Acadia Pharmaceuticals: Targeting A Strong Return By Year End

Summary

• After a huge rally in April, stocks finally saw some significant profit taking last week, leaving some good stocks with lower entry levels.
• This includes Acadia Pharmaceuticals, whose stock lost some 15% on the week despite continued good prospects for Nuplazid.
• We take a deeper look at Acadia below and how we have an easy strategy to post a 20% return even if the shares don't even move through year end.
• I do much more than just articles at The Biotech Forum: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

So few want to be rebels anymore. And out of those few, most, like myself, scare easily.”― Ray Bradbury

After a massive rally through most of April, which made it the best month for equities since 1987, the market succumbed to some profit taking late last week. Given stocks' huge rise over the past month even as major uncertainties around when COVID-19 will be contained as well as how fast the economy will "restart" are still present, Thursday's and Friday's sell-off is certainly understandable, if not overdue.

Fortunately, the late week decline also provided lower entry points for numerous attractive opportunities in small- and mid-cap biotech/biopharma equities. I continue to use almost exclusively simple covered call option strategies using just out of the money long dated call strikes to put new money to work in this volatile market.

Today, we highlight one such opportunity after providing a quick investment analysis on mid-cap name with a more advantageous risk/reward profile after an approximate 15% sell-off in the stock this week.

Company Overview:

Acadia Pharmaceuticals (NASDAQ:ACAD) is a San Diego-based "Tier 3" biopharma concern. Acadia focuses on the development and commercialization of small molecule drugs that address unmet medical needs in central nervous system disorders. The firm's primary asset is Nuplazid or pimavanserin for the treatment of hallucinations and delusions associated with Parkinson's disease psychosis for which the compound was approved by the FDA for in 2016. It's also developing pimavanserin as a treatment for dementia-related psychosis and as an adjunctive treatment for schizophrenia that are in Phase III clinical trials, and pimavanserin as an adjunctive treatment for major depressive disorder. ACAD currently sports a market cap of approximately $7 billion and is a large holding of noted biotech investors, the Baker Bros.

Fourth Quarter Results:

Source: Company Presentation

On Feb. 26, Acadia posted a loss of 34 cents a share, slightly above expectations. Revenues rose 65% on a year-over-year basis to just under $100 million, again slightly above expectations. For the full year, revenues grew some 52% to nearly $340 million. Management provided 2020 net sales guidance of $440 to $470 million. The company also plans to submit a sNDA for Nuplazid to treat Dementia-Related Psychosis in the summer of this year. The company has a full slate of potential upcoming catalysts as well.

Source: Company Presentation

Analyst Commentary & Balance Sheet:

Goldman Sachs upgraded Acadia to a Buy at the end of March. Goldman's analyst also raises his price target to $72 from $45 previously with the following commentary.

While acknowledging the evolving situation surrounding the COVID-19 global pandemic, we see an upward re-rating opportunity for ACAD on upcoming events, namely 1) Nuplazid expansion into dementia-related psychosis (DRP; GSe peak global sales of $4bn from $3bn prior); and 2) Ph3 CLARITY-2 results in major depressive disorder {MDD} – which we add to our model (at 65% PoS, GSe peak global sales of $1.6bn). On the latter, in a conservative scenario, if we were to assume clinical impact to MDD from COVID-19 (thus removing it from our model), our PT would be$62, representing 50% upside potential to current levels."

The current median analyst price target on ACAD is just under $60 a share. The last analyst action came on April 16th when Jefferies assumed coverage on Acadia with a Buy rating, $60 price target and the following commentary.

Lead drug pimavanserin (PIM) is a selective yet potent and versatile CNS drug, w/ a remarkable safety profile. We see PIM becoming a CNS blockbuster that could achieve up to ~$7B in peak US sales across four CNS indications. Key-value driver is dementia related psychosis, which we give 90% chance of approval in '21 and project ~$3.8B in peak-adj. sales. We also note potential for growth from BD and M&A spec. value"

The company ended FY2019 with almost $700 million in cash on hand and no need for additional capital in the foreseeable future.

Verdict:

The company has done a good job rolling out Nuplazid to date and has additional growth drivers on the horizon. The company has solid analyst support and no need to raise additional capital (critical in times like these). I could see Acadia being a possible buyout target when the environment normalizes. I like the overall risk/reward profile of Acadia at these levels, but don't find them overwhelmingly compelling. The company has additional potential catalysts/candidates that we did not cover in this article as well. Therefore, this name makes a solid buy-write or covered call candidate when the conditions (outlined in opening narrative) are right.

Source: Company Presentation

Option Strategy:

To establish a small buy-write position in ACAD, an option strategy like the one below seems prudent. Using the December $45 call strikes fashion a Buy-Write order with a net debit in the $37.50 to $38.00 range (net stock price - option premium). Liquidity is very solid at this strike price. This strategy provides decent downside risk and also a potential return of just north of 20% even if the stock does nothing through mid-December.

The greatest crimes in the world are not committed by people breaking the rules but by people following the rules. It's people who follow orders that drop bombs and massacre villages.”― Banksy, Wall and Piece ”

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum

Analyst’s 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.

Comments

[User 50039191]

I sold my stake between $48-49.... my opinion based on the technical chart is that the stock has hit a short term high and will need some time to consolidate before the next stable leg up. Insider transactions are also waving a red flag although Insider selling history for this company has been a surprisingly weak predictor of poor stock performance.

[en2018]

Thank you so much for this wonderful analysis, I’m buying acacia

[South Pacific]

The swimwear or the tree?

[Vitamanrocks1]

Make sure you get the symbol right.
Acad.
Acacia doesn't have near the upside as Acadia.

[m100patel]

Curious if saw the recent insider stock sales and have any concerns

[Vitamanrocks1]

They probably got wind of an offering.
Love the drug and we are long until the end now, but management are gluttons for offerings.
Bet they do one in late August.
Yes, right, they don't need one.
They'll do one anyway.
Watch.
That being said we see $80 by year end, and that's conservative

[Eugene Capital Advisors]

Not concerning.....looks like these sales were made to cover taxes from vesting of restricted stock options