I don't really like analyzing pharma/biotech companies. But I've lived in San Diego for nearly two decades, giving me a courtside seat to many of the pharma/biotech rocket ships and subsequent explosions over the years. Every once in a while, I set my inferences aside and look further into the industry that quite frankly puts San Diego on the map. I live in ground zero of the biotech industry that is so important to the region — La Jolla, Calif. There are over 400 biotech companies in the area, and it is one the biggest industries in our city (besides Qualcomm (NASDAQ:QCOM) and tuna fishing).
It's almost impossible not to give at least some attention to the sector if you live here. Some of the best and brightest are taught at UCSD and then are drafted to try and figure out how to crack some of mother nature's cruelest diseases. I hear a great deal about these companies, and a whole lot of it is fluff.
The topic du jour has been regarding local pharma/biotech companies taking over the marijuana industry on a variety of levels. Companies like Medical Marijuana Inc. (MNJA), Innovative Industrial Properties (NYSE:IIPR) and GW Pharmaceuticals (NASDAQ:GWPH) have seen their shares trade at varying degrees of mania. I assure you that's just a small corner of what's happening down here in the pharma industry.
But one company in particular has this San Diegan very interested. The company I'm talking about is ACADIA Pharmaceuticals (NASDAQ:ACAD), and in a field of speculative, pre-FDA-approval pharma companies, ACADIA has potential few others possess.
I don't plan on going into an egregious amount of time looking at ACADIA by its potential as a standalone company for years into the future. It's my belief this company represents everything a Pfizer (NYSE:PFE), Johnson & Johnson (NYSE:JNJ), Biogen (NASDAQ:BIIB) or AstraZeneca (NYSE:AZN) would want in a tuck-in acquisition.
Why do I think ACADIA's solo days at the dance are numbered? Many reading this will likely know this company well, but ACADIA Pharma, ignoring the magnitude of size, reminds me a whole bunch like Relypsa (NASDAQ:RLYP), which was taken out by Galenica AG (OTC:GNHAY) in April 2016. (And for what it's worth, Galenica was not the expected suitor.)
History doesn't repeat itself, but it sure does rhyme, in my experience. The companies are nowhere near the same size, but ACADIA has done nearly everything that Relypsa did before its eventual acquisition. Let's go into a bit more detail regarding the timelines of the two companies. I'll be interested to see if readers also see the similarities.
The New Drug Show:
Biotech/specialty pharma and pharma companies often work in the same manner. Research, research, then research some more; fight the FDA to get X drug approved. After approval, sell X drug yourself, through third parties, or just sell the drug or the entire company to someone who can bring said drug to market more effectively than you.
Sales almost always start off slow, and the companies need to spend a boat load of cash bringing X drug to the market by convincing the doctors to use drug X. Sometimes the drug is so amazing doctors call the reps themselves looking for samples and more information, more times than not it's the marketing people trying to convince the doctors to give drug X a shot and that it will, in fact, help their patients.
When doctors from other countries see how it works in the USA, they think we are crazy. Drug pushers just don't exist in other countries in the manner they do here, in fact, aggressive sales tactics we see in the USA are illegal in some countries. I'm not here to discuss the merits of one system vs. another so let's see how this works.
After a drug is approved, the battle is far from over. The company needs to get the insurance companies, Medicare and Medicaid to reimburse them for the drugs they are selling. If a company thinks the drug will be well received regardless of reimbursement, they go flat out on the marketing front even before insurance approval. In most instances, the sales people need to convince the doctors why their drug, drug X, is better than the drug they have been using for some years, drug Y.
Doctors tend to do a little case study of their own and see how their patients handle the new drug, see how they are feeling or how it is affecting their quality of life. Then if X drug does well on the test, the doctor will slowly replace drug Y with drug X. Why does any of this matter when talking about a big pharmaceutical company buying out a smaller pharmaceutical company?
It all comes down to the small pharmaceutical company showing the world, and its potential suitors for that matter, that they will, in fact, go it alone if need be and bring a drug through to commercial success on their own. The company needs to show its investors, potential suitors and the street, in general, they can, in fact, run the new drug marathon, from cocktail napkin to commercial success if you will.
Sometimes the executives at the small pharma companies think they can do it alone, but for some, it's more of a negotiating tactic than anything else. If a Pharma company was to dip its hand too much, showing the world they needed to be acquired, then the price of that acquisition might happen at considerably lower levels. So why do I think ACADIA is like Relypsa in that manner?
