Short interest is a key metric to pay attention to because it may signal that a stock could be ready to fall -- or continue a recent downturn. 

Acadia Pharmaceuticals (NASDAQ:ACAD) has been one of the top performing biopharmas even since its experimental treatment for Parkinson's disease psychosis called pimavanserin met its primary endpoints in a late-stage study in 2012. As the company is getting closer to a regulatory filing for the drug, however, short-sellers have started to move into the stock in a big way, illustrated by the chart below. With this in mind, let's take a look at three reasons why shorts are targeting this developmental stage biopharma. 

ACAD Chart

ACAD data by YCharts

Reason No. 1
Acadia is presently in the throes of completing the required supportive studies for a New Drug Application, NDA, for pimavanserin. These studies include drug-drug interaction studies and CMC development. 

What's important to understand is that clinical setbacks in these additional studies could significantly delay a regulatory filing. Although the company expects to submit an NDA by the fourth quarter of this year, an unexpected clinical problem could push this date back or even sink the filing altogether.

It's a good idea to bear in mind that the 020 study was pimavanserin's only successful late-stage trial and the drug did fail to meet its primary endpoints in another pivotal trial as a treatment for PDP. In short, a major clinical setback in these follow-up studies might be unlikely, but it's also not totally out of the realm of possibility.  

Reason No. 2 
Another reason shorts could be targeting Acadia is because the supportive studies may produce a result that limits pimavanserin's label and hence, its commercial potential. On this front, I think the drug interaction studies are key to pay attention to moving forward.

Patients suffering from Parkinson's disease are often taking a wide variety of drugs to help manage their symptoms and pimavanserin could produce an undesirable side effect with any one of them. What this would mean is that pimavanserin's use would be restricted to a select subset of patients, hurting the drug's commercial potential.

Reason No. 3
Even if everything goes smoothly in the supportive studies, Acadia isn't expected to become cash flow positive in the next few years due to the expense of launching a new drug (although, with almost $370 million in the bank and a relatively low cash burn rate, it looks like they've got plenty of time to work on this). Because Acadia choose not to partner for pimavanserin, they are responsible for the cost of manufacturing the drug on a commercial scale and raising a sales force to effectively market the drug. Moreover, the FDA could require expensive postmarketing studies that would also need to be borne solely by Acadia, forcing the company to raise additional funds through a secondary offering.  

Foolish wrap-up
Although pimavanserin looks like an important breakthrough in the treatment of PDP based on the 020 study results, the company is facing a number of risks that could negatively impact its share price going forward. Under ideal circumstances, pimavanserin's supportive studies will conclude without a hitch and the cost of marketing the drug won't be overly burdensome. But in the real world, such blue-sky scenarios don't always pan out.

Moreover, Acadia has little else to fall back on in case it hits a major speed bump with pimavanserin. The company's collaborations with Allergan (NYSE:AGN) have some potential future milestone payments which are tied to the successful advancement of an applicable product candidate -- but with the potential additional money totalling $15 million for a glaucoma candidate and $10 million for a chronic pain candidate, there isn't that much juice left pre-commercialization (and these are early to-mid stage assets). Also note that the recent takeover attempt of Allergan by Valeant Pharmaceuticals could delay this process or even scuttle it entirely. On the bright side, Allergan is steadfastly resisting Valeant's overtures. 

Overall, Acadia's risk factors are par for the course for clinical stage biopharmas and should be viewed squarely in this context. At the same time, there aren't many biopharmas that sport multibillion dollar market caps based on the potential of basically a single drug. As such, investors with a long-term outlook might want to take a cautious approach with this one until some of these clinical and regulatory issues have been resolved.

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George Budwell has no position in any stocks mentioned. The Motley Fool recommends Valeant Pharmaceuticals. The Motley Fool owns shares of Valeant Pharmaceuticals. 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.

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