Acadia Pharmaceuticals (ACAD -1.69%) stock has been on absolute fire in 2019. Thanks to improving sales for its Parkinson's disease psychosis (PDP) medicine Nuplazid and a recent late-stage readout in the dementia-driven psychosis setting, the drugmaker's shares have shot up by an astounding 141% so far this year.
Does Acadia's stock have even more room to run or should investors take profits after this monstrous rally? Let's take a look at the bull and bear case for this red-hot biotech stock to find out.
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The bull case
Not surprisingly, Acadia's stock was immediately blessed with several analyst upgrades following Nuplazid's positive late-stage readout for dementia-related psychosis. H.C. Wainwright & Co. and Canaccord Genuity, for example, both raised their respective price targets on Acadia's shares yesterday. Wall Street, in turn, seems convinced that Acadia's stock can indeed continue to tick higher.
Why are analysts so bullish? They key reason is that Nuplazid is staring down a potential $2 billion commercial opportunity with a future label that would include both PDP and dementia-related psychosis. Equally as important, Acadia may end up fetching a high-dollar buyout offer with a successful label expansion for Nuplazid. There are no FDA approved drugs for dementia-related psychosis after all.
Keeping with this theme, Amgen recently doled out $13.4 billion to get its hands on Celgene's plaque psoriasis medication Otezla. That transaction is important to bear in mind in this case for two reasons. First off, Otezla is expected to peak at around $2.5 billion in annual sales. Secondly, this anti-inflammatory drug competes in a rather crowded market.
Nuplazid, by contrast, is projected to post similar peak sales to Otezla but with little to no competition for the foreseeable future -- that is, assuming the FDA grants this key label expansion. Put simply, a revenue-hungry big pharma may indeed be willing to pay up to acquire Acadia if Nuplazid lives up to the hype.
The bear case
There are three clear-cut reasons to doubt that Acadia's stock can maintain this momentum. Firstly, the biotech's shares are now trading at close to 3.5 times Nuplazid's peak sales projection as a treatment for both PDP and dementia-related psychosis. That's not a totally unreasonable valuation, but it also isn't cheap for a company facing a critical regulatory decision, either.
Secondly, the FDA could delay or even reject Nuplazid's label expansion. This year, the FDA has taken a surprising stance on more than a few drugs with compelling late-stage data. Thus, there's no way to predict how Nuplazid's forthcoming regulatory process may play out with this seemingly more strict version of the FDA.
Thirdly, Acadia has a serious cash burn problem. Despite Nuplazid's improving sales in the PDP arena, the company has already burned through a cool $140.2 million during the first six months of 2019. Although Acadia still sports a cash runway of more than two years, the company would obviously be wise to raise capital after this latest spike in its share price. Acadia's rally, in turn, may stall if the company chooses to roll out a particularly large secondary offering.
Verdict
There is a lot to like about this mid-cap biotech stock. Nuplazid has a real shot at becoming a bona fide franchise-level drug following these impressive late-stage results. The downside is that most of this good news appears to be baked into the company's valuation at this point.
Bottom line: Acadia's shares will probably have trouble pushing much higher in the near term due to the company's premium valuation and the strong likelihood of a hefty capital raise. Investors, therefore, may want to wait for a more compelling entry point.
