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Carnival Bottoms



March 07, 2011 – Comments (3) | RELATED TICKERS: CHTP.DL , BCRX

Greetings from Port-of-Spain, Trinidad. Between the 100 degree heat and lack of sleep, my girlfriend has wilted into a mid-day pre-Carnival coma allowing me to quietly pop open my laptop and engage in what she mournfully calls my "favorite thing". I predict that I have between 90 and 120 minutes to complete this analysis before I get busted.

Investors don't like to see instability in foreign governments and oil markets, because it slows what they perceive as the inexorable upward rise of their investments. We traders, on the other hand, lick our lips at turmoil especially when we have cash to burn. In volatile sectors like baby biotech, world crises are like a stick of dynamite tossed into a lake. A savvy trader just needs to know which floating fish to collect from the surface. I believe I've detected two more stocks in persistent downward trends leading to a lack of congruity between market cap and objective value. In short, I've found two new players for the GBMB.


Chelsea Therapeutics (CHTP) - market cap 231M, share price 3.92. Cash 93M, debt 0, burn 6-12M.

The first thing a careful reader might notice is that the market cap and cash do not correspond with numbers on Yahoo Finance. This is because I have attempted to account for the most recent dilutive financing of 2/11 as well as exercise of warrants, in order to achieve the most accurate numbers going forward. If there is an easy method of maintaining a running share count on publicly traded companies I'm unaware of it, so the market cap might not be accurate. My estimates are weighted towards the conservative (higher cap).

The most recent PR has clarified the mentality of company management regarding plans for Northera (droxidopa for orthostatic hypotension). Despite conflicting data regarding the efficacy of Northera from the two phase III trials 301 and 302, the company will submit an NDA in Q3 2011 based on the high significance and low p value of the positive data from study 301. Data from study 306, specific for Parkinson's, will form the basis for a future sNDA and is not relevant to the current application. This is significant in that weak interim data from study 306 was the stumbling block that caused the share price to begin its retreat of more than 50% from highs above 8 earlier this year. The company PR provides extensive justification for the approval of Northera based on the results of completed trials, which includes hefty subjective insight into what the FDA considers sufficient grounds for approval. In my opinion, the likelihood of first pass aproval for Northera is about 20%. However, my reading of chart psychology tells me that once the company actually submits the Northera NDA, the share price has a strong likelihood of resuming a climb back to previous highs.

Another important upcoming catalyst is unblinded interim data from the ongoing phase II trial of anti-folate compound CH-4051 in rheumatoid arthritis. This is a much stronger program than the Northera project from the efficacy perspective, although there have been some safety concerns. Compounds showing efficacy in rheumatoid arthritis have proven to be massive stock catalysts in the recent past, and I believe that the market will drive up the share price in anticipation of this data as well. I do not expect upcoming phase II data for droxidopa in adult ADD or fibromyalgia to be particularly impressive or to have much effect on share price.

Looking at the chart, the share price languished at about 3 for months last summer in advance of the positive data from study 301. That data as well as the announcement of the plan to proceed with NDA submission without another efficacy trial sent the share price over 8 briefly. Dilution means that lower share prices translate into higher valuations of the company, but also remove the overhang of low cash reserves. The downward trend in share price may have slowed, but ongoing strife in the Middle east and rising oil prices suggest prudence in the trigger finger. I'll set a GBMB buy-in of 3.5 for Chelsea, but I reserve the right to reset the threshold.


Biocryst (BCRX) - market cap 179M, share price 3.99. Cash 66M, debt 0, burn 3-11M.

Biocryst was a top performer from the depths of the 2009 crash, peaking in November of that year ten times higher than March lows. The recovery was aided by the H1N1 flu epidemic and FDA authorization of IV peramivir for emergency use. 2010 was a much more troubled year for the stock, with a 60% decline after the dissipation of the epidemic and a large dilutive financing at a discounted share price. The decline has continued thus far in 2011, despite some apparent positive developments in the pipeline. 2010 saw the release of encouraging phase II data for BCX4208 in gout, and more phase II data is expected around the end of the year. Thus far, study endpoints have referenced the lower bar of uric acid levels rather than clinical improvements. Peramivir is a more nebulous proposition, with the phase III efficacy trial having undergone a change in patient inclusion criteria that will delay completion of enrollment into 2012. A recent announcement of an additional 55M award from HHS to fund the completion of the trial was met with a brief and unsustained bump in share price. Nevertheless, the risk/reward ratio tilts in favor of flu stocks at depressed prices due to the ever-present possibility of a new epidemic. Forodesine wasn't mentioned in the most recent PR despite ongoing phase II trials in CLL and CTCL, which is somewhat ominous for that program given lackluster interim results reported so far. The share price has been hovering around 4 for about 6 weeks and no short-term negative catalysts are apparent. The solid cash position makes a dilutive financing unlikely until the company has regained a higher share price. My GBMB threshold for Biocryst is 3.8.  


3 Comments – Post Your Own

#1) On March 07, 2011 at 6:39 PM, Option1307 (30.65) wrote:

Thanks for the updates, enjoy your trip!

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#2) On March 08, 2011 at 8:03 AM, mhy729 (30.30) wrote:

This 'covert' Caribbean communique is much appreciated!  Have fun!

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#3) On March 10, 2011 at 4:34 PM, lemoneater (57.10) wrote:

Don't get sunburnt! Be sure to bring back the requisite seashell art :)

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