Acadia Pharmaceuticals (NASDAQ: ACAD) has been in the biotech/pharma investing spotlight after getting approval for Parkinson's Disease-associated psychosis symptoms like delusions and hallucinations (NASDAQ:PDP) for Nuplazid, the first drug to be FDA approved for this clinical indication. In addition, Baker Brothers, one of the most well-known hedge funds in the healthcare space have been increasing their stake in this company (currently owning $837 million worth of the company's common stock).
We discuss the company's pipeline and present our investment thesis, including sum-of-parts DCF/risk-adjusted NPV valuation for the common stock in this report. We have a Conviction buy rating on the stock with price target (fair value based on sum-of-the parts, DCF method)= $47.57. We recommended the stock to our premium service subscribers on 09/08/16 at stock price of $33.09.
- Stock rating= Conviction Buy
- Stock price target (fair value)= $47.57
- Current stock price= $34.15
- 52-week price range= $16.64 to $43.89
- Average daily share volume= 2,218,629
- Market Cap= $4.09 billion
- Cash reserves= $545 million
- Cash enough to last till= early 2018
- Debt= nil
Figure 1: Acadia Pharmaceuticals common stock price chart (from nasdaq.com)
Acadia Pharmaceuticals' key product is Nuplazid (Pimavanserin), an inverse agonist of 5HT2A receptors. This receptor has been found to play a key role in various mental disorders like schizophrenia, and even depression and other mood disorders. Various companies have been targeting this therapeutic target (for example, Intracellular therapeutics (NASDAQ:ITCI) is developing an antagonist of this receptor in schizophrenia (ITCI is open position in our portfolio and we have published a research report on it recently).
Figure 2: Acadia Pharmaceuticals, product pipeline
Parkinson's disease-related psychosis:
Problem: Parkinson's disease (PD) is a common neurological disorder that affects about 1 million Americans and about 60K new cases are added each year. Worldwide, it affects about 10 million people (source). Psychotic symptoms like hallucinations and delusions develop after few years in PD and may be seen in 10-20% patients (source). The prevalence of minor psychosis symptoms like illusions is even higher (40-50%). While there are multiple causes of these psychotic symptoms in PD (drugs like dopamine agonists, delirium due to infections, etc.), PD by itself is now known to cause psychosis.
Various existing antipsychotic drugs have been earlier used off-label to treat PD-related psychosis . However, most of them worsen motor symptoms (like tremor) seen in PD or are unsafe (like clozapine that can dangerously lower white blood cell count). Quetiapine, a commonly used antipsychotic drug did not show clinical efficacy in PDP. PDP is a major cause of morbidity and mortality in PD and a leading cause of nursing home placement (source). Visual hallucinations in PD are related to increased 5-HT2A receptors in the visual processing areas of the brain (source).
Pimavanserin has shown clinical efficacy in reducing psychotic symptoms in a phase 3 trial (34% reduction in SAPS-PD score compared to 14% in placebo, p=0.0014) as shown in figure 3. source.
Figure 3: Results of phase 3 trial showing clinical efficacy of Pimavanserin in reducing psychotic symptoms in PDP (source).
In addition, caregivers of the Pimavanserin treatment arm reported reduced burden and the drug improved night-time sleep and day-time wakefulness in PD patients (figure 4).
Figure 4: Reduced caregiver burden and improved night-time sleep and day-time wakefulness in PD after treatment with Pimavanserin (source).
The drug was also well-tolerated and did not worsen motor symptoms of PD or cause sedation. Treatment emergent adverse events in this phase 3 trial are shown in figure 5.
Figure 5: Treatment-emergent adverse events in the phase 3 trial of Pimavanserin (source).
The drug was approved by FDA to treat hallucinations and delusions related to PD earlier this year. It is priced at $24K per year in the U.S. in this indication. The drug is expected to be covered under Medicare Part D (after pre-authorization) and most patients qualify for free 30-day trial. Most of the pre-authorizations are confirmation of the diagnosis since PDP is a new diagnosis code. Coverage under private insurers is expected to be completed in early 2017. The company has called on 9,700 of 12,000 target physicians in the U.S. (most are neurologists) since commercial launch, and has launched an extensive marketing campaign to educate the medical community about the drug. The company expects to submit the regulatory approval application to the European Medicines Agency (NYSEMKT:EMA) in early 2017.
Alzheimer's disease-related psychosis (NASDAQ:ADP):
Alzheimer's disease (AD) is a common neurodegerative disease that affects about 5.3 million people in the U.S. It is the 6th largest cause of deaths in the U.S. Psychotic symptoms like hallucinations and delusions are commonly seen in AD and may affect about 10-20% patients. The prevalence of minor psychotic symptoms like agitation is even higher (25-50% patients), source. These psychotic symptoms are a major cause of morbidity in AD and one of leading causes of nursing home placement. ADP has even been linked to increased mortality in AD patients. Common symptoms of ADP are delusions and visual hallucinations. Associated negative symptoms of schizophrenia (like lack of motivation and energy) and depression are commonly seen (source).
