Look Before You Leap With This Company
Naomi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
ACADIA Pharmaceuticals (NASDAQ: ACAD) is a bio-pharmaceutical company that specializes in the innovation of small-molecule drugs that are used to treat complex neurological and Central Nervous System (CNS) disorders. The biotech firm is responsible for wonder drugs such as Pimavanserin, a drug that ACADIA is developing for the treatment of Parkinson’s disease Psychosis.
ACADIA Pharmaceuticals’ stock has been massively bullish in the last one year, with current share price of around $18 being a whopping 1289% higher than it was one year ago (that’s close to 13 times higher than it was a year ago). In fact, ACADIA Pharmaceuticals’ stock has been rated the best performing NASDAQ-listed stock during the past year. The biotech firm’s release of positive data on the novel drug Pimavanserin, a neurological drug in the pipeline currently in the second phase of development that is being developed for treating Parkinson’s psychosis is, to a very large extent, responsible for the bullish run.
However, I believe that ACADIA’s stock is overrated and due for an imminent market correction. Expect the downward slide to continue in the coming months, the optimism surrounding Pimavanserin notwithstanding.
ACADIA Pharmaceuticals reported a $6.1 million net loss, translating to $0.08 per common share, in the first quarter of 2013. The cash and cash equivalent for the biotech firm stood at $101.5 million, a slight drop from the $108 million recorded in Q4 2012. Revenue in the period amounted to $417,000 compared to the previous quarter’s $450,000. Revenue was derived from the firm’s collaboration with Allergen as well as Research and Development grants. General and administrative expenses soared to $2.2 million in the quarter from $1.7 million last quarter. $328,000 was used for stock-based compensation.
The firm expects to use $28 million-$32 million to fund operations this year. A huge chunk of these funds will go toward pre-commercial activities and development of Pimavanserin. ACADIA Pharmaceuticals has had a lot to crow about lately, thanks to the huge promise of Pimavanserin in the treatment of Parkinson’s psychosis. Phase III trial results released recently have shown that Pimavanserin has considerable ability to reduce psychotic episodes in people suffering from Parkinson’s Disorder without any negative effects on motor function. The drug is expected to be approved by the FDA and could hit the market anywhere between late 2014-early 2015.
Catalysts driving the share price
Expected annual sales for Pimavanserin are $300 million-$400 million. The drug is not confined to the treatment of Parkinson’s Disorder alone. There are early indications that it might also prove effective against a number of other neurological disorders such as schizophrenia, bi-polar disorder, and other related disorders. Potential sales could, therefore, be well in excess of $1 billion per year.
Although the optimism surrounding Pimavanserin is partly responsible for the bullish run, the other big catalyst that has helped push the share price to those dizzying heights is the interest by Baker Brothers. Baker Brothers is a hedge fund that mainly focuses on biotechnology firms such as ACADIA. Baker Brothers had strong positions in Seattle Genetics (NASDAQ: SGEN) and Pharmacyclics (NASDAQ: PCYC) during their early stages.
Both firms went on to be blockbusters. Seattle, a biotechnology company, focuses on the development and commercialization of innovative monoclonal antibody-based cancer therapies. The company, which recently entered into a new Antibody-Drug Conjugate collaboration with Bayer, makes up 18% of Baker Brothers' portfolio which is valued at $686 million.
Pharmacyclics, on the other hand, is a clinical-stage biopharmaceutical company with its focus on development and commercialization of small-molecule drugs for the treatment of cancer and other immune-related health conditions. At the recent International Conference on Malignant Lymphoma held in Lugano,Switzerland, the company presented its Ibrutinib Monotherapy clinical trial data in patients with Waldenstrom’s Macroglobulinemia. Ibrutinib is a BTK inhibitor currently in the company’s clinical trials pipeline. Pharmacyclics makes up 23% of Baker Brothers' portfolio and is valued at approximately $878.4 million.
Baker Brothers recently acquired a 22.6% stake in ACADIA Pharmaceuticals, a move that has sent positive signals to investors regarding the potential of the biotech firm.
Investing without a safety net
Despite the wild optimism surrounding ACADIA Pharmaceuticals and its wonder drug Pimavanserin, I would advise investors to tread with caution when it comes to placing their bet in this basket. For starters, the firm’s $1.53 billion market cap is inflated for a company with zero sales. Granted, the Pimavanserin NDA (New Drug Application) filing is likely to be approved by the FDA, but here is the rub with all the wild optimism surrounding the company: ACADIA has never had any of its pipeline drugs approved before!
Previous trials for Pimavanserin itself fell flat on their face. Although this wonder drug seems to be bringing home the bacon right now, only a clairvoyant can tell with 100% certainty whether this will translate to real sales come late 2014 or early 2015 when it is supposed to officially hit the markets.
Cash flow is typically a very important indicator of a biotech company’s health. ACADIA Pharmaceuticals has a strong cash flow and increased year-on-year cash flow by more than 200% from just $31 million last year to $108 million this year. The company also has zero debt, meaning they can continue to spend cash freely on their clinical trials for Pimavanserin. The financial indicators seem to say that the company is doing well.
However, let us not forget that ACADIA has been here before and lost. Early phase III trials for Pimavanserin did not perform very well, since the drug failed to meet its efficacy endpoints despite proving to be very safe. ACADIA has pointed out that the dosages used were too low, hence the less-than-impressive efficacy results. There is no way of guaranteeing that the FDA will approve Pimavanserin for the treatment of PDP (Parkinson’s Disease Psychosis). As an investor, keep in mind that rejection by the FDA is a very real possibility.
The market for Pimavanserin as the potential drug for the treatment of PDP is rather small -- $2.5 billion per year. The good news, however, is that if Pimavanserin proves to be effective against schizophrenia, with a much bigger market, its sales could very well skyrocket. Right now, ACADIA Pharmaceuticals has no revenue to speak of and has a high cash burn rate. This does not augur well for the company in the long run.
Right now, its all systems go for ACADIA and Pimavanserin. There is a case to be made for the company’s stock considering the almost [infallible] record the Baker Brothers have in picking out winning biotech stocks. But, remember that there is nothing like a foolproof method of picking out winners or losers in this business. It would not be prudent to hold the stock for now and wait till one and half or two years later to find out whether Pimavanserin will actually be approved by the FDA for sale. The current strong showing by the company is purely based on sentiment. I would strongly advise to sell the shares now but keep an eye on the company and developments on Pimavanserin.
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Naomi Warmate-Igwe has no position in any stocks mentioned. The Motley Fool recommends Seattle Genetics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!