Acadia Pharmaceuticals (NASDAQ: ACAD), a company developing treatments for diseases of the central nervous system, has had an exceedingly rough go of it this year, with the company's stock falling by a whopping 14.5% year to date. Wall Street, however, clearly thinks that Acadia's sizable downturn presents an outsize buying opportunity.
The Street's low end 12-month price target of $40, after all, indicates an attractive upside potential of about 55% from current levels. Analysts' average and high-end price targets, on the other hand, imply even greater upside potentials of 95% and 136%, respectively.
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I think that these various price targets are unrealistic, and that the stock's march southward is indeed justified. In fact, I think Acadia's shares will continue to struggle in the days and weeks ahead. Here's why.
Too much depends on a single drug
The core issue is that Acadia's valuation depends entirely on the commercial trajectory of its Parkinson's disease psychosis medication, Nuplazid. Although the drug has gotten off to a quick start since its commercial launch in May 2016, the fact remains that Acadia's lofty valuation clearly assumed an even greater penetration rate. The biotech's stock, after all, is presently trading at a price-to-sales ratio in excess of 24 -- even after this latest downturn.
Nuplazid's sales would thus need to rise by 128% from current levels simply to bring the company's valuation in line with most other biopharmas (an average price-to-sales ratio of around 5). In a similar manner, the drug's sales would need to rise by perhaps 265%, relative to its projected haul of $263 million for 2018, to make the Street's low-end price target a fundamentally sound projection.
The current consensus, by contrast, has Nuplazid's sales growing by a far more modest 68% for the whole of 2019 compared to this year. So, as you can see, the Street's price targets for Acadia's stock don't match up with the company's near-term growth prospects.
Compounding matters further, Nuplazid's rapid growth rate has been due in part to a very aggressive pricing strategy over the past year. Regular price increases, however, have been a good way to draw the ire of payers, leading to reimbursement issues.
So, at a bare minimum, the company probably can't continue to rely on price increases to meet quarterly estimates. Nuplazid's sales growth may therefore start to taper off significantly soon -- that is, unless management is right in its assumption that script volume will pave the way for growth this year and next.
A capital raise is looming
Another good reason to avoid this pricey biotech stock is the fact that the company is set to continue incurring heavy losses for the foreseeable future due to both the promotion of Nuplazid and the drug's development for other indications like dementia-related psychosis. Even with Nupazid's sales heading higher, Acadia is on track to burn through over $151 million in 2018, bringing its cash and cash equivalents down to about $190 million by the end of the year.
To be fair, Acadia believes it will exit 2018 with a cash buffer of more than $200 million. But that rosy forecast appears to assume that Nuplazid's sales will come in on the high side of its estimated range for the year, and the drug's clinical development costs won't increase even more in the near term. As Nuplazid's all-important late-stage trial for dementia-related psychosis is just getting underway, and the company is arguably running out of room to drive growth via price increases, I think these estimates are questionable, to put it mildly.
The key takeaway here is that Acadia is perhaps less than a year away from having to issue a large secondary offering in the area of $200 million or so. Nuplazid, after all, is about three full years away from a possible label expansion for dementia-related psychosis, and the drug's sales for Parkinson's disease psychosis are showing signs of hitting a plateau. If they were growing organically, after all, Acadia probably wouldn't have set three price increases over the course of 2017.
All things considered, I think Wall Street's sky-high price targets are actually assuming a buyout at a ginormous premium. The company, as things stand now, doesn't have the growth drivers in place to meet these targets organically.
Another glaring problem with the buyout assumption is that Acadia's valuation arguably isn't a compelling bargain for would-be suitors. Nuplazid needs to expand into other high-value indications to unlock Acadia's deeper value, and there's no guarantee when it comes to clinical trials.
All told, I think there are far too many moving parts to Acadia's growth story to have confidence that things will work out exactly as planned. And if Acadia does run into trouble in the clinic or with payers, the market could very well revalue this single-drug biotech in a dramatic fashion.
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