Please ensure Javascript is enabled for purposes of website accessibility

Caution: Acadia Pharmaceuticals Is Overvalued

By David Liang – Updated Feb 14, 2017 at 8:04AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Does shaky phase 2 data justify a $5 billion valuation?

Shareholders of Acadia Pharmaceuticals (ACAD 2.42%) must be riding high after the stock's meteoric run -- up a massive 29% in the past 3 months. While current shareholders are undoubtedly pleased with their returns, plenty more eager investors are on the sidelines considering buying in. If you're in the latter camp, take caution: Acadia Pharmaceuticals' dramatic rise is based on controversial phase 2 data, and a lot would have to go right for the company to maintain its current premium valuation.

Nuplazid

Acadia only has one drug product, Nuplazid, which is approved solely for the treatment of Parkinson's disease psychosis (PDP). Nuplazid (also known as pimavanserin) is a once-daily oral medication that targets a serotonin receptor called 5-HT2A. This receptor is believed to play an important role in psychosis.

Acadia announced positive phase 3 data for pimavanserin in PDP way back in 2012. Pimavanserin met both its primary and secondary endpoints with a very convincing p-value of .001. Since then, after two delays and a CEO exit, Acadia finally submitted an application to the FDA for Nuplazid for PDP in late 2015.

Acadia is currently studying Nuplazid in trials related to schizophrenia, chronic pain, major depressive disorder, and Alzheimer's disease psychosis/agitation in hopes of expanding the drug's addressable market. 

A hand pulling a piece from a jenga tower

Image source: Getty Images.

The Alzheimer's disease controversy

Toward the end of last year, Acadia released topline data from a phase 2 study of Nuplazid in Alzheimer's disease psychosis. While the results were positive and Nuplazid technically met its primary endpoint, this outcome was met with both controversy and criticism. The primary endpoint of this trial was a statistically significant reduction in psychosis at week 6 of dosing. While the resulting reduction was statistically significant, it was just barely so, coming in at a p-value of .0451. For reference, a p-value of .05 is generally considered the upper boundary for statistical significance, and the lower the better. Acadia reported a p-value of .001 for Nuplazid in its phase 3 trial for PDP -- indicating a much stronger significance.

Moreover, while Nuplazid did meet its primary endpoint of significance vs placebo in week 6, the drug failed to show statistical significance versus placebo at week 12. As Alzheimer's disease is a life-long disease, durability of response is paramount for approval and wide-spread usage within this indication.

And finally, the FDA's approval for the drug in PDP  came with a black box warning stating that "elderly patients with dementia-related psychosis treated with antipsychotic drugs are at an increased risk of death." As an estimated 5.2 million of the 5.4 million Americans with Alzheimer's are age 65 and older, this could pose a significant hurdle toward penetrating the Alzheimer's market.

Valuation

We only have one full quarter worth of sales data for Nuplazid, but so far, revenue looks promising. But does it warrant what is currently nearing a $5 billion valuation? Let's do some back of the napkin math. Acadia's $5.3 million in third quarter revenue easily beat Wall Street's expectations of $2.9 million. Moving onward toward the fourth quarter, management has guided toward $8 to $9 million in revenue. Taking the midpoint of this range, $8.5 million, this implies a 60% quarter-over-quarter growth rate. If we take this rate and annualize it, ($13.6 million for the first quarter of 2017 and $21.8 million for the second quarter), we end with a sum of $49 million in sales for the drug's first year on the market. At a $4.5 billion market cap, Acadia is trading at a whopping 92 times current year revenues.

An overheated market

While Nuplazid is undoubtedly treating a large and underserved PDP population, I believe the market may have gotten ahead of itself. Judging from the price climb since Acadia's readout of its phase 2 ADP data, it seems that the market feels Alzheimer's success is baked in. All told, the combination of a single product portfolio, a black box warning, and shaky Alzheimer's data makes me feel that the risks may outweigh the rewards at today's prices.

David Liang has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Acadia Pharmaceuticals Stock Quote
Acadia Pharmaceuticals
ACAD
$17.45 (2.42%) $0.41

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
331%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.