Seeking Alpha
Value, research analyst, author, long only
Profile| Send Message|
( followers)  

Acadia Pharmaceuticals (NASDAQ:ACAD) has been one of biotechnology's greatest surprises of the year, posting 12-month gains of 800%. Its anti-psychotic drug pimavanserin (pima) showed excellent efficacy without significant side effects in patients with Parkinson's disease psychosis (PDP). This was a medical breakthrough, as some drugs are used to treat the disease but without FDA approvals. The outcome from this particular trial also correlates with psychosis in other indications, thus leading many to believe that pima could become a diversified drug in the treatment of various mental health disorders.

Immediately following Acadia's surprising data, analysts were racing to determine the fundamental value of pima. At first, projected sales of $300 million were the consensus; then $1 billion became the standard; now, $2 billion is what most analysts project. The reason is that analysts began to account for both off-label usage and future indications. But much like other high-profile drugs, these estimates are just scratching the surface, and as pima gets closer to its FDA approval, the drug will be exposed as having the greatest sales potential since Lipitor, and will become the most successful small molecule drug ever developed to fight mental illness

The Anatomy of an Uptrend

Do you ever wonder why some biotechs just keep trending higher, and others get stuck, or drop lower in the clinical stage? The direction of a biotech depends on a delicate balance between expectations and valuation. Perhaps the greatest examples (on both sides of the fence) are Pharmacyclics (NASDAQ:PCYC) and Dendreon (NASDAQ:DNDN).

For Pharmacyclics, it is an old company that produced absolutely nothing for 15 years. Then, all of a sudden, Pharmacyclics either stumbled across greatness with ibrutinib or underwent a change in culture to develop ibrutinib. Either way, Pharmacyclics was a $60 million company in 2009, and with no expectations. Then, the upside and potential of ibrutinib reversed the stock's trend, and quickly.

To make a long story short, ibrutinib became noticed, and peak sales potential slowly rose from $500 million, to $1 billion, to $3 billion, $6 billion, and now some are even saying $9 billion. During Pharmacyclics' four-year 10,000% return, the company has not sold one product, but the constant re-assessment of potential for ibrutinib pushed shares higher, that and a few breakthrough designations.

On the other side of the trade lies Dendreon, which was a company that traded way beyond its potential before ever selling a product, and now its stock has readjusted to reflect the reality of fundamentals. In the case of Acadia, it is more like Pharmacyclics, because while its one-year 800% gain may be large, it only reflects both the increase in estimates for pimavanserin and its likelihood for FDA approval. Moreover, once estimates begin to rise to $5 billion, $7 billion, $10 billion, and maybe even $15 billion over the next year(s), Acadia will see gains that Pharmacyclics investors could only dream to produce.

How's It Figured?

If there's one thing I hate about Seeking Alpha, it's reading an article with charts and graphs that aren't explained well. So, before we dig deep into the numbers, here's a little table that you will find useful:

Population - This is the number of patients estimated to suffer from a particular disease.

Psychosis % Range - This is the range of patients who are estimated to experience psychotic episodes (those who would qualify for treatment).

Psychosis % Used - This is the percentage from the range that is being used to calculate what population will use Pimavanserin. Keep in mind, the table below is using very conservative estimates to ensure that pimavanserin is not overhyped.

Peak Penetration - This is the percentage of patients from the "psychosis % used" that Acadia will penetrate with pimavanserin.

Net Price to Manufacturer (Mfgr.) - the amount of total sales that is received by Acadia. On a side note, we do not know pricing for Pima. However, we do know that Acadia has said that Pima will command premium pricing. Therefore, $1,000 per month or $12,000 per year is being used, which is equivalent to current Abilify pricing. From this $12,000, it is estimated that $7,692 will be earned by Acadia after mark ups from both the retail pharmacy and wholesaler. Thus, $7,692 annually is the estimate to Acadia.

