, the panel just makes a recommendation.  The FDA makes the decision.  It's that decision that is coming out on Feb. 14th.  That means risk... a lot of it.

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

Three things that are hugely noteworthy:

1. The implied volatility reached 400% during the cataclysm news digestion (i.e. when the tea leaves read "no drug approval."

2. The volatility collapsed once the news came out that the FDA panel voted 16-1 for approval (that's normal -- once news is out, risk is lessened and that means volatility drops).

3. The implied has risen into this next (possibly final) FDA go around, but not as high as before.  To be fair, Feb vol is priced at 294% -- but that ain't 400%.

Finally, the Options Tab is included below.

Provided by Livevol

So here we go.  We can see that the Feb 10 calls are bid as are the Feb 2 puts... the at-the-money (ATM) straddle is priced to ~$2.00 which is ~40% of current value.  I dunno, this may sound absurd, but does 40% sound cheap?

OK, 294% vol is hard to call cheap, but what happens if the FDA rejects the drug for approval?  What happens if the FDA approves the drug? Do either of those events lead to the stock inside the range [$3, $7]?  I can think of one event that will keep the stock in that range, and kill all that volatility in Feb -- if the FDA decision is delayed or somehow inconclusive but not worded in a way that is overly positive or negative.  And yeah, that happens a lot.

My take is that if there is an end-all-be-all decision, the stock is higher than $7 or less than $3.  But we might not get an end-all-be-all decision.  Then what... owning that juice could be quite painful.

We'll see.

This is trade analysis, not a recommendation.

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