What’s Next For This Biotech?

Sherrie 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) 1,100% gain makes it one of the best performing stocks in the market. This rally began after its Parkinson’s disease drug Pimavanserin produced a positive outcome in its Phase III trial.

In particular, Pimavanserin had no negative impact on motor function and significantly reduced psychotic episodes compared to placebo. The drug’s likelihood for approval is now all but a guarantee, and investors are buying like crazy.

Moreover, Acadia Pharmaceuticals does not have to complete another late-stage study, as previously expected. This fact has created much of the gains following its initial 150% pop in November 2012. Therefore, it is expected that Pimavanserin will be approved by early next year and then available in the market in late 2014 or early 2015.

In terms of upside, Pimavanserin’s expected sales for the Parkinson’s disease Psychosis indication is between $300 and $400 million annually. The real upside for Pimavanserin lies in off-label uses and its expanded use. Most believe that it will be used in schizophrenia, bipolar disorder, and other diseases where antipsychotics are necessary. Thus, Acadia is poised to benefit from a large $18 billion market, and many have projected that Pimavanserin’s label and off-label uses combined could generate sales north of $1 billion annually.

What To Do Next

As a long-term investment, I think Acadia is one of the best places to put money to work in the market. As a short-term investment, its stream of catalysts are running low.

Acadia has seen its large run-up because of how cheap it was prior to Pimavanserin’s data. Now, with a $1.25 billion market cap, the only catalyst remaining is its meeting with the FDA and the eventual launch.

While these two events are important, 16 months of inactivity and a lack of headlines can hurt a biotechnology stock. Also, during the launch and approval process, sometimes warnings and negative information is found that was previously undiscovered.

Thus, stocks that run higher before these events, often trade lower as all good news is already priced into the stock. Therefore, if you own Acadia with gains of 300% plus, it might be wise to take some profits off the table – especially if you’re not planning to hold the stock for multiple years.

The Only Likely Catalyst

While the catalysts will be few and far between over the next 16 months, there is one possible catalyst remaining, and that is an acquisition.

Like I said, the antipsychotic market is massive, and one where most large pharma companies have drugs available. However, many of these antipsychotic drugs are being replaced with newer and better drugs, along with losing patent protection.

Acadia Pharmaceuticals has full rights to Pimavanserin, and with it being an innovating drug with large potential sales, it seems logical that large pharma would show a considerable amount of interest. If in fact the company is for sale and the large pharma company has an antipsychotic segment.

One company in particular that has been discussed often is AstraZeneca (NYSE: AZN), a very large $65 billion company. The reason it has been mentioned is because it owns Seroquel – but is facing generic threats. The acquisition of Acadia could reignite AstraZeneca’s antipsychotic line of products, and seems to be a good match.

Then, there is Acadia’s partnership with Allergen (NYSE: AGN). However, this partnership is for the development of Acadia’s early stage products, as Allergen is a company focused on the development of therapeutics for glaucoma and chronic pain. Thus, Allergen may not have the resources to effectively launch and market Pimavanserin.

If Acadia is acquired, there’s little doubt in my mind that it will be under $2 billion. Pimavanserin has too much upside and when combined with large pharma’s sales force and manufacturing process, the profit margin for Pimavanserin could be north of 30%. As a result, a $2 billion acquisition would return a profit fairly quickly.

Conclusion

With all things considered, Acadia has been a great stock – but does not have upcoming catalysts. In fact, the only notable catalyst might be an acquisition, and it’s never a good idea to buy a stock on the speculation of an acquisition alone.

Thankfully, as we look long-term Acadia Pharmaceuticals has great upside potential. In my opinion, the best way to play Acadia over the next year is to hold a small position, and to take gains off the table if you already own.

Currently, I say there is a 50/50 chance of the company being acquired, although it’s hard to know when it might occur. Therefore, by keeping a small position you are still exposed if an acquisition is announced, and if not, you can buy back on any potential dip during the next 16 months.

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Sherrie Stone 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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