Acadia Pharmaceuticals (ACAD +4.33%) stock has plunged more than 40% so far in 2018. Is Acadia stock ready for a rebound? Or is it what investors refer to as a falling knife that you shouldn't try to catch?
Those questions aren't easy to answer. Actually, they raise even more questions. Whether or not Acadia is a buy depends on the answers to the following three questions.
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1. What will happen with an FDA evaluation of Nuplazid?
One major reason behind Acadia stock's big drop this year stems from reports of safety problems for the biotech's Parkinson's disease psychosis drug, Nuplazid. CNN reported in early April that Nuplazid was listed as "suspect" in 500 reported patient deaths. The cable news channel also interviewed physicians and medical experts who expressed concern about the safety of the drug.
The situation for Acadia worsened a few weeks later. FDA commissioner Scott Gottlieb was asked about Nuplazid in a Congressional budget hearing. Gottlieb replied that the FDA would "take another look" at Acadia's drug. The FDA subsequently confirmed that it was "conducting an evaluation of available information about Nuplazid."
Of course, the FDA has already conducted an extensive review of the safety data for Nuplazid. The drug couldn't have won approval otherwise. It's also important to note that the FDA issued a statement saying that adverse events reported with Nuplazid "typically involve geriatric patients with advanced-stage Parkinson's disease, as well as numerous medical conditions, who are frequently taking concomitant medications with risks for serious adverse events, including death."
2. Will sales momentum for Nuplazid pick up steam?
Assuming nothing bad happens as a result of the FDA's evaluation of Nuplazid, the question for Acadia would then primarily concern the commercial success of the drug. Acadia reported net sales of $48.9 million for the drug in the first quarter. That reflected a 220% year-over-year jump and was 12% higher than sales in the fourth quarter of 2017.
Some analysts projected that Nuplazid would reach sales of $1 billion by 2021. There's a long way to go to reach that level. The negative publicity from the CNN reports and latest FDA evaluation will no doubt make it much more difficult for Nuplazid to pick up momentum.
It is still early, though. Acadia continues to conduct a disease awareness campaign that appears to be having some success in educating patients and caregivers. Despite the challenges, Acadia still projects $255 million to $270 million in sales this year.
3. How will Nuplazid fare in clinical studies?
Nuplazid isn't just Acadia's lead product. It's the company's only pipeline candidate. A significant part of the valuation for Acadia relates to the potential for the drug in treating additional indications.
Acadia has four clinical studies in progress. Two are phase 3 studies evaluating Nuplazid in treating dementia-related psychoses and schizophrenia inadequate response. The other two are phase 2 studies of the drug in treating schizophrenia negative symptoms and major depressive disorder.
One of these studies could provide a catalyst to Acadia in the near future. The company plans to announce top-line results from the phase 2 study targeting major depressive disorder in the second half of 2018. In addition, Acadia should report results from its phase 3 study targeting schizophrenia inadequate response and the phase 2 study targeting schizophrenia negative symptoms next year.
Is Acadia a buy?
The problem is that it's impossible to answer these three questions with certainty. At best, we can speculate about the most likely answers. That's the nature of investing, though. If there were total certainty and no risk, there would be no potential for rewards.
What will happen with the FDA's evaluation of Nuplazid? My view is that the odds are higher that Nuplazid remains on the market than the chances are that Acadia will have to withdraw the drug. It's possible the FDA could find troubling data that leads to a more dire consequence, but as of now, there doesn't appear to be any compelling reason to expect that outcome.
As for Nuplazid's sales momentum, it seems likely that the drug will continue to generate higher sales -- assuming, of course, Acadia moves past the current safety questions. However, I don't think Nuplazid is going to become a blockbuster by 2021, like some predicted.
With clinical studies, I usually just go with the historical probabilities. The chances of a neurology drug in phase 3 testing ultimately winning approval are a little under 50%. Those odds drop to around 14% for a neurology drug in phase 2.
I won't be surprised if Acadia bounces back if the FDA evaluation ends with no action. However, for me -- and probably for most other investors -- there's just too much risk in buying Acadia right now. In my view, the best course of action is to stand on the sidelines and see what happens.