ACADIA and Relypsa
I've said earlier ACADIA is a much larger company that Relypsa, and ACADIA has other drugs in its pipeline, something Relypsa did not. Relypsa's Veltassa was approved on Nov 27th, 2016, and they had the drug on the shelves by December of 2016. The company had done secondaries in April 2014, Feb 2015 and had an open at the market (ATM) stock sale mechanism in early 2016. Still with all the secondaries and deals with other companies the street was well aware they didn't have enough cash on hand to bring Veltassa through commercialization.
The company was rumored to be the target of multiple companies on both December 2015 and again in April 2016. Then in May of 2016 Relypsa went to the debt markets raising 150mm, enough to see Veltassa through commercialization. Did Relypsa management really want to go it alone on Veltassa? I think it's unlikely they did, but they had to at least appear that way to suitors, so nobody stole the company at fire sale prices.
On July 21st what many had thought was inevitable happened. Galenica AG bought the whole company at $32 per share. An over 60% premium to where shares were trading the day before. Many thought Galenica still got a great deal as the drug from ZS Pharm who AstraZeneca (AZN) acquired was shelved for the time being because of concerns about dangerously high potassium levels in people given the drug.
With Veltassa the only drug in town, at least only new drug, many thought Relypsa should have fetched a higher price. As it stood, Relypsa was acquired about 8 months after they got their drug on the shelf. Regardless if you think Relypsa got a good price for the company or not one thing is quite certain. They played the game pretty well in regards to making it seem they were prepared to go it alone if they needed too. So why does ACADIA remind me of the Relypsa saga?
ACADIA's only drug currently on the shelf, Nuplazid was approved on April 29th, 2016 and launched in June 2016. So the drug has been live for about 8 months which is right about when Relypsa was acquired. If only things were that simple but ACADIA also did some similar things that Relypsa did. In August 2016 the company raised 230mm USD to commercialize Nuplazid further, telling the street it was ready to "go it alone," if you will. Sounds familiar, right?
ACADIA has a bit over 500MM in cash which is likely enough to take Nuplazid all the way through commercialization. As ACADIA has a drug on the shelf that is being sold it too could likely tap the debt markets if it wanted to further add to its cash reserves to bring the drug through to financial success. ACADIA is actually in a much better position that Relypsa was. Its drug which is currently only approved for use on people with Parkinson's disease has potential to help with Alzheimer's Disease, Schizophrenia, Lewy Body Dementia and Major Depression.
Globally there are an estimated 5-6mm people living with Parkinson's, and an estimated 40% of those suffer from the Hallucinations the drug treats. In the US alone there are over 1mm with Parkinson's disease meaning there are over 400k that could benefit from the drug for it's on the box use. It cost 24k per year for Nuplazid which starts to give you a good idea why ACADIA has a 4.7 Billion market cap. If ACADIA could convert just 25% of the estimated 400k patients with Parkinson's disease that suffer from hallucinations that would net the company 2.4 Billion in sales. Then you have all the other diseases for which the company is trying to get the drug approved.
In fact, many believe doctors are so impressed by Nuplazid they are apparently already using it for off-label diseases such as Alzheimer's or Lewy Body Dementia. Off-label prescribing is perhaps the biggest endorsement a drug can get from medical professionals. A doctor is saying he or she believes the benefits of the drug outweigh any risks from prescribing the drug for that particular patient. To further show just how big ACADIA may grow, figure in the US alone there are over 5mm with Alzheimer's (approximately 50% that experience hallucinations source: pubmed.gov), over 1.3mm with Lewy Body Dementia (LBD) (source: michaeljfox.org) and over 3mm with Schizophrenia (source: Sardaa.org). It's very rare for someone to have Schizophrenia and not have hallucinations, but it does happen.
As LBD is the "little brother" of dementia vs. Alzheimer's, I found conflicting information on the prevalence of hallucinations, but most estimates are around the 30-50% level. If Nuplazid is approved for all the conditions it's ACADIA is going after, the addressable amount of patients in the US will be well over 5mm people. Assuming they can convert just 10%, that's 13 billion in yearly sales, and that's just in the US alone.
