Last month shares of ACADIA Pharmaceuticals (ACAD) rallied 140% after announcing positive data for its Phase 3 Parkinson's Disease psychosis (PDP) drug, pimavanserin. The stock had traded with volatility throughout the year, as investors remained uncertain due to the failures of so many companies that had attempted to treat the disease. Yet now that the stock has pulled back from its post-data announcement and is seeing increased support, this might be a golden investment for the next several years.
Allow me to jump straight to the point: I think ACADIA Pharmaceuticals has upside of 400% if the company continues to develop pimavanserin alone, or upside of at least 150% if it chooses to accept an acquisition offer. The reason is simple: In the past, so many have attempted to treat this disease, and have failed. With ACADIA's technology it has proven that its drug is effective, and with large market potential it becomes very attractive to both institutional investors and large pharma alike.
Prior to November 27, shares of ACADIA had traded with volatility and mostly flat. The reason for this uncertainty, or this lack of conviction, was due to a previous Parkinson's study where its product was not statistically significant, due to it being tested with two different doses. But in the Phase 3 trial, the company elected to test only the dosage that saw meaningful results - and then the stock jumped more than 140% after announcing the results.
Using the 40mg dose of pimavanserin, ACADIA demonstrated a 5.79-point reduction in psychotic behavior. This was considered to be statistically significant, as those taking placebo saw just a 2.73-point reduction. The product did not worsen motor function in patients, therefore meeting its secondary endpoint as well.
Now that you know the data, and my reason for being bullish, I should explain the catalysts for gains. My reasons are simple, a matter of risk/reward based on valuation and potential sales compared to the industry averages. Take a look at a few of my reasons that ACADIA is a strong buy at its current price based solely on catalysts.
- Parkinson's disease psychosis has no current treatments.
- Without treatment alternatives it gives ACADIA both pricing power and a less competitive approach.
- Due to the unsuccessful attempts to treat the disease on behalf of other companies, ACADIA's technology will be highly valued once approved and the FDA should be generous with classifying the drug.
- The product has the likelihood of earning additional indications, including treatment for psychosis associated with Alzheimer's. This one indication alone could double its expected peak sales.
- Peak sales could be $400 million.
In most cases, a drug never reaches its peak sales estimates. But in the case of ACADIA, with it having the only product to treat the disease, it will not have to compete with other products and will capture all of its potential market. Over time, ACADIA should trade like all biotechnology stocks with such data, and should reflect the future sales of its product in market capitalization.
Seeing as how ACADIA was only a $125 million company prior to its data, the rise to its current value of $280 million seems appropriate for a biotechnology stock. However, what's not appropriate is that ACAD is trading at just 0.70 times peak sales. Most of the time a stock will trade at 1.0-2.0 times peak sales prior to an expected FDA approval, and the value is higher if there is a realistic chance of a takeover or if the product is exclusive. ACADIA fits into both of these categories and should trade at no less than 1.5 times peak sales.
To better explain my target of 1.5 times peak sales, consider Questcor Pharmaceuticals (QCOR), which is a fast-growing company that has lost over 40% of its value following the news of an investigation. Despite these concerns, Questcor is valued with a price/sales of 3.82. Keep in mind that at 52-week highs it was trading at 6.0x sales. Sarepta Therapeutics (SRPT) is in a similar point in development as ACADIA, and is now trading at 1.0 of its peak sales, and will most likely rise prior to and after its meeting with the FDA. Therefore, a 1.5x peak sales is not an overly-bullish expectation. In fact it's conservative and highly obtainable for a company in this position.
In my opinion, the reason that ACADIA is not trading at 1.5x peak sales is due to its $125 million valuation prior to its announcement of data. A 400% gain does not occur overnight for any biotech stock, but over time ACADIA shall appreciate because of its likelihood of being approved in the near future and the strong possibility of it being acquired. On Wednesday we saw the stock move higher by 13% thanks to an $86 million private placement. Ergo, the concerns regarding cash and funding a launch are no longer an issue. ACADIA could very well become a favorite on Wall Street over the next year, and I'd say its private placement is living proof, adding value to its stock as investors price in its inevitable future.
Disclosure: I am long ACAD.