There is no FDA approved therapy to treat ADP or AD-related agitation. Various existing antipsychotic drugs are used off-label but have been found to be associated with increased mortality.
Ina preclinical study in a rodent model of Alzheimer's disease, Pimavanserin reversed psychotic symptoms (source). Pimavanserin is in a phase 2 clinical trial in treatment of ADP. The study is randomized, placebo-controlled, double-blind, single-center clinical trial at the Kings College Hospital, London, U.K. (source). Pimavanserin 40 mg once daily is being tested vs.s placebo with treatment duration of 12 weeks (longer than 6 weeks treatment duration in the PDP phase 3 trial). The number of subjects enrolled is 181 and the primary study end-point is Neuropsychiatry Inventory-Nursing Home version. This tool is a questionnaire that measures a professional caregiver's assessment of an alzheimer's disease patient's symptoms like delusions, hallucinations, agitation/aggression, sleep disturbances, depressive symptoms, manic symptoms, anxiety, disinhibition and negative symptoms like apathy (link).
Patient enrollment in this trial has been completed and results are expected in end of 2016. The company also plans to develop Pimavenserin in treatment of AD-related agitation (which is a larger market).
Schizophrenia (characterized by hallucinations, delusions etc.) is a common mental disorder that affects about 1% of the population worldwide and in the U.S. There is a desperate need for new antipsychotic medications that treat the psychotic symptoms without impairing the physical and psychological well-being. Commonly used antipsychotic medications like quetiapine have side effects like sedation, high blood glucose level, increase in QT interval on EKG, weight gain, prolactin elevation and increased serum triglyceride levels. Treating negative symptoms of schizophrenia is another area of great need. Recently, Minerva Neurosciences' (NASDAQ:NERV) 5-HT2A and sigma-receptor antagonist, MIN-101 was successful in treating negative symptoms of schizophrenia in a phase 2 study (Minerva neurosciences is an open position in our portfolio and we have published a research report on SA recently on this company).
In a multi-center, double-blind, placebo-controlled phase 2 trial, Pimavanserin 20 mg/day + risperidone 2 mg/day showed similar clinical efficacy as risperidone 6 mg/day in reducing psychotic symptoms but with lower side effects like weight gain and faster onset of action (6 weeks treatment duration). The dose of Pimavanserin in this trial (20 mg/day) was lower than that used in the PDP and ADP trials (described above). It is possible that higher doses of Pimavenserin (40 mg/day) may show clinical efficacy in schizophrenia even when used as monotherapy.
It is unclear if the company is conducting a clinical trial of Pimavaserin as a monotherapy in schizophrenia at present. A successful phase 3 trial in this clinical indication could open up a huge potential market worldwide. Peak annual sales of top-selling antipsychotic drugs may exceed billions of dollars, for example, Abilify had peak sales of $7 billion globally in 2013.
In addition, Pimavanserin is also expected to improve sleep disturbance (like insomnia) seen in schizophrenia. Acadia has announced plans to further develop the drug in this clinical indication.
Other R&D programs:
Acadia is also developing a small molecule candidate for treatment of chronic pain (novel alpha-adrenergic agonist) in partnership with Allergan (NYSE:AGN). Successful early stage clinical trials have been conducted in chronic pain indications like fibromyalgia, esophageal hypersensitivity, etc.
Another product candidate targeting a subtype of muscuranic receptors could have potential application in treatment of glaucoma (in preclinical stage).
Agreements and collaborations:
Pimavanserin was licensed from Ipsen and Acadia will pay various milestone payments and 2% royalty on its net sales.
Allergan is developing the small-molecule, chronic pain candidate described above.
Various patents protecting Pimavenserin extend till 2028.
The CEO, Stephen Davis was earlier the Chief Financial Officer at Acadia. He has over 20 years of experience in the drug development industry. He has previously served as Chief Operating Officer at Heron Therapeutics and Ardea Biosciences; and Chief Executive Officer at Neurogen Corporation. He is a Board member of Bellicum Pharmaceuticals (NASDAQ:BLCM) and earlier served as a Board member of Synageva Biopharma.
More details about the management team and the Board of directors can be accessed here.
Institutions hold more than 93% of the outstanding common stock. Baker Brothers, well-known healthcare hedge fund have been increasing their stake over past few quarters and own $837 million worth of the common stock.