Before Relypsa was acquired, they were looking to expand their drug Veltassa as well. If they were able to get it over the line before they were acquired, I have no doubt the price they fetched would have been higher. If ACADIA gets everything, they want Nuplazid approved for past the FDA the 8-10 Billion that ACADIA is rumored to want might seem like a complete bargain. A bird in the hand is worth 10 in the bush, but the rumors that doctors are prescribing Nuplazid off-label give good ammunition to investors that think ACADIA will be able to get Nuplazid approved for these other diseases.
The last parallel between Relypsa and ACADIA I want to draw in on the sales rep front. Relypsa had about 125 sales reps before approval and was on track to expand that to over 250 before they were acquired. In addition to its sales reps, Relyspa struck a deal with Sanofi in which Sanofi reps could also sell Veltassa to mainly Nephrologists. Even with all those sales reps sales of Veltassa didn't impress the Street, and many, myself included were wondering what exactly all those reps were even doing. Relypsa was having trouble converting patients to ongoing patients and was giving the drug away to try and spur sales.
Most of the suitors Relypsa was courting had substantially higher sales teams. The idea was you could almost overnight make thousands of more doctors aware of Veltassa and give them the starter packs for new patients. ACADIA has about 140 sales reps at writing, one of the companies that are rumored to be a suitor, AstraZeneca has over 5k sales reps in the field.
If ACADIA were sold to AstraZeneca the number of reps selling Nuplazid could potentially go up 35X overnight although it's unlikely all those reps would be selling the drug. Even if ¼ of AstraZeneca reps were assigned the drug, the sales team selling the drug would still 10x overnight. Johnson and Johnson , one of the other suitors, doesn't seem to post sales rep data, but at 120k total employees, it's safe to say it's massive. Selling the company seems to make quite a lot of sense, who will have the ultimate decision should a sale happen?
There are some very large holders of ACADIA shares that would have to OK any deal. Here's some of the biggest:
- Baker Bros. Advisors LP - % 21.32
- FMR LLC - % 15.00
- Vanguard Group - % 5.88
- T. Rowe Price Group Inc - % 4.67
- BlackRock - % 4.45
That's over 50% of the whole company in just 5 holders. Baker Bros. has been the most vocal regarding their stake in the company, and some thought the firm might force the company to sell in mid - 2016. Then rumors started floating around Baker Bros wouldn't entertain any offers not in the $8 billion to $10 billion range, putting the take-out price in the $65-$80 range. This might be quite a bit if Nuplazid only gets approved for Parkinson's disease, but as we saw earlier, if the FDA gives it the green light for other conditions, that range might prove a steal.
Vanguard can be seen as non-active as its holding in ACAD are just for the index funds that so many of us hold in our various retirement accounts. Fidelity is in the same boat, but as you move further down the holder's table, you run into various funds that would like to see the company sold. Janus Capital and Millennium are all holders that might push the company towards a sale if any firm bids appear for the company.
I'd wager how it currently sits Baker Bros would be open to a sale at $65+ per share. There is a risk to holding out to see if Nuplazid is approved for other conditions and the manager is already sitting on huge gains. 8 months into launch looks like a good as time as any for a possible sale, and with both the holders and suitors seemingly on board, I want to next look at who might be the best fit for ACADIA.
Anybody who has been recently following ACADIA knows seemingly every week a new potential suitor comes up. Let's look at some of the rumored suitors
- AstraZeneca: In early February of 2017 street insider reported that AstraZeneca made an offer for the company (source: streetinsider.com). The company and potential advisors rebuffed simply stating large Pharmaceutical companies are always talking to each other. Astra has many of the attributes one would want to see in a potential suitor. They are big enough with a market cap of 73Bn USD as of this writing. They have the cash with over 10Bn in the bank and raising the capital through debt, stock or a combo of both would be a relative breeze. They also have the one thing I look for most in a potential suitor, a sub-par growth rate at % 6 CAGR through 2020. That growth rate is assuming a large revenue spike in 2020 which may or may not happen. Looking out to just 2019 that growth rate is a rather paltry % 4.5 long story short they need another growth driver. AstraZeneca is interesting because they are allegedly interested in the whole company vs. some others who are only interested in Nuplazid. AstraZeneca is my #2 candidate for a take-out of ACADIA.
