Acadia Has A Steep Path Ahead

Summary

• Lead product sales are ramping up for NUPLAZID, indicated for Parkinson's delusions and hallucination.
• Research and development expenses for label expansion of NUPLAZID in Parkinson's psychosis, depression, and schizophrenia are ramping up as well.
• Untapped label expansion trials for NUPLAZID in post-traumatic stress disorder, trauma, and drug abuse markets could further expand its market significantly.

Acadia Pharmaceuticals (NASDAQ:ACAD) is a $3.4 billion market cap company focused on developing treatments for central nervous system disorders with unmet needs. The company's lead product, NUPLAZID (oral Pimavanserin, a selective serotonin inverse 5-HT_2A receptor agonist), was approved by the FDA in April 2016 to treat delusions and hallucinations accompanied with Parkinson's disease. It is the only FDA approved drug for this indication. The drug received breakthrough therapy designation from the FDA in 2014.

Acadia's 155 person sales team, with 25 long-term specialists, continues to penetrate NUPLAZID (pimavanserin) into long-term care markets and commercial coverage under Medicare. The company's pipeline continues to advance with ongoing trials including a Phase 2 study in Alzheimer’s disease agitation, schizophrenia inadequate response, schizophrenia negative symptoms, and major depressive disorder. ACAD's Phase 3 study in Alzheimer's disease psychosis is expected to be initiated in 2H 2017. The company has one collaboration with Allergan (AGN) for the development of alpha adrenergic drug candidates to treat chronic pain.

There is clearly a need for treating Parkinson's psychosis. It is considered the second-most "prevalent and burdensome" age-related neurodegenerative disorder behind Alzheimer’s disease. Studies indicate that over the lifetime of the disease, nearly 60% of patients develop some kind of serious psychotic symptoms, with as many as 75% developing visual hallucinations and as many as 60-80% developing auditory hallucinations.

Combine the fact that the 2015 global census data leads to estimates for adults over 65 will increase from 8.5% to 16.7% of the population over the next decade, and we can see that there will be an increasing need for these therapies. It is estimated that one million people in the U.S. have Parkinson's Disease (PD), and over five million people have Alzheimer's Disease (AD).

Prior to approval of primavanserin for PD delusions and hallucinations, clozapine and quetiapine were the treatments of choice (though quetiapine showed no benefit in clinical trials over placebo in this indication). Dopamine therapies are needed to recover motor function, and many of these are associated with psychotic symptoms. Because clozapine and quetiapine also block the dopamine receptor D2, motor function can decrease under these treatment regimens, even at low doses.

Moreover, clozapine blocks 5HT-2A receptors, histamine H1 (associated with drowsiness), and dopamine D2 receptors in dose-dependent manners, eventually supporting the notion that the 5HT-2A receptor is the pathway of Parkinson's psychosis symptom amelioration. Since then, several 5HT-2A receptor antagonists have emerged in clinical trials, although not without problems of their own including anxiety, sleep disorders, and fatigue.

Though having an FDA approval following breakthrough therapy designation for NUPLAZID, and an accompanying generously valued stock as determined by the market, not everything is rosy for the company. The safety profile of NUPLAZID, though manageable, has a number of negative associated events. Elderly patients with a history of dementia are at an increased risk of falls and mortality. The drug is not recommended in patients with long QT syndrome, hepatic impairment, severe renal impairment, or for those who are pregnant.

It is associated with urinary tract infection and hallucination in control patients (paradoxically). It is contraindicated in those with hypersensitivity reactions to pimavanserin or any of its breakdown products. Common adverse reactions seen in studies compared to placebo were peripheral edema (+5%), nausea (+3%), confusion (+3%), hallucination (+2%), constipation (+1%), and gait disturbance (+1%).

Moreover, the sales of NUPLAZID seem to be dragging along more slowly than might be wanted for a drug with such large investor expectations. 1Q 2017 revenues increased to only $15.3 million, yet still almost 30% greater than Q4 2016. Lead product NUPLAZID was first made available for prescription starting in May 2016, indicating a slow start off of the blocks. On the plus side, ACAD holds the worldwide rights to commercialize NUPLAZID, which was discovered and developed as a novel compound at Acadia.

Research and development expenses however are hot off the blocks, having increased to $35.4 million for 1Q 2017 from $22.8 million for 1Q 2016. Expenses are associated with clinical trial expenses for label expansion studies for NUPLAZID. Net loss for 1Q 2017 was a whopping $87 million. Not rosy at all.

End of 1Q 2017 cash and cash equivalents totaled $469 million providing plenty of cash runway for label expansion, but only if results of the trials meet primary endpoints. The company has enough cash to get through 3Q 2018. With insurance coverage obstacles now overcome, the company will need to get its sales gears shifted up to keep pace with its spending.

When looking at the company stock, one might ask how this company can pull off a market cap of well over $3 billion when net sales are only $15 million per quarter and the company's 1Q 2017 loss is $0.70 per share on well over $80 million per quarter in losses. The product can potentially serve some large markets. The annual market for treatment of Parkinson's Disease is expected to be $3 billion by 2021. But much of this market is derived from dopaminergic therapy for treatment of motor impairment.

