Valuing Acadia Pharmaceuticals

| About: ACADIA Pharmaceuticals (ACAD)
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Summary

Acadia's lead candidate NUPLAZID has a PDUFA date of May 1, 2016.

The market opportunity looks attractive.

A valuation model is provided based on NUPLAZID being approved on its PDUFA date.

Acadia Pharmaceuticals (NASDAQ:ACAD) appears poised for an extremely volatile 2016. After much delay, its NDA for NUPLAZID (pimavanserin) has a PDUFA date of May 1, 2016. For the purposes of this article, I'm assuming that most readers are familiar with Acadia and its lead candidate for Parkinson's Disease Psychosis [PDP], so I'm not going to review the data from the clinical trials or go into much depth about the drug and its chances for approval - which appear very high at this point. Instead, I am going to assume that the drug is approved on its PDUFA date and develop a valuation model in an attempt to assess the risk/reward right now.

Market Opportunity

According to the Acadia, there are approximately 1 million people in the United States and 4 to 6 million people globally that suffer from Parkinson's Disease [PD]. Of those, it's estimate that about 40% may suffer from psychosis, which brings the market opportunity to about 400,000 within the US. Checking a few other sources, these numbers generally seem to be in line with most estimates, so I think it's fair to use these numbers as the basis of my model.

There are no currently approved treatments for PDP, although several anti-psychotics are commonly used off-label. These drugs can often cause Parkinson's Disease to worsen and carry a black box warning, so NUPLAZID will certainly be serving an unmet need. This is important when it comes to obtaining insurance coverage and garnering the attention from prescribers. Awareness of the condition and potential drug appear to be high, as I've personally talked to a handful of people who have family members with PDP that have already heard about NUPLAZID. This bodes well as to the initial commercial launch being a success, which is extremely important for an unproven company trying to commercialize its first product.

I'm not aware of Acadia announcing any specific numbers as to how it will price NUPLAZID, but other PD treatments may get us in the ballpark. I've seen pricing for Teva's (NYSE:TEVA) Azilect anywhere from $4,000 - 6,000 per year depending on the insurance coverage. Given that PDP is typically associated with older individuals that will be on Medicare or some other form of publicly sponsored healthcare, the price point will be a touchy subject - especially given all the publicity on drug pricing recently. Therefore, I'm going to assume that NUPLAZID has a net sales price of $6,000 per year after all discounts and rebates are taken into account.

Multiplying $6,000 per year and the full estimate of 400,000 patients in the US leads to a potential market opportunity of $2.4 billion. Given that the company is required to pay a 2% royalty on net sales to Ipsen and that it's extremely unlikely to acquire 100% of the potential market, I'm going to use $2 billion as the initial market opportunity for PDP.

I am assuming that Acadia would find a partner for the rest of world, so I'm not including that as part of my analysis right now - although it could certainly provide additional upside.

Valuation

After the recent equity raise, the cash situation looks much better than when I originally started my due diligence on Acadia. It's burning around $40 million per quarter, but that number will certainly grow if NUPLAZID is approved and the drug launch is commenced - so raising cash was the prudent thing to do. The timing of the capital raise, however, certainly throws up a few red flags though.

With $240 million in cash as of Sept. 30, 2015, and likely around $200 million as of the end of FY 2015, the company appeared to be well funded going into its PDUFA date. So why raise now instead of after approval, when the share price would likely be much higher? Is the company concerned about a CRL or the FDA needing more time to complete the NDA review? Or does the company simply need more cash in order to start hiring a sales force and preparing for a commercial launch ASAP after approval? Is the possibility of being acquired now completely off the table? These are among the many questions I am trying to figure out as I consider initiating a position in the stock, and certainly leading to some of the recent volatility.

Given the on-going clinical trials for NUPLAZID in other conditions like Alzheimer's Disease Psychosis and Schizophrenia, the company's burn rate will continue to be high even after the launch of NUPLAZID. Based on this, I'm not looking for the company to become cash flow positive until the 3rd year after NUPLAZID is launched, which means that Acadia will need to raise somewhere around another $200 million in capital.

While there are certainly many ways to company could obtain this capital, I'm assuming that it would be raised with another secondary offering, after a sales trajectory can be made and ostensibly at a higher share price. Ultimately, I'm modeling for a total of approximately 125 million shares outstanding (including an allowance for employee equity incentives).

Assuming that peak sales will be reached after 5 years on the market, Acadia would report revenue of about $2 billion in 2021 and have approximately 125 million shares outstanding. That represents $16 per share. But now comes the hard part: determining what multiple the market will assign to those sales.

Multiples in biotech/pharma vary widely depending on the competitive position, pipeline, management, etc, often ranging anywhere from 3-12x sales. As a conservative investor - I know, that's kind of a mirage when investing in biotech, but I digress - I typically use 3x sales for biotech companies in a competitive market and 6x sales for companies with exclusivity or a specific competitive advantage. For Acadia, I believe the 6x multiplier is safe to assign, especially given the off-label use that may occur with NUPLAZID. This means that Acadia shares would be valued at about $96 per share in 2021.

So now that I've determined what the shares would be worth under a peak (optimistic) scenario, I need to discount that to a present value to determine the risk/reward. Personally, I want at least 20% compounding growth in order to take on the risk of FDA approval, drug launch going smoothly, manufacturing problems, etc, so I'll use a 20% discount rate. This implies that fair value is about $38 per share right now, while using a 25% discount rate implies fair value at $31 per share. Therefore, I've got a target price of $31-38 per share, which means the recent sell-off is overdone and the stock is attractively priced at the current range around $22.

Conclusion

With the recent slump in the market - particularly the biotech space - I'm not rushing to buy much right now. Combine that with the overhang of the recent secondary offering and ensuing questions that it created, and I'm cautiously waiting until the right time to initiate a position. So despite seeing Acadia's stock as attractively priced with at least 40% upside, I plan to pay close attention to management's commentary in the coming months and the possible announcement of an Adcom meeting before I'll initiate a position. If any readers have an opinion about the stock, I'd love to hear them in the comments section below.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.