Prior to this week, Acadia Pharmaceuticals (NASDAQ:ACAD) stock had fallen roughly 40% this year. And also prior to this week, ACAD was trading about 60% from the high it created back in July 2015. Therefore, when positive briefing docs were released over the weekend, followed by a landslide victory in favor of its drug Nuplazid by the FDA Advisory Committee, investors might have expected an enormous stock reaction, higher. When the stock resumed trading on Tuesday, it was higher by 25%, but by the time it closed on Wednesday those gains were reduced to just 9%. Hence, it certainly seems like ACAD stock is being disrespected, but in retrospect, the price action is well warranted.
First, let's look at the reasons why some investors expected ACAD to jump 40%, even 50% higher after the panel's positive 12 to 2 vote in favor of Nuplazid to treat Parkinson's disease psychosis, or PDP.
- There are 17 million shares sold short. Thus, short covering should have sparked lavish stock gains. Moreover, with so many shares short, the gains should theoretically span over many days, not just one.
- Several analysts reiterated bullish outlooks, launched Buy ratings, or hiked their price targets on ACAD. These include Piper Jaffray ($39 to $44) and Needham reiterating its $49 target among other firms. Usually, such activity provides a boost to stock prices.
- Nuplazid seems like a guarantee for blockbuster sales. Each of the firms to upgrade ACAD have also guided for peak Nuplazid sales significantly higher than $1 billion. Fellow SA writer PTSD Trader recently explained why sales could approach $7.5 billion and back in 2013 I called Nuplazid the most underestimated blockbuster in biotechnology, with sales that possibly reach $10 billion.
With that said, the big growth driver for Nuplazid has always been its off label sales potential, and also the assumption that it is no more risky than an aspirin, causing very mild side effects. However, that is not what the FDA panel found, and during the meeting, Nuplazid's safety was discussed to exhaustion.
The panel head did not do a very good job at disclosing the names of panel speakers throughout the discussions, but in listening to the entire meeting, I counted four different experts who favored a black box label for safety and noted off label usage concerns. With 3x as many patient deaths while on Nuplazid versus placebo, the panel seemed to agree that a post-approval safety trial is necessary.
Nevertheless, so much of what analysts and investors expect from Nuplazid lies on whether it can capture off label sales. It is widely known that antipsychotics are used off label due to the prevalence of psychosis coupled with very few safe treatment options. With Nuplazid receiving a Breakthrough designation, Priority Review, and being the first drug effective in treating PDP, many believed it was well positioned to thrive in off label use. However, a black box label is essentially notification to physicians that there are unknown questions surrounding Nuplazid, and increased liability if using it to treat indications outside its intended use.
What's all this mean?
At the end of the day, Nuplazid is going to be FDA approved, but there will probably be some safety-related requirements associated with the FDA's decision, whether it be a post-approval trial or a label warning of sorts. Now, many have shorted ACAD over the last year because they believed that one Phase 3 trial would not be enough to earn an FDA approval, and these investors were betting that an additional Phase 3 trial would push the stock much, much lower. Furthermore, many investors thought Acadia's existing data on Nuplazid would not warrant a positive vote from the FDA's Advisory Panel.
The bears were wrong in large part, underestimating the unmet medical need to treat psychosis associated with Parkinson's disease. However, the ongoing safety questions are keeping ACAD shares in check, and it is these raised questions that prevented ACAD from maintaining the momentum it began with on Wednesday, and the high short interest and lack of short covering likely played a big role in reversing that momentum, as shorts prove to be more resilient and patient than longs.
As I explained right after the panel's decision, the shorts actually have a point, and despite my long-time bullishness, I am not increasing my stake right now from the 1,200 shares I have owned for years. Acadia has a lot of questions to answer, and no one knows what restrictions if any will be placed on Nuplazid. Depending on what happens, Nuplazid's revenue creation, Acadia's interest from major partners, and whether or not Acadia has to alter its ongoing Alzheimer's disease psychosis, ADP, trial to better monitor safety will be affected. These are major unknowns that will impact how much revenue Acadia ultimately creates.
The answer to these questions and how Nuplazid is ultimately marketed could dictate whether the drug creates $500 million in the next five years or $5 billion. Yes, that is a wide range, but you must keep in mind that Acadia's trial and success in treating ADP, Schizophrenia, and agitation will determine how big of a blockbuster Nuplazid will be. These are much larger indications than PDP, and if Acadia has to make major changes to monitor safety that prolong the expanded label by one, even two years, and has to operate with additional safety labels, then it could be the difference in widespread off label usage across the antipsychotic board or very little to any off label usage.
Finally, when you consider that ACAD trades with a market capitalization of $3.4 billion then it becomes clear that Nuplazid needs to be a blockbuster product soon to both support the company's current valuation and create shareholder value long-term. Given this fact, it is reasonable to conclude that ACAD is trading around fair value right now, appropriately considering both the risks and rewards of its upcoming FDA approval date on May 1. In other words, just be patient.
If Acadia and Nuplazid fly through the regulatory process with nothing more than a required post approval safety trial to further confirm what the FDA determines to be a safe and effective drug, then Nuplazid will reach blockbuster sales that exceed the most bullish of expectations in short order. At that point, even if ACAD doubles following this decision, there would still be tremendous long-term investment value. But if the FDA is hesitant about setting Acadia loose in an enormous patient population to market and capture billions in off label drug sales, thereby giving it a black box label, then don't be shocked if ACAD stock trades lower, or is seen at fair value for the time being.
Disclosure: I am/we are long ACAD.
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.