What Can You Learn From Acadia Pharmaceuticals' Exceptional Year?

Jul.24.13 | About: ACADIA Pharmaceuticals (ACAD)

ACADIA Pharmaceuticals (NASDAQ:ACAD) has become the unquestioned biotech leader of the last year, with its one-year 1,200% return. Looking back at November of 2012, when ACADIA traded at just $2 a share, the upside was so apparent, although no one noticed. However, as the stock apparently flew under-the-radar of so many, there is a good lesson to be learned, such as what you should have noticed, and how can you use this experience to help you in the future.

What Caused The Jump?

It seems almost surreal to think of ACADIA Pharmaceuticals as a sub-$150 million company. However, the perception surrounding the stock is much different than it was in November. Back then, not too many people were betting on its lead drug pimavanserin's success. Therefore, it was shocking when the drug reduced psychotic events in patients with Parkinson's disease psychosis, and more importantly, showed no negative impact on motor function - unlike drugs clozapine or quetiapine.

Pimavanserin showed robust and consistent efficacy throughout a wide array of measures. Therefore, the peak sales potential of pimavanserin has slowly crept from $300 million to over $2 billion as the likelihood of off label uses and a successful Alzheimer's disease psychosis study is assumed. This, combined with news that its Phase 3 data is sufficient to bypass additional testing, has all led to the massive gains in ACADIA Pharmaceuticals.

Why We Should Have Seen This Coming

ACADIA has went from being a small and speculative biotech to having the presumed best antipsychotic drug in development. Looking back, I know myself and many others are kicking ourselves, or at least trying, because we should have seen this coming.

ACADIA had tested pimavanserin in a Phase 3 study back in 2009. In this study two doses were used, 10mg and 40mg. In that study, the cumulative results did not demonstrate a statistically significant reduction in antipsychotic behavior compared to placebo. However, the 40mg dose did perform well, while the 10mg dose lagged. As a result, ACADIA built a study around the 40mg dose.

Theoretically, if we already knew that 40mg dose was effective in a 2009 study, then it should have been effective when used alone in another study. However, this simple logic was blinded, and very few bought behind this common sense. Personally, I bought at $6 and have enjoyed very nice gains. But, if I would have followed my own advice about investing in biotechnology, then ACADIA would have been in my portfolio at $2, which would've been even nicer.

What To Learn From The Experience?

The bottom line is that we should have seen this coming. One of the reasons that we didn't is because data mining in biotechnology is so widespread that once a company uses small patient subgroups from a larger trial, we automatically become skeptical. However, in this case, we should have added 2+2 to produce 4.

In my opinion, there might be a second opportunity at ACADIA, and that stock is ImmunoCellular Therapeutics (NYSEMKT:IMUC). Now, before you automatically assume that my ACADIA spill was a pump job for ImmunoCellular, you should hear me out, as I am going to show you the similarities, and you can use these examples of how to invest in biotechnology.

With a market cap of $125 million, ImmunoCellular looks to be in the same position as ACADIA was last November. Strangely, the end of the year could also be company changing for ImmunoCellular, as it prepares to announce data on its Phase 2 brain cancer drug ICT-107. And much like ACADIA, all common sense suggests that the drug will be a success.

As I briefly explained, biotechnology companies often data mine. This means that a company can take a 400 patient failed clinical trial, and from that failed trial, the company can find 25 people who responded well to the treatment (or better than placebo). The company can then link together those patients by some measure, whether it be a certain antigen expressed or possibly an age group. Theoretically, this "grouping" can be anything; the company just has to find a common connection that investors will buy.

The company then sells these 25 patients to investors, flips data, and markets it as great potential. ACADIA Pharmaceuticals did not do this. ACADIA had two different doses, and one worked, the other did not. In the case of ImmunoCellular Therapeutics, its candidate ICT-107 is treating glioblastoma multiforme [GBM]. This is the most deadly form of brain cancers, also called Stage IV, where patients are lucky to live one year after being diagnosed.

As I explained in this article, there are no current treatment for GBM. Sure, Merck's (NYSE:MRK) Temodar and Genentech's Avastin are approved to treat the disease, but Temodar showed no consistency in reducing the progression of the disease and added just 2.5 months to the average life of patients. Moreover, Avastin showed no improvement in overall survival, and very slight results in treating the progression of the disease. Therefore, while there are approved drugs for the disease, I find it difficult to say that there is a treatment for the disease.

As I said, newly diagnosed GBM patients live about a year. The progression free survival of the disease is 6.9 months, meaning it advances very rapidly. ImmunoCellular's drug has only been treated on 16 patients, but eight of the original 16 are still alive after four year.! And six of those patients have shown no signs of disease progression, and three have surpassed the five-year mark. These results are unprecedented.

The downside, and the reason for its $125 million market cap; the patient population was small; there was no control arm; and the data was compared to historical figures. However, unlike other diseases, where the size of the tumor or the severity of the disease can be questioned, you can not question the severity of GBM.

In order to be classified as GBM, a patient has to bypass three other stages of brain cancer. As a result, there are no good cases, small tumors, and in the past, death has been the only outcome. Moreover, the company uses the same approach that Dendreon (NASDAQ:DNDN) uses with Provenge, which is to target certain cancer presenting antigens and force the immune system to fight off the disease.

The only difference is that Dendreon only targets one antigen that is expressed in prostate cancer. ImmunoCelluar targets seven antigens that are expressed in GBM, but are also expressed in other cancers such as breast and lung. Hence, peak sales for ImmunoCellular sit at $1 billion, but like ACADIA, expectations could rise with a successful study.

Final Thoughts

ImmunoCellular is the best example I have for seeing the obvious in biotechnology, but there are more companies like it. These companies are very attractive, both before and after data. In the case of ACADIA, its valuation before data was so low that the market is still rushing to appropriately value the potential of pimavanserin. In a space that trades at 3-4 times peak sales, ACADIA could still trade significantly higher over the next several years. With that said, I urge you take this lesson in seeing the obvious in biotechnology and use it to your advantage. Unfortunately, you may be wrong at times, but by using common sense and eliminating emotion your investments in biotechnology are sure to perform better.

Disclosure: I am long ACAD, IMUC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.