Whether you follow the stock exchange regularly or not, an announcement of a company's stock jumping up by 137% in a single day is enough to blow your mind. But that's exactly what happened in the case of Acadia Pharmaceuticals (NASDAQ:ACAD) this past week. But what exactly caused this giant leap forward in stock value, and how does it play out for Acadia and its competitors?
It all started with…
The exponential rise in stock value came after Acadia released the results of Phase III clinical trials on its latest pipeline drug pimavanserin. The drug is targeted for use in Parkinson's disease; more specifically, it aims to reduce the psychosis which often accompanies extreme cases of Parkinson's. The results of the trials were, not surprisingly, extremely positive. Pimavanserin's performance in comparison to the placebo group and even against drugs being manufactured by the nearest competitors was outstanding. Naturally, the promise of a drug capable of significantly reducing hallucinations and delusions suffered by Parkinson's patients is enough to skyrocket the reputation of the parent company. And that's exactly what we saw happen in the stock market - Acadia's stock was trading at $6.54, its highest since August 2009. Another reason for the increase in the valuation of the company is because pimavanserin is the only product on the market which is capable of acting as an anti-psychotic and is expected to bring relief to over 500,000 Americans. This automatically confers the image of Acadia being the pioneer in the industry, which is never a bad thing.
Acadia's incredible run is definitely good news for the management, but this does not mean that the company has secured its position as the alpha male of the stock exchange. The Celsion Corporation (NASDAQ:CLSN) recently announced that, come January, it would be releasing its own Phase III clinical trial results for its drug ThermoDox, a promising therapy for primary liver cancer. Simply based on this announcement, trading in Celsion stock saw a 15 percent increase, and this is a strong indicator of the optimism people have over the results. Celsion's drug is also more eagerly anticipated, since it was allowed to skip directly to Phase III trials in both the United States and Europe. The layman can only infer from this information that ThermoDox has immense potential, or else it would not have been allowed to bypass so many stages of the testing process.
On another front, Exelixis (NASDAQ:EXEL) also received FDA approval on its drug aimed at alleviating metastatic medullary thyroid cancer called Cometriq. While the direct competitor of this drug in the open market is going to be AstraZeneca's (NYSE:AZN) Caprelsa, there is no doubt that FDA approval for Cometriq will bump its market value up, and hence pose a challenge to Acadia's position.
One area where Acadia does have the upper hand is in competition with AstraZeneca and Johnson & Johnson (NYSE:JNJ). Both the competitors have produced drugs aimed at Parkinson's disease, named Seroquel and Risperdal respectively, but neither has the capacity to deal with the imminent psychosis. This competitive advantage is expected to carry Acadia rather well, and if the company gains FDA approval soon, will take them even further.
What about the investors?
From an investor's standpoint, the current scenario is a tricky one to make a decision on. While pimavanserin is bringing home the bacon for Acadia, and prospects look equally good in the near future, it would still be imprudent to invest heavily in the company. This is because Acadia's valuation dropped sharply in 2008 when it failed to meet its goals via clinical trials with pimavanserin itself. While that definitely makes this comeback all the more poignant, it does not absolve the company of its past failure entirely. In short, the current success of pimavanserin is not a definitive indicator of how the company will do in the long run, and this is important information for investors looking to establish a long-term relationship with the company.
On the other hand, investors can benefit if Acadia decides to partner pimavanserin - something that it should do. This is because the drug and the market opportunity are too large to go alone, and having a competent partner would make the process of seeking FDA approval a lot smoother. This same partner can also help Acadia expand into European and Asian markets, a move which will bring back further meaningful revenues. Another reason why Acadia should seriously consider a partner is because its current teammate - Allergan (NYSE:AGN) - is focused on the development and commercialization of drugs made for treating glaucoma and chronic pain. With pimavanserin, it can be assumed that Allergan's expertise may not be enough, hence underscoring the need for Acadia to find someone who can work solely on pimavanserin.
Label expansion is also something that Acadia should - and is - considering. Pimavanserin is also being tested for efficacy in dealing with Alzheimer's disease psychosis [ADP]. If test results prove effective in alleviating psychosis in Alzheimer's patients as well, it would cause Acadia's reputation to soar even further.
Phase III clinical trials of Acadia Pharmaceuticals' new drug pimavanserin have proven it highly effective at debilitating Parkinson's disease psychosis [PDP]. Upon public release of this information, Acadia's stock went up 137% to reach its highest value in three years. As a pioneer in the area of PDP alleviation, Acadia's prospects look rather strong. However, other companies like Celsion and Exelixis are also bringing out their respective drugs against liver and thyroid cancer respectively, and pose a challenge to Acadia's position as stock market leader.
The company now has to gain FDA approval for the drug, and seek a partner to help commercialize and develop it; doing so will allow Acadia to enter new markets and gain more meaningful revenues. While the current scenario is definitely attractive to investors, there is no concrete evidence to predict how Acadia will perform in the long run. Investors are advised to allow some room for this initial hype to settle before considering their next move with regards to Acadia.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.