- Johnson & Johnson: The rumor J&J was looking at ACADIA came the week of Valentine's Day. A couple of things were interesting about J&J as a potential suitor. For one they are an absolutely massive company with a market cap over 300Bn USD, they could take ACADIA out, pay a premium and it wouldn't even move their needle. The CEO of J&J, Alex Gorsky has a great deal of experience with CNS drugs, even though he is at the helm of a huge company Nuplazid would be very much in his wheelhouse. J&J's growth rate is even worse that AstraZeneca's with just a 2.5% CAGR estimated growth rate through 2020. They are barely keeping up with GDP growth in the aggregate markets in which they operate. Even though J&J is a massive company if Nuplazid gains blockbuster status, meaning it's approved for most of what it's gunning for, it would move J&J's needle. J&J is my number one pick for a potential acquirer of the company.
- Pfizer: Pfizer is a weird suitor. According to rumors at least they aren't interested in the whole company. They just want Nuplazid the drug and to leave whatever is left in ACADIA's stables. From what I understand deals like that, and excess debt is what has sunk Valeant Pharma (NYSE:VRX), that and a whole bunch of questionable decisions. In an environment where drug companies are being accused of buying up drug patents and then jacking up the price, I haven't a clue why anyone in their right mind would do such a deal if that's how it is viewed optically. Regardless of how the deal would be structured Pfizer possess all the attributes I look for when looking for a potential ACADIA suitor. They have the cash and complete unfettered access to the debt capital markets if that cash isn't enough. Their revenue growth rate is just awful, around % 1.5 CAGR through 2020 going off the mean analyst estimate. If they bought ACADIA in its whole and Nuplazid took off it would move their needle no doubt. Pfizer seems happy to go after smaller fishes than what an ACADIA deal would look like but I'm not completely ruling them out. They likely have their hat in the ring if there is a ring going on in the background.
Everyone else: I'll list off some potential suitors that have been rumored to have been interested in ACADIA or that might make sense. Bristol-Myers Squibb Co. (NYSE:BMY) would have made a lot of sense a couple of days ago since then Uncle Carl or Carl Icahn has taken a stake in the company and is rumored to want to push for a sale. BMY has done what many companies have done when Uncle Carl comes knocking: They announced a buy-back in the hopes of keeping him at bay for a while. It would be hard for BMY to pay the premium ACADIA would likely fetch with Carl pushing the for sale. Carl could get enough of a stock pop from just the perception of change at the company, sell and take his ball to play elsewhere. In the meantime, it might be hard for BMY to take out ACADIA.
Biogen (BIIB) would make a whole lot of sense as the company already has testing programs for other treatments of Alzheimer's and Parkinson's. Biogen has one of the biggest things I look for when looking for potential ACADIA acquirers. Sluggish revenue growth. Biogen has this problem in spades with analyst estimates for 2017 revenue at 11.28 Bn and going to 2020 going just to 13.59 Bn. As we have seen earlier if Nuplazid takes off it could nearly double Biogen's revenue should it be so lucky to buy the company and the drug living up to its full potential.
It makes sense for Japanese companies to take their rapidly depreciating yens and access to nearly negative interest and buy US pharma companies. Otsuka Holdings Co., Ltd (OTCPK:OTSKF) has experience in the space ACADIA plays having launched the drug Abilify successfully. Otsuka would have to be pretty creative raising the capital to buy ACADIA at the levels the company is rumored to want to fetch. An ACADIA buyout would be Otsuka's biggest acquisition in recent memory with Avanir the next biggest company Otsuka would have taken out at 3.2Bn USD.
Gilead Sciences (NASDAQ:GILD) has a big revenue problem, that being its revenue is expected to go down from 2017 estimates to 2020 estimates. Not a good place to be in the Pharmaceutical business. With nearly 40% of the company's market cap in cash, they could take ACADIA out and would have cash to spare for other acquisitions and to even buy back some shares. CNS drugs aren't exactly Gilead's specialty, but they need to do something quickly to stay relevant.
Search "ACADIA buyout suitors" on Google, and you can read articles for hours on end. At the end of the day, there just aren't a lot of companies out there with the growth potential ACADIA has but there a whole bunch of companies that need a company like ACADIA. If you have any strong opinions on a potential suitor, please leave it in the comments below, I'd love to hear about it.
Timeline and Risks
As we saw with Relypsa, the rumor mill was having a party with shares of Relypsa for well over a year until the company was finally taken out. During that time the very real possibility Relypsa wouldn't have enough cash to go it alone existed, by no means was an investment in Relypsa a walk in the park. So what does the flip-side of the coin look like regarding ACADIA and a potential acquisition?
