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Acadia Pharmaceuticals (NASDAQ:ACAD) gapped up over 64% yesterday on the announcement that the company will bypass a second Phase III trial, and instead file a New Drug Application (NDA) with the FDA for Pimavanserin by the end of 2014. Pimavanserin is the company's lead drug candidate, and is indicated for the treatment of Parkinson disease psychosis (PDP). Last November, Acadia announced that Pimavanserin's Pivotal Phase III had easily met both its primary and secondary outcomes, yet the company felt a confirmatory Phase III trial was still necessary to quell concerns over a previous failed Phase III trial. Since announcing the positive Phase III results, shares of ACAD have been on an absolute tear, climbing from the mid $2's into the $13 dollar range in less than 6 months. At this point in the game, it is therefore important to think about how best to profit from holding this stock, or possibly taking the other side (short) of the trade to maximize gains. I explore the rationale behind taking a short position in ACAD in this article.

Despite the exuberance exhibited by the market for ACAD of late, and especially yesterday, I believe this stock has become a perfect candidate to take a short position. In fact, I believe ACAD is ready to yield 20-30% gains to investors willing to take a position that stands in marked contrast to the overwhelming market sentiment. My reasoning is simple and straight to the point.

Basically, investors jumping in ACAD yesterday didn't have time to think through the press release properly, or the company's Special Call. Indeed, the stock was up 40% literally upon the initial announcement that Pimavanserin would forgo a confirmatory trial, and instead head into an NDA filing. Nevertheless, critical details, such as timing of the NDA filing, were missing from the initial press releases, which ultimately appeared in later versions. Even so, the devil is in the details so to speak, and that's what's going to matter over the next year for ACAD investors.

In particular, the most critical detail that didn't appear in every press release was the fact that Pimavanserin isn't slated to reach the NDA stage until the end of 2014. Instead, Acadia must deal with various aspects of the PDP regulatory pathway including completing additional standard development studies, drug-drug interaction studies, and final aspects of CMC development. Thinking this through with the benefit of a day's time, this means that the earliest Pimavanserin will be approved is more than midway through 2015 - over 2 years from now. And that is assuming no slip ups in the PDP regulatory process that would further delay the NDA filing with the FDA.

The question thus becomes, how does the market justify a billion dollar market cap for a company with no revenue yet considerable expenses? And how can it support such a market cap for the lofty timeframe of 2+ years? The answer is simple: it won't. After the irrational exuberance exhibited by investors jumping into the stock yesterday, the market is no doubt going to correct ACAD's overinflated market cap to the downside. How far down is anyone's guess, but I think taking a short position with the goal of 20% gains at current levels is a slam dunk trade.

In conclusion, I do believe Pimavanserin is likely to be approved by the FDA in 2015. But that's the point entirely-Pimavanserin won't begin to earn revenue for Acadia until 2015 at the earliest. In the meantime, the company still has to deal with operational and clinical expenses. Anticipation alone cannot justify a billion dollar market cap for over 2 years. As a result, this stock is destined to correct to the downside in a major way. I personally plan on taking a short position tomorrow, with the plan of exiting after a 20% correction to the downside. With that said, ACAD may correct back to previous support levels ($6-7 range) over the next few months, as there is little to justify such a high market cap at this point in time. Finally, I would imagine that an astute management team, such as that at Acadia Pharmaceuticals, would recognize this as the perfect time to raise capital in case of unforeseen events (e.g., problems in PDP regulatory pathway). As such, I fully expect a secondary to be announced any day now, which will act as a catalyst to the downside.

Source: This Biopharma Is Ready To Be Shorted