Acadia Pharmaceuticals (NASDAQ:ACAD) is a mid-cap biopharmaceutical company focusing on the development of drugs for neurological and central nervous system disorders. Its stock is currently trading at $23.5 (as of 9/18/13), placing its market cap at $2B.
Acadia's leading drug candidate, pimavanserin, is in Phase III development as a potential first-in-class drug for Pakinson's disease psychosis (PDP). Pimavanserin is a small molecular inhibitor of the serotonin receptor 5-HT2A and has potential applications for psychosis in patients with other neurological diseases, including Alzheimer's and schizophrenia. Acadia plans to file for a new drug application (NDA) for FDA approval toward the end of 2014 for Pimavanserin for Parkinson's disease. If approved, the drug could be in the market by 2015.
The company has had a long-term partnership with Allergan (NYSE:AGN) to co-develop treatments for chronic pain and glaucoma. The drug candidates are based on alpha-adrenergic receptor agonists and muscarinic agonists discovered at Acadia. The alpha-adrenergic receptor agonist program is in Phase II. Allergan is looking for a partner to conduct Phase III trials. Acadia's R&D pipeline also includes a preclinical program developing inhibitors for ER-Beta and Nurr-1.
In this report, we will address the following questions. First, what is the probability of pimavanaserin approval by the FDA based on its clinical trial results? How big is the market for psychosis and the neurological space? Who are the competitors for Acadia's product?
Second, Acadia has a partnership with Allergan to develop pain-related products. Does the partnership sufficiently pay for the development costs? Or will Acadia need to raise more money through public or private capital markets? More equity offerings will certainly dilute existing shareholders' holdings.
Finally, we will review ACAD's financial status, forecast its revenues and earnings for the next 5 years and derive an intrinsic value for the stock.
This report contains three parts. Part 1 is an overview of ACAD's business model, its key products, and risk factors associated with the company. In Part 2, we will review its partnership agreements with Allergan and point out relevant royalty payments and liabilities that ACAD will incur. A 5-year revenue projection for ACAD will be presented. In Part 3, we will analyze its financials and derive an intrinsic value for ACAD. Our analysis suggests that the intrinsic value for ACAD is ~$31.
Part1: Business Overview
Acadia Pharmaceuticals is a mid-cap biopharmaceutical company that develops serotonin receptor inhibitors with applications for psychosis in patients with neurological diseases, including Parkinson's disease, Alzheimer's disease and schizophrenia. The company currently has a market cap of ~$2.1B with a stock price of $23.5 per share and about 83 million weighted average shares outstanding.
Its leading drug candidate is pimavanserin, which is in Phase III development as a potential first-in-class treatment for Parkinson's disease psychosis (ACAD 10K 2012). Acadia plans to file an NDA toward the end of 2014 for Pimavanserin for Parkinson's disease. Pimavanserin also has potential application for the treatment of psychosis associated with Alzheimer's and schizophrenia.
The company has clinical-stage programs for chronic pain and glaucoma in collaboration with Allergan, Inc. These programs are based on alpha-adrenergic receptor and muscarinic agonists discovered at Acadia.
When evaluating a company like ACAD, we need to consider several key issues (or potential risk factors) uniquely associated with the company.
First and foremost, what are the future growth rates for its product revenues and product royalty revenues paid by its corporate partners? When will the company turn profitable? What is the competitive landscape for its drugs? Obviously, the company's profitability is closely tied to its drug sales. ACAD has collaborated with Allergan to develop drugs for chronic pain and glaucoma. How much in milestone payments and royalty from sales will Acadia expect to receive over the next 5 years?
A second issue is related to the expansion of its clinical trials on various fronts. While the company intends to expand its drug franchises to as many indications as possible, there are significant costs associated with each clinical trial. Does the company make wise investments on this front? What is a likelihood of success for these trials? We will review its late-stage clinical programs.
A third issue is related to the company's financial strength or weakness. Due to mostly non-profitable quarters in the past, ACAD's accumulated deficit is $382M as of June 30, 2013 (ACAD 10Q2013). With over $564M additional paid-in capital, Shareholder equity is $181M as of June 2013. In the financial projection section, we will discuss when the company will turn profitable.
As of June 2013, ACAD had $205M cash and cash-equivalent securities. It has no long-term debt nor convertible notes. However, the company has continuously funded its development through stock offerings in both private and public capital markets. These activities have led to significant expansion of stock shares and dilution of shareholders' equity for years. Going forward, the company will need to raise additional funds for Phase III trials in schizophrenia and Phase II trials in Alzheimer's associated psychosis (ADP). It is inevitable that further stock offerings are anticipated. We will discuss the impact of its equity offerings during stock valuation.
Part 2: Product Sales and Revenues from Partnership Agreements
Pimavanserin is an inhibitor of the serotonin receptor (5-HT2A), and is currently in Phase III clinical development for Parkinson's disease psychosis. At present, there is no drug approved for PDP. Therefore, pimavanserin could be the first drug approved for this indication. It is estimated that 60% of patients with Parkinson's disease have psychosis that require medical assistance. The potential market for PDP is estimated to be $1B.
