Shares of Acadia Pharmaceuticals (ACAD) have surged in 2017, with shares rising by nearly 38% YTD. Shares moved another 6.5% percent higher on February 14th to close at $39.65. The company has gotten caught up in the biotech M&A hype machine, with several companies mentioned in press reports as potential suitors.
The drug at the center of all of this speculation is Nuplazid (pimavanserin), which treats Parkinson's disease psychosis (PDP). Nuplazid was approved by the Food and Drug Administration (FDA) in early 2016 and officially launched in June 2016. It is currently the only drug approved by the FDA for PDP. Estimates suggest that nearly 400,000 people in the US suffer from PDP alone. Nuplazid offers great promise to PDP patients, who tend to be fragile, elderly people. It has been proven to be a safe and effective treatment, and before its approval, the only other available therapy for PDP was the off-label use of an atypical antipsychotic, such as Seroquel or Risperidone. This class of drugs comes with a host of side effects which can be particularly harmful to the population suffering from PDP. Nuplazid can effectively treat the disease without affecting patients' motor skills or other adverse side effects.
Nuplazid is currently selling at a cost of $24,000 per year and it wouldn't take very many patients for the drug to become a $1 billion a year blockbuster. In fact, if ACAD were able to capture only 20 to 25 percent of the estimated 400,000 PDP patients in the U.S., annual revenue could approach $2.5 billion. Moreover, the potential for Nuplazid goes beyond PDP. In December, ACAD reported positive Phase II results in Alzheimer's disease psychosis (ADP). The company has indicated it plans to launch another trial in the indication later this year. The company is also running trials for Nuplazid as an adjunctive treatment in schizophrenia and depression, as well as Alzheimer's disease agitation. In total, they have four trials running currently, and a potential fifth trial, for ADP, to begin soon. (See: ACAD Shares Up Following Positive Results.)
As of September 30th, 2016, Baker Brothers Advisors owns about 25.8 million shares or 21% of the company. Additionally, Fidelity owns 18.1 million shares or 15% of the company. There are currently 94 million shares in the float, and nearly 37% of those are tied up between those two holders.
Baker Brothers' stake goes beyond owning shares. Dr. Stephen Biggar is the chairman of ACAD's board and a partner at Baker Brothers. Meanwhile, Julian Baker—a managing partner at Baker Brothers—is also on the ACAD board of directors. There are reports that many of the board members have had relationships with Baker Brothers in the past. In March 2016, there was a board and management turnover, and as a result, the firm began asserting influence over the new team. The turnover occurred after the previous CEO resigned due to delays in filings needed to get Nuplazid in front of the FDA. There are currently only seven members on the board.
Stephen Davis is the chief executive officer of ACAD and is on board. He was an executive vice president and COO at Heron Therapeutics (HRTX). SEC filings show the Baker Brothers own about a 10% stake in Heron Therapeutics. He was also the CEO of Neurogen, while Julian Baker was on the Board of Neurogen, at the time. Jim Daly is on the board and had been an Executive Vice President and Chief Commercial Officer at Incyte Corp. (INCY). Bakers owns about 12.2% of INCY. Edmund Harrigan has roots back to Neurogen as well, when Stephen Davis was CEO and Julian Baker was on the board. All this shows the commitment Baker Brothers has made to see through the successful development of Nuplazid.
Then there is valuation. Back in September of 2014, when Avanir Pharmaceuticals reported positive results from a phase II trial examining the treatment of Alzheimer's agitation with its drug, AVP-923, also known as Nuedexta. At the time Nuedexta was approved for the treatment of pseudobulbar affect (PBA). Avanir reported in its 10-K for 2014, the company had total sales of $115 million. On December 2nd, 2014, Japanese firm Otsuka Pharmaceutical announced they would buy Avanir for $3.5 billion. The Baker Brother owned 32.7 million shares of AVNR or roughly 17%.
The Avanir acquisition gives us an indication of how a successful Alzheimer's agitation trial would immediately add to ACAD's value. It could add at least $3.5 billion to the current valuation of ACAD. If one assumes ACAD could get to 100,000 PDP patients, at four times future sales, ACAD could be looking at a market cap valuation well north of $10 billion. JNJ recently paid $30 billion for Actelion, nearly 15 times sale Actelion's $2 billion per year in revenue. (See also: J&J Buying Actelion for $30 Billion Cash.)
It's also helpful to look at actual sales of Nuplazid. For the third quarter, which was the first full quarter of Nuplazid sales, the company reported only $5.2 million in sales, according to YCharts analyst had only been looking for about $2.6 million. Meanwhile, analysts are currently expecting ACAD to report revenue of $9.05 million. In the 10-Q for the third quarter, the company reported deferred revenue of $1.8 million.
Meanwhile, the company also had accounts receivables of $3.8 million.
At the beginning of the fourth quarter, ACAD had revenue or revenue owed to it of nearly $6 million. This figure could rise above $9 million by the end of the quarter. ACAD uses the sell-through revenue recognition model, which means ACAD only recognizes revenue when the specialty pharmaceutical distributed delivers Nuplazid to the patient, not when Acadia sells Nuplazid to the specialty pharma.
Despite all of these details, the shorts seem undeterred. As of January 31st, there were nearly 23 million shares short, which represent approximately 25% of the float of the company. Additionally, it the days to cover for the 23 million shares is currently 13.5 days.
Admittedly, the stock has gotten an extra boost in recent days due to potential M&A. However, even if those rumors do not prove to be true, the company is well positioned to continue to grow well into the future.
Michael Kramer and the clients of Mott Capital Management, LLC own shares of ACAD. Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.