Acorda Therapeutics Has Significant Upside From Its Current Stock Price

| About: Acorda Therapeutics, (ACOR)

Summary

Acorda Therapeutics is a central nervous system-focused emerging bio-pharmaceutical company.

The company's pipeline includes products targeted at areas of unmet need like OFF symptoms of Parkinson's disease, Parkinson's related dementia and post-stroke walking difficulty.

We are initiating coverage on Acorda Therapeutics with Buy rating and common share long-term price target (fair value) = $51.87 based on sum-of-parts valuation using the enterprise DCF method.

Acorda Therapeutics (NASDAQ: ACOR) is a central nervous system (CNS) focused emerging biopharmaceutical company. The company's pipeline includes products targeted at areas of unmet need like OFF symptoms of Parkinson's disease (PD), Parkinson's related dementia and post-stroke walking difficulty. These CNS conditions are common and through its acquisition of Biotie, Acorda Therapeutics has build up a strong, promising pipeline of product candidates. In addition, the company also has some marketed products generating revenue like Ampyra (dalfampridine) in multiple sclerosis (MS) with walking difficulty. We are initiating coverage on Acorda Therapeutics with Buy rating and common share long-term price target (fair value) = $51.87 based on sum-of-parts valuation using the enterprise discounted cash flow (DCF) method.

Investment highlights:

- Common stock price target= $51.87

- Current stock price= $25.76

- 52-week stock price range= $23.85 to $43.63

- Market Cap= $1.19 billion

- Average daily share volume= 563,836

- Cash/ cash equivalents= $431.4 million

- Debt= $293.7 million

- Short interest= 12.8%

- Short interest, days to cover= 12.8

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Figure 1: Acorda Therapeutics, common stock price chart (source: Bloomberg.com)

Investment thesis:

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Figure 2: Acorda Therapeutics, product development pipeline

CVT-301 in treatment of OFF symptoms of Parkinson's disease:

Parkinson's disease (PD) is a common neurological disorder that affects over 1 million patients in the U.S. After few years of treatment of Levodopa, abnormal motor movements called dyskinesia alternating with periods of decreased mobility (called OFF symptoms) develop. About 35% of PD patients may develop OFF symptoms.

CVT-301 is an inhaled formulation of Levodopa using proprietary ARCUS technology that is currently in a phase 3 clinical trial for treatment of OFF symptoms in PD. The drug was successful in a phase 2 clinical trial (source). Results of the phase 3 trial are expected in 2016 and a New Drug Application is expected in Q1, 2017. Currently, the only approved drug for treatment of OFF symptoms in PD is injectable apomorphine, a dopamine agonist. Cynapsus therapeutics (NASDAQ: CYNA) is developing a sublingual form of apomorphine (in phase 3 trial). Extended release version of levodopa/carbidopa and other dopaminergic agents are also being developed which might compete with CVT-301 in this indication. Acorda has patents protecting CVT-301 till 2032.

Using probability of success=67%, annual drug price=$15K, discount rate of 12% and peak 5% market share projection in the U.S. and Europe, we modeled peak $1.06 billion revenue (risk-adjusted) in 2032 (at patent expiry) after deducting 5% annual royalty from revenue to Alkermes (NASDAQ: ALKS) using enterprise DCF method. We calculated future operating value of cash flows from this indication= $341 million, and projected contribution to fair value per common share= $7.41. The spreadsheet used in the valuation can be downloaded here.

Tozadenant in treatment of OFF symptoms in PD:

Tozadenant is an oral adenosine A2a receptor antagonist that was acquired from the Biotie acquisition. The drug was successful in a phase 2b trial in reducing the OFF time and increasing the ON time (source) and is in a phase 3 trial as adjunctive treatment for OFF symptoms in PD. If approved, the drug could represent a novel therapy in treatment of PD. Various patents protecting Tozadenant extend till 2030.

Using probability of success=67%, annual drug price=$15K, discount rate of 12% and peak 5% market share projection in the U.S. and Europe, we modeled peak $1.05 billion revenue (risk-adjusted) in 2032 (at patent expiry) using enterprise DCF method. We calculated future operating value of cash flows from this indication= $408 million, and projected contribution to fair value per common share= $8.86. The spreadsheet used in the valuation can be downloaded here.

Dalfampridine to improve walking in patients with post-stroke walking deficits:

Dalfampridine (Ampyra) is a potassium channel blocker that is approved for improving ambulation in multiple sclerosis with walking difficulty. Acorda is developing this drug to improve ambulation in patients with walking difficulty after stroke. About 795,000 patients in the U.S. suffer from stroke each year (source: 10-K) and about 7 million patients in the U.S. are estimated to have post-stroke walking deficit. In a phase 2 clinical trial, the drug was successful in increasing the walking speed and improving ambulation in post-stroke patients with walking difficulty (source). The drug is in a phase 3 trial and results are expected in 4Q, 2016. Based on results, two more pivotal phase 3 trials are planned in 2017. Various patents protecting this drug extend till 2027.

Using probability of success=67%, annual drug price=$15K, discount rate of 12% and peak 2% market share projection in the U.S., we modeled peak $1.4 billion revenue (risk-adjusted) in 2027 (at patent expiry) using enterprise DCF method. We calculated future operating value of cash flows from this indication= $563 million, and projected contribution to fair value per common share= $12.22. The spreadsheet used in the valuation can be downloaded here.