ACADIA has over $550mm in cash in the bank thanks to three secondary offerings in 2014 and 2016 through which investors have already sat. ACADIA's current cash burn is about 70mm per quarter, but that could be quite a bit more in the coming quarter, potentially as high as 80mm or 90mm as they are ramping up sales of Nuplazid. A company would never draw their cash to zero, so it's pretty reasonable to say that ACADIA probably has enough cash to last it through the end of the year.
ACADIA has many no dilutive capital raising options now that it has a drug on the shelf. It can issue debt backed by stock, sell the rights to Nuplazid in a different country or form a partnership with an another drug company to sell Nuplazid. I don't think we are close to seeing any of those, but they are a possibility. What does the cash balance tell us about a potential take-out timeline?
Nuplazid or pimavanserin as it is called in FDA trials is currently in Phase 3 for Schizophrenia Inadequate Response Therapy and Phase 2 for Alzheimer's Disease Psychosis. Phase 3 Schizophrenia testing was started on November 6th, 2016 and is a 6 week randomized, double-blind, placebo study. ACADIA released some mid-stage data for the Phase 2 Alzheimer's study in early January.
One thing is pretty clear; we will see additional FDA study data sets in 2017 that will significantly change ACADIA's timeline for both a potential take-out and cash needs. If they get Nuplazid approved for another disease quicker than expected and they continue to want to go it alone, they will need more cash. If the street takes some of the upcoming FDA data positively, they might do another equity raise if they feel the price is right.
Additional cash will allow them the further barter for a higher price in the case of a takeout. If I were to bet, I'd say ACADIA will likely be taken out before year end 2017 and have been looking at some long dated call spreads in the January 2018 expiration. Relypsa took longer than I thought, there's no reason this one won't take longer as well. With that in mind what are the risks to investing in ACADIA at current levels with a buy-out in mind?
The rumor mill started to heat up in early January 2016. Some reading this article aren't going to like this, but unfortunately, I haven't seen much data other than the buyout rumors to explain the move from 32 to 39. If I were to guess I'd say at least 50% of those 7 points it potential takeout premium, I think it could be quite a bit more, potentially all of it.
If ACADIA were to say on the upcoming call they aren't interested in selling at this time, I would expect a whole lot of that premium to come rushing out of the stock. The other big risk is there is the possibility that Nuplazid will only ever be approved for use in Parkinson's disease. Parkinson's disease is a big enough problem the company could command the market cap it has now with just that condition, but the market is certainly expecting a bit more.
The rumors doctors are already prescribing Nuplazid off box is encouraging but these are still rumors, and we can't be sure until the next ER call on Tuesday. Then you have the more obvious ones, the company runs out of cash and has to issue stock at some huge discount. The merger and acquisition market in the pharma space could completely dry up.
At $24k a year, Nuplazid isn't cheap, the news could get a hold of the story and shame ACADIA into dropping the price for the drug. Who knows, Trump could go after ACADIA itself, or the whole sector, whacking all the names in conjunction. Buying ACADIA certainly isn't a sure thing, but I like my chances. I'll be trimming my position going into ER and moving into my "core," the stock has moved just too much lately for me to go in up to my eyes in stock.
Several others and I did quite well on Relypsa, but by no means was it an easy ride. When the acquisition of the company looked nearly certain, we had to wait another 8 months for it actually to come. That's 8 months of prescription numbers, 8 months of a subpar earnings report that showed the company couldn't keep it going without more cash and 8 months of attack pieces by shorts and even the sell-side community claiming Veltassa was garbage.
It seems like as good as a time as any for someone to pick up ACADIA, sure you could de-risk the acquisition by waiting for another disease to be FDA approved but you'll likely have to pay more. A suitor could make ACADIA an accretive acquisition at 10bn even with the drug that is on the shelf and prescribing it per the box. You get Nuplazid into the hands of a sales team 3-4-5 or even 10X the size of the team that is currently selling the drug and a suitor could ramp sales quite quickly.
It's been my experience that the best thing to do when investing in a pharma company like this (i.e., one that has a drug and has other companies circling like sharks) is to just close your eyes and wait for the payday, because looking at them daily can drive an investor nearly mad.
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.