By Jason Napodano, CFA
On March 12, 2013, Acadia Pharmaceuticals (ACAD) reported financial results for the fourth quarter and full year 2012. Total revenues in the quarter were $0.4 million, essentially in-line with our estimate of $0.3 million. Revenues consisted of collaborative payments from Allergan, Inc. (AGN) and other collaboration partners. For the full year 2012, total revenues were $4.9 million. Revenues consisted of collaborative payments from Allergan and full recognition of the remaining payments from Meiji Seika Pharma Co., Ltd after discontinuation of the development agreement to discover new pro-cognitive antipsychotic (PCAP) drugs to treat patients with schizophrenia and related disorders in July 2012.
Net loss for the fourth quarter 2012 totaled $6.8 million, or $0.11 per share. Loss was driven by $4.9 million in R&D expense and $2.3 million in SG&A expense. Both were generally in-line with our expectations. Net loss for the full year 2012 totaled $20.8 million, or $0.38 per share. Loss was driven by $18.8 million in R&D expense and $7.0 million in SG&A expense.
Acadia exited 2012 with approximately $108.0 million in cash, cash equivalents, and short-term investments. The cash position was strengthened by an $80.5 million equity raise in December 2012. The significant cash war chest allows Acadia management to do two things, both push forward into the confirmatory phase 3 program with pimavanserin in Parkinson's disease psychosis (PDP) on an expeditious timeline and branch out with the molecule into new potential indications, specifically Alzheimer's disease psychosis (ADP), a disease we see being roughly five times the size of PDP.
We find the existing cash balance to be sufficient to fund operations for the foreseeable future. Acadia management has indicated that it expects to use between $26 million and $30 million of its cash resources to fund its operations in 2013.
Moving Forward With Pimavanserin
We remind investors that in late November 2012, Acadia announced the successful results from its pivotal phase 3 trial evaluating the efficacy, tolerability and safety of pimavanserin in patients with Parkinson's disease psychosis . Although only top-line results, the data looks like a "homerun" for management.
Full data from the -020 study is coming next week, on March 20, 2013, in poster form, at the American Academy of Neurology (AAN) Annual Meeting in San Diego. Acadia will have Dr. Jeffrey Cummings, M.D., Sc.D., Director of Cleveland Clinic Lou Ruvo Center for Brain Health, present the poster during the "late breaker" Emerging Science Session. We look forward to seeing that data on the 20th, which we suspect will include additional analysis of the secondary endpoints.
Confirmatory Phase 3 To Begin Shortly
Acadia is currently in the final planning stages to begin a confirmatory phase 3 study, dubbed-021, to start during April 2013. Now that the results from the -020 trial are out and positive, we suspect that management will have little trouble enrolling patients in -021. With respect to the -021 study, we expect many of the same sites will be used from -020. Management may look to expand more in Canada for -021, but we do not expect any significant enrollment outside of North America. Executive Vice President of Development, Roger G. Mills, M.D. noted on the most recent conference call, "We don't plan to mess with a winning team."
That's smart. Now is not the time to get cute. The trial worked because Acadia enrolled PDP patients with severe psychosis and found ways to mitigate placebo response. Things like enrollment criteria, dosing, timing of the efficacy read-outs, and the primary and secondary endpoints will mirror -020. If the product is eventually approved, we expect sizable use in earlier-stage PDP patients with significantly longer durations of therapy.
After the data came out, we had an opportunity to speak with Dr. Stuart Isaacson, M.D., Associate Professor of Neurology, FIU College of Medicine, Miami, FL and Director of the Parkinson's Disease and Movement Disorders Center of Boca Raton, FL. Dr. Isaacson called the results a "game changer." He also that he would not wait for symptoms to materialize in severe form before using the drug. We suspect most caregivers will agree, and use pimavanserin far earlier in the real world setting than the strict entry criteria instituted in the -020 study. In this regard, we think the Caregiver Burden Scale secondary endpoint management assessed in the -020 study was brilliant - pure marketing ammunition.
Label Expansion Key To Sales Upside
Beyond the initial indication in PDP, we believe pimavanserin has potential utility in Alzheimer's disease psychosis , a disease with similar manifestations to PDP. The ADP market plays out in similar fashion to PDP, only potentially five times as large. Statistics show the number of American's living with Alzheimer's disease to be roughly 5.4 million, roughly 50% of which will develop some form of psychosis as the disease progresses.
In July 2012, management reported promising mechanistic data with pimavanserin in a preclinical rodent model of the disease. This data was published in Behavioral Pharmacology (Price et al., "Pimavanserin, a 5-HT2A Receptor Inverse Agonist, Reverses Psychosis-like Behaviors in a Rodent Model of Alzheimer's Disease,") in July 2012. If pimavanserin is a $400 million drug in the U.S. for PDP, with similar data in ADP, it's a blockbuster drug. Management plans to conduct a phase 2 study, dubbed -019, in ADP during the second half of 2013.
Partnering Offers Upside
Acadia is pushing forward with the confirmatory phase 3 study without a development and commercialization partner. This is not a concern considering the company was able to secure greater than $80 million in cash in December 2012 on the heels of the strong -020 top-line results. This affords management significant flexibility. As such, on the most recent conference call, CEO Uli Hacksell noted the company's efforts are focused squarely on moving pimavanserin forward. A partnership can wait. That only maximizes the value to shareholders. That being said, ultimately, we think Acadia will partner pimavanserin for commercialization. The drug and market opportunity are too big to go alone and investors would benefit from having a big pharma partner help Acadia navigate the new drug application (NDA) filing process and potential FDA curve balls around chemistry, manufacturing and controls (CMC). Plus, Acadia is focusing only on North American right now with pimavanserin. There is obviously meaningful sales opportunity for the drug in Europe and Asia. Acadia needs a partners help to enter these markets. We remind investors that Acadia did previously have a deal to commercialize pimavanserin with Biovail. Biovail paid Acadia $30 million upfront with the potential for $365 million and 15-20% royalties on sales back in May 2009 pre-phase 3. It's clearly worth a lot more now.
Raising Target To $7.50
Pre-data, we believed the stock was worth around $2.50 per share. We've now made some pretty significant changes to our DCF model post-data. We've dramatically reduced the discount rate (risk) in our model and are now using a rate of 13.8% (risk free of 2.00% + equity risk premium of 5.90% x 100% firm adjustment). We have also adjusted up slightly our peak sales estimate for pimavanserin in PDP, from $312 million in the U.S. based on 25% penetration to $378 million in the U.S. based on 33% penetration. The data from -020 are that good. On a global basis, with positive data in ADP that matches the outcome in PDP, pimavanserin is a $2+ billion drug. We also assume that Acadia does partner the drug in 2015, and lands $50 million upfront and up to $500 million backend potential with 20% royalty on sales.
Our model is telling us the stock is worth $7.50. Although we would not chase the stock here, this is clearly a stock we like. The single biggest catalyst for the shares is the signing of a commercialization deal in 2013 or 2014 - ahead of our expectations. We recommend using pullbacks to establish a position prior to that event.
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