Acadia Pharmaceuticals: Some Thoughts Ahead Of 2021 – Seeking Alpha

ACADIA Pharmaceuticals (Acadia) (ACAD) is a name which I have lost coverage on over the past few years, enough of a reason to provide an update. My last take on Acadia dated back to this month in 2017, as I concluded that this was a risky, yet potentially lucrative investment case.

Three years ago the investment case of Acadia was driven by the pick-up in NUPLAZID while the company was still burning through its cash position.

Founded in 1993, the company has taken nearly a quarter of a decade to come up with a marketable product and this was NUPLAZID. The company obtained FDA approval in March 2016, allowing for the treatment of patients with psychosis associated with Parkinson's disease.

The potential market opportunity is very large as Parkinson's is affecting about a million people in the US alone, of which 40% has related disease psychosis. After minimal sales in its debut year of 2016, sales have been increasing quite steadily to $35 million in the third quarter of 2017, when I last covered the stock. This secular growth and potential expansion to Europe revealed a roadmap to grow sales further and achieve break-even results.

That was needed as 122 million shares traded at $27 at the time, for a $3.3 billion equity valuation, or $3.0 billion operating asset valuation, equal to about 16-17 times annualised sales, all while the company was losing money. Other than secular growth in sales, real upside has to come from potential approval of NUPLAZID for treatment of dementia-related psychosis and furthermore potentially Alzheimer's as well, although both are notoriously difficult diseases to find a cure for.

In the end, I ended up concluding that I would initiate a small speculative position on the back of potential approval for these other indications, yet I warned about losses and reliance on a single product.

Early in 2018, the company originally guided for 2018 product sales to come in between $255 million and $270 million. Shares slipped during 2018 even as the company obtained good research results on Phase 2 trials for major depressive disorder. The outlook for sales for the year worsened throughout the year as the company continued to burn money and later that year was ''forced'' to issue quite a few shares at $17. Revenues for the year only came in at $224 million as reported early 2019, with the company guiding for sales to improve to $275 million-300 million for 2019.

A big break came in September 2019 as the company released positive results on its Pimavanserin drug for Parkinson's, prompting the company to sell a sizable chunk of shares at $40 in the days following. Furthermore, the third-quarter results were solid, with quarterly sales hitting $95 million, yet despite the spectacular top-line growth the company still reported an operating loss of $42 million.

Since the start of 2020, shares have largely traded in a $40-60 price range. Shares traded around the $40 mark in February as the company reported quarterly revenues of nearly $100 million for the final quarter of 2019, while guiding for full-year 2020 sales between $440 million and $470 million. A diluted share count of 155 million shares valued the equity of the company at $6.2 billion as the company ended the year with nearly $700 million in cash.

Product sales so far this year were not that strong amidst the impact of Covid-19 as the big news in July was a highlight of course, when the FDA accepted the NDA for NUPLAZID for the treatment of hallucinations and delusions associated with dementia-related psychosis. All of this good news and third-quarter sales having expanded to $120 million have been driving shares higher to $57 at the moment of writing. Shares trade at these highs, even as the company continues to lose some money with the ramp-up in sales being geared largely towards increasing R&D expenses.

The combination of continued dilution after years of big losses while shares have risen made that the company here supports a $9.0 billion equity valuation, valuing operating assets at $8.4 billion.

With sales trending at half a billion per year, expectations remain elevated at 16-17 times sales while the company remains a one product pony. That said, the potential for Acadia is that a second indication is on the way in terms of NUPLAZID while other research programs have progressed as well. The good news is that wider approval of NUPLAZID might not just unleash a great potential market, it could result in a huge cut in R&D expenses as well, providing an immediate boost to the bottom line. This could earn the cash burn, and thus dilution.

While Parkinson's related psychosis is a large market with about a million people suffering from Parkinson's disease, the potential target market for Alzheimer's is almost ten times as large, which is the real upside. If approval comes in and a similar market share could be obtained, this could be $5 billion revenue business. This arguably makes the current valuation a steal, with potential for shares to at the very least triple based on industry sales multiples. An important date is April 2021, when the PDUFA date is set following the application this summer.

Here and now the valuation is arguably an important aspect driven by further and wider approvals down the line, and that always remains a big uncertainty, in this situation being a binary case. If the outcome in April of the upcoming year is a negative, there is significant downside for the stock as well, yet there is plenty of room for further gains as well if a positive response comes in.

Hence, I continue to hold on to a speculative position which I have initiated late in 2017. That small position has fortunately doubled over the past three years which is decent, yet current levels do not invite me to take profits, or further increase my position.

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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.

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Acadia Pharmaceuticals: Some Thoughts Ahead Of 2021 - Seeking Alpha