Caution: Acadia Pharmaceuticals Is Overvalued

Shareholders of Acadia Pharmaceuticals (NASDAQ: ACAD) 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.


Acadia only has one drug product, Nuplazid, which is approved solely for thetreatment 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.

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.


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.

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