Royalty (for Ex US population) - 22%, which is consistent with other blockbuster and anti-psychotic drugs that are partnered after FDA approval

The Model

Parkinson's

Alzheimer's

Schizophrenia

U.S. Population

1,000,000

5,200,000

7,000,000

Psychosis % Range

25%-60%

25%-50%

100%

Psychosis % Used

35%

35%

50%

Peak Penetration

60%

50%

45%

Net Price to Mfgr

$7,692

7,692

$7,692

Ex U.S. Population

5,300,000

13,331,000

35,500,000

Psychosis % Range

25%-60%

25%-50%

100%

Psychosis % Used

35%

30%

50%

Peak Penetration

35%

25%

20%

Net Price to Mfgr

$7,692

$7,692

$7,692

Royalty

22%

22%

22%

PEAK REVENUE POTENTIAL - 2018

U.S. Peak Sales

$1.615 billion

$7 billion

$3.384 billion

Ex U.S. - Royalties Only

$1.098 billion

$1.353 billion

$6 billion

Total Peak Revenue to Acadia

$2.713 billion

$8.353 billion

$9.384 billion

In total, I believe it is mathematically possible that peak global sales of pima could easily exceed $20 billion globally! To explain, let's breakdown the three noted indications.

PDP

So far, most analysts believe that the Alzheimer's indication is where value is created. In fact, many models project peak Parkinson's disease revenue of just $300 million. My question is how?

It's no secret that there is NO FDA approved medication for PDP. Most patients diagnosed with the disease take other anti-psychotics that are used off label. In the case of pima, it will be the first FDA approval for this indication. Thus, it is plausible that pima will control the majority of this market.

With pima, the efficacy is extraordinary, and the side effects are minimal (occasional headaches), so there is little debate as to whether or not it will be FDA approved, and the conversation is now how successful it will be in the market. In fact, the FDA decided that the efficacy was so well proven that they waived the 1.5 to 2 years it would have taken for the final Phase 3 confirmatory trial. This fact is about as much of a green light as you can get in biotechnology.

In total, there are about 200 patients that have been on Pimavanserin for over two years and some have been on the drug for seven years with no side effects of significance. Therefore, I think it could control a significantly larger share of PDP than what is estimated. But for the sake of argument, I think the figures shown above (for PDP) are hard to argue.

Approximately 25-60% of the 1 million US PDP patients have psychotic episodes. However, in the attempt to be conservative, 35% is being used. If pima captures 35% of this market, which I also believe will be larger due to it being the only approved product, then U.S. sales alone should easily exceed $1.5 billion, net sales to Acadia, not retail sales.

Once again, these are conservative estimates, and the only difference with figuring Ex U.S. sales is the royalty rate of 22% on a larger population. Therefore, why is it that market estimates are so far off when it comes to predicting peak sales for this indication, and where do they get $300 million? Honestly, I have no clue. My best guess is that no analyst has yet to complete a thorough model to see how the numbers stack up. It would be near impossible to determine peak U.S. sales of $300 million in the PDP indication for pima - if using existing facts regarding the disease.

Alzheimer's disease psychosis (ADP) & Schizophrenia

Most analysts consider ADP to be the bread and butter of pima, and many believe it will be approved to treat this indication and/or that it will be used off label following the approval of PDP. With that said, what is the revenue potential for this indication?

Admittedly, figuring peak sales in this indication is a bit trickier. For one, many patients with delusions and hallucinations must be institutionalized, needing 24/7 supervision. But, this is costly, and if you can remove these effects then the cost of care for supervision can be reduced. This is where pima comes into play, and is why it will likely be such a hit in both the institutional and home settings.

The same scenario is applicable with Schizophrenia, but not to the same degree. However, with schizophrenia, 100% of patients experience psychotic episodes. Therefore, Acadia has a good opportunity to have high penetration rates.

With this particular topic of caregiver costs, there is a lot of data, and one of the many reasons that analysts have projected ADP and Schizophrenia to be such lucrative indications is because pima can eliminate psychosis and 24/7 supervision, thus saving billions in healthcare costs for not for profit mental health institutes and managed care payers. With that said, is a 45-50% peak penetration rate unrealistic on 35%-50% of these patients? I don't think so. Especially considering that treatment options are limited, and with the exception of pima, all have serious side effects.