SYN120 in Parkinsonism-associated dementia:

SYN120 is an oral 5-HT6/5-HT2A dual receptor antagonist that was acquired after Biotie acquisition. 5-HT6 antagonists are a new class of drugs that are being tested to improve cognitive dysfunction in neurodegerative conditions like Parkinsonism and Alzheimer's disease. Dementia may be seen in 30-50% of PD patients and is a major cause of morbidity. Axovant (NYSE: AXON) has another 5-HT6 antagonist in a phase 3 trial in Alzheimer's disease. SYN120 is currently in a phase 2 clinical trial after successful phase 1 study (source). Results of this trial are expected in end of 2016. Various patents for SYN120 extend till 2030. The drug could also be developed in Alzheimer's disease related dementia which is a larger market.

Using probability of success=30%, annual drug price=$10K, discount rate of 12% and peak 10% market share projection in the U.S. and Europe, we modeled peak $198 million revenue (risk-adjusted) in 2030 (at patent expiry) using enterprise DCF method. We calculated future operating value of cash flows from this indication= $188 million, and projected contribution to fair value per common share= $4.08. The spreadsheet used in the valuation can be downloaded here.

BTT1023 in Primary sclerosing cholangitis (PSC):

BTT1023 is a fully human anti-VAP1 (vascular adhesion protein) antibody that was acquired after Biotie acquisition. VAP1 is a novel target in fibrotic diseases and this drug has received Orphan drug designation in Europe for treatment of PSC, a debilitating fibrotic liver disease. The drug is in a phase 2 trial in treatment of PSC after successful phase 1 trial (source) and interim results may be announced in end of 2016. Intercept Pharmaceuticals (NASDAQ: ICPT) is developing OCA, a bile acid product for PSC which may offer some competition. Various patents protecting BTT1023 extend till 2028 at present.

Using probability of success=30%, annual drug price=$50K (premium pricing due to orphan indication), discount rate of 12% and peak 10% market share projection in the U.S. and Europe, we modeled peak $112.5 million revenue (risk-adjusted) in 2030 (at patent expiry) using enterprise DCF method. We calculated future operating value of cash flows from this indication= $74 million, and projected contribution to fair value per common share= $1.61. The spreadsheet used in the valuation can be downloaded here.

Dalfampridine in walking difficulty due to multiple sclerosis:

Dalfampridine, a potassium channel blocker is approved in the U.S. for treatment of walking difficulty due to multiple sclerosis since 2010 and has orphan drug designation for this indication. Revenues from this indication have been growing at 27% annual growth rate from 2010-2016 and grew 18% year over year in Q1, 2016. Outside the U.S., the drug is licensed to Biogen (NASDAQ: BIIB). Ex-U.S. royalties grew 9% year over year in Q1, 2016. The drug has patent protection till 2027.

Using conservative revenue growth estimates (declining at 2%/year in U.S. and 1% per year ex-US), we modeled peak revenue from this indication= $960 million in 2027 at patent expiry. We calculated future operating value of cash flows from this indication= $724 million (10% discount rate), and projected contribution to fair value per common share= $15.71 using enterprise DCF method. The spreadsheet used in the valuation can be downloaded here.

Contribution of cash/cash equivalents, non-operating assets and debt to fair value/share:

We adjusted non-operating assets like extra cash and cash-equivalents, operating loss carry-forwards and liabilities like long-term debt, operating lease liability and employee stock option liability (at fair value). We calculated the contribution to fair value/share from non-operating assets minus liabilities= $1.98. The spreadsheet used in the valuation can be downloaded here. Since the projected contribution of assets acquired from Biotie has been included above, the acquired goodwill and acquired intangible assets from Biotie acquisition were not included in this calculation.

Other products and product candidates:

Revenue from Zanaflex in treatment of spasticity have been declining after launch of generic versions. Patents for Qutenza in treatment of postherpetic neuralgia will expire in 2016. Some other product candidates like CVT-427 (inhaled zulmitriptan for treatment of acute migraine) and rHIgM22, a remyelinating antibody in multiple sclerosis are in phase 1 trial and we would wait for more data before including them in the valuation. These products were not included in the valuation model.

Sum-of-parts valuation of common stock:

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Using the sum-of-parts valuation, we calculated fair value/common share= $51.87 using future projected revenue from these indications (enterprise DCF method). This represents significant up-side from current stock price. Near-term catalysts like phase 3 results of CVT-301 and Tozadenant in OFF symptoms of PD and Ampyra in post-stroke walking deficit may add near-term upward boost to the stock price. Institutions like FMR LLC and Baker Brothers hold significant stake in the stock (source). The management team has many years of experience in the industry. Details can be accessed here.

Risks in the investment:

Like every emerging pharmaceutical company, this investment has risks. It is possible that the product candidates might fail in clinical trials, regulatory agencies might not approve the products, unexpected side effects might be seen, clinicians might not widely prescribe the products or insurers might not reimburse them. Competing products from other companies might gain significant market share in the planned clinical indications. The company might need to raise more cash to fund its operations through equity and/or debt financing which might put downwards pressure on the stock price.

Conclusion: In conclusion, we rate Acorda Therapeutics Buy at the current stock price, with a long-term price target (fair value)= $51.87. We are including it in our model portfolio as of 7/6/2016 (suggested allocation of 1 to 2% of capital).

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Disclosure: I am/we are long ACOR.

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.

Additional disclosure: This article represents my own opinion and is not a substitute for professional investment advice. It does not represent solicitation to buy or sell any security. Investors should do their own research and consult their financial adviser before making any investment.