Figure 6: Acadia Pharmaceuticals, institutional holders (source: nasdaq.com).
Competition: Some other companies that are developing products in AD-related agitation indication include:
- Axsome Therapeutics (NASDAQ:AXSM): Dextromethorphan and bupropion combination: finished phase 1, phase 2/ 3 planned.
- Intracellular therapeutics (NASDAQ:ITCI); ITI-007 (5-HT2A antagonist, dopamine modulator): in phase 3 for treatment of schizophrenia; finished phase 1 in treatment of behavioral disturbances associated with AD.
- Otsuka Pharmaceuticals: Brexpiprazole (atypical antipsychotic approved for schizophrenia), in phase 3 trial to treat AD-associated agitation.
- Orion Pharma (Finland)/Johnson & Johnson (NYSE:JNJ): ORM-12741 (alpha-2c-adrenergic antagonist)in a randomized, placebo-controlled trial in AD-agitation.
Studies of memantine and Elan Pharmaceuticals' ELND005 were unsuccessful in treatment of AD-related agitation.
ITCI and AXSM are open positions in our portfolio and we have previously published research reports on SA on these companies.
The company has a healthy balance sheet with about $545 million in cash and other cash-equivalent investments to fund its on-going R&D programs (after the latest equity raise) till early 2018. There is no long-term debt.
Valuation of the common stock:
Company estimates for PD patients in the U.S. that were being treated with off-label antipsychotic drugs prior to Nuplazid's launch is about 150K patients. Our target market size for PDP in the U.S. was 10% of PD prevalence (100,000 patients). We modeled peak 74% market penetration in PDP indication in the U.S. (peak about $3 billion U.S. sales in 2028). Our trajectory for market penetration was 60% market share by 2021 and then 3% annual growth in market share till 2028 (patent expiry). Cost of drug/year per patient was input as $24K. Free operating cash flow was input as 15.5% of revenue (median for top 40 biotech/pharma firms). Risk-adjusted NPV (at 12% cost of capital for first 5 years than 10%) was $3.2 billion and per share contribution from future revenue this indication=$25.86 using diluted share count (including stock options).
For ADP indication, we input cost/year=$18K and peak market penetration=23% in the U.S. (peak risk-adjusted $2.6 billion sales in 2028, 30% probability of reaching market). The lower calculated market penetration in this indication is due to potential competition from other drugs in the development. The drug was assumed to be launched in the U.S. market in 2019 for this indication, gain 20% market share by 2023, and then 3% annual market share growth till 2028 (patent expiry). FCF was input as 15.5% of revenue (median for top 40 biotech/pharma firms). Risk-adjusted NPV (at 12% cost of capital for first 5 years than 10%) was $2.1 billion and per share contribution from future revenue this indication=$16.94 using diluted share count (including stock options).
We calculated the contribution of non-operating assets (including cash, deferred tax assets) minus liabilities= $4.77 using diluted share count.
Using sum-of-parts DCF method, we calculated total contribution per share of Acadia Pharmaceuticals from above indications= $47.57 (fair value per share). This is our first price target for Acadia stock.
Nuplazid is also planned to be launched in the treatment of PDP in the E.U. (possibly in 2017). Our calculations have included only the U.S. revenue from these two indications. Additional E.U. market for Nuplazid will add further up-side to the peak revenue and our stock price target. In addition, we have not included potential revenue from Nuplazid for treatment of schizophrenia in this valuation. Drug approval in this clinical indication would open another huge market for the drug.
Subscribers to Vasuda Healthcare Analytics, our premium investment research service on Seeking Alpha's marketplace can download the valuation models/ spreadsheets used in this article.
Risks to the investment
Like every emerging pharmaceutical company, this investment has risks. It is possible that regulatory agencies might not approve the products, unexpected side effects might be seen in future, 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 may also need to raise more cash to fund its operations in 2018 through equity and/or debt financing, which might put downwards pressure on the stock price.
Up-coming catalyst: Positive results of phase 2 trial of Pimavenserin in AD-related psychosis may give an upward boost to the stock price. AD-associated agitation is another huge potential market.
Conclusion: In conclusion, we have a conviction buy rating on Acadia Pharmaceuticals' common stock and price target (fair value based on sum-of-the parts DCF method)= $47.57 (adjusted for probability). The company is also an attractive take-over target. Up-coming catalysts described above could give near-term boost to the stock price. An approval in schizophrenia treatment could make Nuplazid one of the top-selling psychiatric drugs of all time.
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Additional disclosure: This article represents my own opinion and is not an investment advice or solicitation to buy or sell any security. Investors should do their own research and consult their financial adviser before making any investment.
Disclosure: I am/we are long ACAD, ITCI, AXSM, NERV.
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.