Peak sales

When we consider that $300 million of the $2 billion in peak sales estimates for pima is PDP, and the remaining is for ADP and Schizophrenia, it is clear that pima might be the most under-the-radar/underestimated drug of the last decade. Above, I have explained my reasoning; I have given you the facts, and I have used conservative estimates. However, there are a few more facts to consider that have not been included, which further illustrate the level of conservatism that is being used in this model.

There is absolutely no data regarding China; thus China has been excluded from Ex U.S. estimates for PDP and ADP and only Europe and Japan are being used. None of the Ex U.S. sales includes Russia, China, India, South America, or Africa for PDP and ADP and sources were available to exclude China and India for Ex US Schizophrenia populations. Therefore, Ex U.S. sales could be significantly larger than the estimates.

Penetration rates are on the low end of what I've seen referenced in analyst comments and the few pima models that exist. Given the benefits of pima, penetration could likely be far greater than estimated.

The $12,000 annual price is based on Acadia's CEO saying that a premium would be given to pima. Then, accounting for the mark up from the wholesaler (Cardinal) and from pharmacy creates $7,692 to Acadia. This is priced the same as a 30-day script of non-generic Abilify. However, given Abilify's side effects, including some cases of death, it is likely that Acadia's price could be $15,000 - $20,000 per year, which would profoundly affect the model.

Severe bipolar is not included, which is a U.S. market estimated at seven million with no effective treatments, estimated to affect 2.6% of all Americans over the age of 18. In fact, if studies are effective, peak sales could be far greater than what's estimated.

Lastly, given the benefit and low risk for pima, many believe it will eventually become the aspirin for all off label indications like bipolar, depression, anxiety, OCD, anger management, etc. In the Phase 2 ADP trial, secondary endpoints include anxiety, aggression, etc., which would open pima to a whole new market. Essentially, pima could control anger, reduce anxiety, but have none of the known side effects associated with current treatments. Therefore, pima could very well become a household name.

Conclusion

So, how does all of this information translate into value for shareholders?

As an investor, I am supremely confident in this model, and the numbers/data that has been supported. I think conservative estimates are being used, and with those estimates I see no way that pima does not become one of the best-selling drugs of all time, assuming there are no colossal mishaps on behalf of management.

But for the sake of argument, the model predicts peak global sales of $20.45 billion -- the five key points above suggest that sales could be even greater - but I am applying a whopping 50% discount rate to allow for human error. This means that we can cut peak penetration of pima in half from the already low psychosis percentage of patients that was being used. Hence, peak global sales become $10 billion.

If we look at other companies with single (assumed) blockbuster products such as Pharmacyclics or Alexion Pharmaceuticals (NASDAQ:ALXN), then three times peak sales valuation is far from being pricey. Thus, a market cap of $30 billion or a target price over $300 is not unrealistic. Right now you may be thinking that I am "psychotic," but when Pharmacyclics was a $100 million company or Alexion was a $700 million company, no one thought either would reach their current valuations. In fact, last year, not many thought Pharmacyclics would reach a $9 billion market cap, but it did with the rising of estimates.

The bottom line is that as time passes, expect estimates to rise quickly for pima, which will then drive the valuation for Acadia. The current market potential for pima simply does not reflect the valuation of the PDP indication let alone ADP and Schizo. Therefore, unprecedented gains are likely. And for those of you hoping for a buyout or a substantial partnership, I'd cross your fingers and pray that management does not yet entertain such offers. Due to the disruptive nature of pima, many leading pharmaceutical companies are going to lose billions because of pima, which means Acadia is likely already speaking with or is being assessed by a handful of large companies. However, this is a company that simply has too much upside for a 100% premium right now, and over the next year as peak sales estimate rise, you will see that any price under $50 is cheap, and that interest from big pharma will only intensify.

With that said, go ahead and call me crazy for this model, but when we look back in a few years, don't be surprised if I am right.

Source: Pimavanserin: The Most Underestimated Blockbuster In Biotechnology

Additional disclosure: Much of the data, research, and modeling was done by an associate with substantial expertise/experience in financial modeling. This person wishes to remain unnamed.