Expect Huge Upside to This Biotech Stock as It Approaches FDA Approval

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About 600,000 people across the US and 4 million people worldwide suffer from PDP, or Parkinson's Disease Psychosis, a debilitating nonmotor complication of Parkinson's disease. At present, there are no effective therapies available for PDP; worse, most drugs for Parkinson's disease can themselves cause PDP, according to NIH. Now, however, there is hope of effective treatment for multitudes of PDP patients from a new molecule being developed by Acadia Pharmaceuticals (NASDAQ: ACAD).

Pimavanserin, Acadia's proprietary small molecule, is an oral concoction that recently came out with very positive news about its safety and efficacy from its Phase III trial. A month later, more good news followed. The FDA agreed to expedite the drug's NDA process, skipping another late-stage study. Broadly, when the FDA does this, it usually means that it thinks the drug can serve an urgent unmet medical need, and that the drug seems to be safe. The investment community took all this news very bullishly, with the stock jumping up over 40%.

Acadia expects to complete the FDA approval process for Pimavanserin by early 2014.

How Pimavanserin works

Pimavanserin acts as a serotonin 5-HT2A receptor inhibitor. Let me explain. The serotonin 5-HT2A receptor has been identified as causing various neurological disorders. To be precise, it is not the broad receptor itself, but a particular variation of it, called a polymorph and labeled as 1438G/A by researchers, which is known to be the culprit. Now, what an inverse agonist or inhibitor like Pimavanserin does is, it selectively blocks the target entity from causing a particular physiological problem. In that way, it addresses the root cause of a disorder rather than take a symptomatic approach.

Market Opportunity for Pimavanserin

Experts believe that the U.S. market opportunity for Pimavanserin will be around $300 to $400 million per year for PDP alone. Considering that the molecule addresses psychosis and can probably be quite effective in treating Alzheimer's Disease Psychosis (ADP) as well, and also considering that ADP's market is about 4 times as large as PDP's, Pimavanserin has potential to become a true blockbuster. A study by Price et al recently showed that the molecule reversed psychosis-like behavior in rodents suffering from a version of Alzheimer's.

An excellent article by Jason Napodano sums up the outlook for Pimavanserin. The important thing to understand is that this drug will have market exclusivity for years, since no existing drug or drug candidate in anyone's pipeline actually addresses PDP effectively.

Available antipsychotic drugs include Clozaril from Novartis (NYSE: NVS), Zyprexa from Eli Lily, Seroquel from AstraZeneca (NYSE: AZN) and Risperdal from Johnson & Johnson. Clozaril, whose principal ingredient is the antipsychotic agent clozapine, is the most commonly used treatment for PDP. However, it has severe side effects and needs weekly venal blood tests – phlebotomy - to monitor patients. The side effects are so severe and numerous that the drug has 5 separate black box warnings from the FDA. To put it mildly, Clozaril creates more problems than it solves for psychosis patients – and if this is the gold-standard in treatment of PDP as of now, I am not surprised that patients are eagerly awaiting Pimavanserin's eventual approval.

Clozaril, although widely used in other countries, has been seeing steadily declining usage in the US, making for 11% of all prescriptions in 1999, but down to less than 4% last year. Although Novartis makes over $25 billion annually, only a small fraction of it comes from this drug. However, Novartis is a gem of a stock in any biotech portfolio. The third largest healthcare company in the world, Novartis has a dividend yield of 4.1%, which has been steadily increasing over the years. It has a strong product portfolio including such blockbusters as Lucentis, Gilenya, Afinitor and Tasinga, and a great pipeline with multiple products scheduled to be filed for NDAs this year.

Another currently used drug is AstraZeneca's Quetiapine, branded as Seroquel. Unlike Clorazil, Seroquel does not cause agranulocytosis and does not require phlebotomy. However, it has seen a lot of controversy over the death of a few military veterans who were prescribed the drug as part of a group of drugs. The drug has numerous side effects, the most important being somnolence.

Seroquel saw steadily increasing sales until about 2008; then for the next few years it stayed put around the $1 billion dollar mark. However, in the last year or so, it has seen drastically decreasing sales, the reason of which is the patent expiration in early 2012. However, despite all that, AstraZeneca is a major dividend paying company with a yield of 5.34%, a figure that has seen growth over the last decade. The company, despite the loss it faces due to patent expirations, is going the right away and acquiring smaller companies like Omthera (cardiovascular diseases) and Pearl Therapeutics (lung diseases). It is also going into R&D agreements with companies like Moderna and research institutes to develop important products. It has a strong pipeline of major candidates, including the very interesting vascular drug Brilinta. Overall, this is a company that is down, but not out, and investors may want to get in on the action while the stock price is still good.

Conclusion

Despite being a loss-making company with negative earnings, Acadia reported over $100 million of cash in hand as of March 31, 2013. This should be good enough to see the company through the pre-approval stage. As the approval comes along, expect buyout or licensing offers from big biotech. Whether Acadia does it alone through marketing and sales, or piggybacks on an established larger biotech, I see considerable upside potential to the stock.


Dr. Kanak Kanti De has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

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