Estimates for the hallucination and delusion component, ACAD current market, will be provided below, with peak sales estimated in the $750-900 million range. The company has yet to prove in its clinical trials that PD psychosis studies (25-50% incidence in PD patients; not currently approved with studies pending) will meet efficacy requirements by the FDA.

This seeking alpha article by BiotechOutlook does a nice job of explaining why weak clinical results including lack of meeting secondary endpoints for NUPLAZID might bode poorly for label expansion studies. AD is not the end of the road for ACAD label expansion, however. Schizophrenia and depression are also being evaluated in clinical trials.

Another previous Seeking Alpha article by BioNap going back to November 2013 does a market analysis for NUPLAZID. The article does a nice job of summarizing the pros and cons for why and why not there might be a role for 5-HT2a receptor blockade in Alzheimer's disease, given the broad nature of its effects in Phase 2 studies of Parkinsonian symptoms. In the article, it effectively states "It is supported by the association of 5-HT2c polymorphisms with psychotic symptom severity and response to atypical antipsychotic drugs (Angelucci 2009). Pimavanserin has shown activity in animal models of ADP, specifically muscarinic receptor knockout mice and those treated intra-cerebrally with AB peptide (Price 2012)."

There are an estimated 6 million Alzheimer's patients, and the market to treat AD is expected to exceed $13 billion by 2023. BioNap predicted a $4.5 billion peak sales for NUPLAZID in 2023 based upon a 50% prevalence of dementia and hallucinations with AD, with $900 million of that composing its PD component. With an estimate at $27 per share, this estimate has proven to be remarkably predictive, given the current price of $28 per share and potential label expansion success.

With the aging population it's possible that this estimate of $4.5 billion in sales is a low estimate, but it remains for ACAD to prove to the FDA that NUPLAZID has efficacy in these indications, and how good the secondary endpoints might be is also a big "?."

Unaddressed label expansion for NUPLAZID offers a very lucrative possibility for the company as it stands bloodied in battle by growing expenses. These could include increased dementia and psychosis after chronic drug use/abuse including new generation antidepressants, not that much unlike its current goal in major depression. There is also increased risk in psychiatric diagnoses following hospitalization resulting from trauma. Moreover, 5-HT_2A receptor activity has been implicated in post traumatic stress disorder (PTSD) neuronal pattern analysis.

Selective serotonin reuptake inhibitor medications including sertraline (Zoloft) and paroxetine (Paxil) are currently approved by the Food and Drug Administration (FDA) for PTSD treatment, and prazosin may suppress nightmares in those afflicted. Thus, 5HT-2A receptor blockade offers a specific target that is different than the current mechanism of action, and it is well regarded in the industry as a likely successful approach.

In fact, Tonix (TNXP) Pharmaceuticals is currently pursuing an approach for PTSD, having been granted breakthrough therapy designation in December 2016 for its candidate, TNX-102, a serotonin 2A receptor antagonist. This market is ripe for the taking by ACAD (yet nothing is being tested) and it sits at a whopping untapped 8% of the U.S. population or 25 million people.

The annual cost to society is estimated to be over $42 billion. It is extremely prevalent within the military, with 17% of female soldiers reporting serious symptoms of the condition and over 70% of these females developing PTSD due to sexual misconduct. Compare that to the 1.2% prevalence of Schizophrenia worldwide being addressed in ACAD clinical trials (or about 1 million Americans) and that will leave your head itching.

Strong Bio likes the platform for the company and is generally favorable to its efforts in label expansion. The FDA usually regards its breakthrough candidates favorably, but not always (there are some breakthrough therapy candidates that have later failed, but only about 15%). However, given that the company is a one-trick pony, the reality is that much remains to be seen on the clinical trial label expansion front and there is a lot of risk.

The company clearly cannot support its market cap with its slow launch, but if growth continues, there is certainly hope if clinical trial data is positive. Therefore dilution is a risk. The manufacturing hurdle is overcome and the insurance coverage issues appear to have been pushed through, which will provide a smoother transition into other indications in the future.

But competition looms for the 5HT-2A receptor therapies, and the largest market appears to be unaddressed. Competition by companies that recognize the largest market for 5HT-2A should be an eye-opener to ACAD enthusiasts. Overall, it's difficult to criticize management given the enormous obstacles that have been overcome, but some increased business development consultation investment might be a good idea for this company.

This stock will remain on the Strong Bio watchlist. Because critical inflection points are some way off in AD studies, the opportunity to take a position following a dilutive event might make more sense than buying over the top. The market potential here is genuinely huge. Buy targets would be under $14 per share given that no major meltdowns appear to be happening.

The probability for this opportunity appears to be low but better to err on the safe side and let this one get away if an attractive entry is not presented by the market. Upside of $50 per share is certainly possible upon positive interim data for Phase 3 AD. If the company enters a Phase 2 trial in PTSD, as we advise, a small entry position will be made in the low $20s.

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Analyst’s 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.