Acadia announced pimavanserin Phase III data in March 2013 (Pimavaserine phase III data March2013). The data indicated that the drug is safe and well-tolerated. In addition, it reached statistical significance when meeting primary and secondary endpoints, which include improved motor control and sleep, and reduced delusions and hallucinations. Based on the data, Acadia received a green light from the FDA to file for a new drug application (NDA) for the treatment of PDP scheduled at the end of 2014 (Pimavaserin expediated NDA filing April2013). The expedited progress means that Acadia does not need to conduct an expanded phase III trial, thus speeding up commercialization of the drug to market by 2015.
Psychosis is also frequently associated with other neurological disorders, including schizophrenia and Alzheimer's disease patients. The combined market for antipsychotic medicines was estimated at $28B in 2011, so there is a large unmet need in this space (ACAD 10K 2012).
Therefore, Acadia's strategy is to further expand the potential use of pimavaserin to these indications. The company is currently conducting pimavaserin Phase II clinical trials for schizophrenia (Pimavanserin with risperidone schizophrenia Phase II data 2012). The published Phase II indicated that pimavaserin co-treatment with current anti-psychotic medicine (risperidone) enhanced efficacy and reduced side effects associated with existing medicine. Acadia is considering further studies (Phase III) to pursue this indication, but has not specified whether the company will go alone or seek a corporate partner.
About 20%-50% of patients with Alzheimer's disease suffer from psychosis. Acadia plans to initiate Phase II trials for ADP by 2H 2013. There are around 5 million people with Alzheimer's disease in the United States alone. So, the potential market for ADP is ~$3B.
The competition in the anti-psychotic (PDP and ADP) markets includes Seroquel marketed by AstraZeneca (NYSE:AZN) and the generic drug clozapine. These drugs are used off-label as they are not officially approved in the US for PDP and ADP.
For schizophrenia, competition includes Zyprexa made by Eli Lilly (NYSE:LLY), Risperdal by Johnson & Johnson (JNJ) and Ability by Bristol-Myers-Squibb (NYSE:BMY). The first two drugs are already generic.
We estimate that pimavaserin sales will be about $100M (2015), $200M (2016), and $360M (2017). With an 80% probability of approval, the revenues for Acadia are estimated to be $80M (2015), $160M (2016) and $288M (2017). The slow ramp-up of sales reflects that Acadia is a small company without an existing sales force. In addition, the sales numbers account for the PDP indication only, because an expansion of pimavaserin to ADP and schizophrenia will require completion of Phase III trials and approval of the drug for these indications, which is unlikely to happen before 2017.
Alpha Adrenergic Agonist
Acadia is collaborating with Allergan to develop drugs (alpha adrenergic agonist) for the treatment of chronic pain. Allergan reported preliminary proof-of-concept data in Phase II for visceral pain, fibromyalgia and irritable bowel syndrome. Further studies in Phase III will be needed before regulatory approval and commercialization. Acadia did not disclose the royalty rate that Allergan will pay to Acadia under the partnership agreement. We estimate that it is around 10%-25% of net sales, based on comparable transactions in the industry.
Chronic pain treatment has a big market but also many players. For chronic pain treatment, competition includes Lyrica and Neurontin marketed by Pfizer (NYSE:PFE) and Cymbalta by LLY. Lyrica and Cymbalta have sales of $4.2B and $5B in 2012, respectively.
Assuming Allergan completes Phase III in 2014, receives the FDA approval in 2015, and launches the drug in 2016, we estimate that revenues will be about $80M (2016) and $144M (2017). With a 70% probability of approval, it will be $56M and $100M, respectively. However, Acadia will only receive a fraction of the royalty from the net sales. If we assume the royalty rate is 15%, the royalty revenues for Acadia will be $8M (2016) and $15M (2017). So, the bottom line is that the royalty revenues from its corporate partnership have a very modest contribution to Acadia's earnings.
Acadia is also collaborating with Allergan to develop a drug for glaucoma, based on the muscarinic agonist discovered by Acadia. The program is still in Phase I development, and will thus have little impact on revenues over the next 5 years.
Partnership with Allergan
Acadia has collaborated with Allergan to develop drugs for chronic pain, glaucoma and other indications. The drugs are based on alpha-adrenergic receptor agonists and muscarinic agonists discovered at Acadia. There are separate collaborative agreements between these two companies signed in 1997, 1999 and 2003. The upfront payments and partial development milestones have already been paid out. So, here we only look at future potential payments.
The remaining development milestone payments that Acadia is potentially entitled to receive are $10M, $15M and $13.5M for the three agreements, respectively. Thus, the combined potential milestone payments are $38.5M. We assume that it will be paid out over the next 4 years. This translates to an average of $9.6M in milestone payments each year from 2013 to 2016. The numbers are included in our financial forecasts.
Projected revenues for Acadia
Adding together the product revenues from pimavaserin and the royalty revenues from the Allergan collaboration, we estimate that total revenues for ACAD will be $9.6M (2013), $9.6M (2014), $89M (2015), $178M (2016) and $300M (2017). These revenue numbers will be used for stock valuation.