In the past we've written extensively on the redesigns management has instituted in the -020 trial versus the failed -012 and -014 studies. Our article from January 2012, "Will Third Time Be A Charm For Acadia Pharmaceuticals?" provides a good analysis of these changes.
A Little Background On PDP
Parkinson's disease psychosis, or PDP, is a debilitating psychiatric disorder that occurs in up to 50% of patients with Parkinson's disease. In the U.S., we estimate this is 500,000 patients. PDP is characterized by the presence of hallucinations and delusions. Hallucinations are most common and are often visual, but may also include somatic or other sensory phenomena. Delusions commonly involve paranoia, and can be profoundly disturbing and debilitating. PDP represents a major inflection point in the course of Parkinson's disease progression, and is the number one driver of why patients enter nursing homes or long-term care facilities.
PDP is associated with increased caregiver burden and increased mortality. Currently, there are no therapies approved to treat Parkinson's disease psychosis. We attended Acadia's Analyst & Investor Day on PDP back in May 2012 (webcast link). At the event, management had two prominent physicians and key opinion leaders in Parkinson's disease treatment, Dr. Stuart Isaacson, M.D., Director of the Parkinson's Disease and Movement Disorder Center in Boca Raton, Flordia, and Cr. Clive Ballard, M.D., Professor of Age Related Disease at King's College London Institute of Psychiatry. Both doctors outlined the significant challenges in treating PDP patients, and the medical need for a drug like pimavanserin.
Specifically, both physicians and Acadia management believe that pimavanserin has the potential to effectively treat Parkinson's disease psychosis without impairing motor function, a major side effect of current off-label antipsychotic use, and thereby significantly improving the quality of life for patients with the disease.
Sizing Up Pimavanserin
The Parkinson's Disease Foundation estimates approximately one million Americans living with Parkinson's disease, along with another 60,000 diagnosed each year (source). Management at Acadia has cited studies noting between 40% and 60% of these patients developing psychosis within five years of diagnosis of Parkinson's disease. These numbers are in general agreement with what we were able to find independently via medical journals (source, source).
Clinical management of PDP starts with primary prevention; but PDP progresses rapidly as the Parkinson patient deteriorates, and often ends with the undesirable use of atypical antipsychotics.
Prescription tracking data shows that half of Parkinson's disease patients are taking antipsychotic agents to control PDP (source), which may lead to worsening Parkinson's symptoms. A paper published by Dr. Laura Marsh, MD, in Primary Psychiatry (2005;12(7):56-62) does an outstanding job of highlighting the issues with the current treatment paradigm for PDP. From the paper:
Atypical antipsychotics with a low potential for inducing parkinsonism (rigidity, bradykinesia, and tremor) are used in PD. Among those currently available (clozapine, risperidone, olanzapine, quetiapine, ziprasidone, and aripiprazole), only quetiapine and clozapine are consistently recommended.
Clozapine is currently the gold standard of antipsychotic agents in PD given its demonstrated safety and efficacy in controlled trials without worsening parkinsonian symptoms. Sedation or confusion can occur at low doses in this fragile population and most patients respond to <50 mg/day, though some require higher doses or an additional low dose in the mornings. The most common side effects are sedation, orthostasis, confusion, and drooling. Motor fluctuations worsen in some patients, but dystonia, dyskinesias, and tremor can improve. Weekly phlebotomy is required to monitor for potential agranulocytosis. Any inconvenience of this is offset by therapeutic benefits.
Quetiapine is a common first choice because it can be used without the risk of agranulocytosis and weekly blood monitoring. However, quetiapine has not been subject to controlled trials. Its safety and efficacy profile in open-label studies is favorable, but inadequate symptom control or increased parkinsonism or motor fluctuations can occur. Lower doses are used initially because patients with hypotension or orthostasis may not tolerate higher doses. Sedation and confusion are common side effects, but a recent open-label study showed improved cognitive functioning on quetiapine.
For the reasons outlined above, we see pimavanserin as serving a fairly high unmet need. We know of no other drug under late-stage development for PDP. We are familiar with Addex Therapeutic's (OTC:ADDXF) dipraglurant for Parkinson's disease Levodopa-Induced Dyskinesia (PD-LID) (see our analysis of dipraglurant here), but pimavanserin could have meaningful market exclusivity upon launch. As such, obviously depending on the results of the -020 trial, we think that Acadia and its partner could capture up to 25% of the market. At a price similar to antipsychotics, pimavanserin offers a $312 million U.S. opportunity.
$312 Million = 1 Million PD patients x 50% with Psychosis x 25% Penetration x $2,500 per year.
Label Expansion Key To Sales Upside...
Beyond the initial indication in PDP, we believe pimavanserin has potential utility in Alzheimer's disease psychosis (ADP), a disease with similar manifestations to PDP, and as an adjunct therapy for the treatment of schizophrenia.
The ADP market plays out in similar fashion to the PDP market, only potentially five times as large. Statistics show the number of American's living with Alzheimer's disease to be roughly 5.4 million (source), roughly 50% of which will develop some form of psychosis as the disease progresses (source). In July 2012, management reported promising mechanistic data with pimavanserin in a preclinical rodent model of the disease (press release). The data was published in Behavioural Pharmacology (Price et al., “Pimavanserin, a 5-HT2A Receptor Inverse Agonist, Reverses Psychosis-like Behaviors in a Rodent Model of Alzheimer’s Disease,”) in July 2012. If pimavanserin is a $300+ million drug in the U.S. for PDP, and management can show similar results in ADP, it might be a blockbuster drug.
In March 2007, Acadia reported the results from a phase 2b trial studying pimavanserin as an adjunctive therapy for the treatment of schizophrenia (press release). Management recently published the full data from this trial in Schizophrenia Research in July 2012 (download the publication). We see use of pimavanserin as an adjunctive therapy as a small market. For the purpose of our model, we've added in only $30 million in additional sales beyond PDP and ADP.
...And So is Partnering
Following the release of the top-line data from -020 in late November, we expect management to do two things. Firstly, they will immediately begin working to initiate the next study, -021. We expect many of the same sites will be used in -021. Management may look to expand more in Canada for -021, but we do not expect any significant enrollment outside of North America. Acadia remains squarely focused on the U.S. market for pimavanserin, at least for now. Acadia owns worldwide rights to the drug, including in China, India, and Japan, but for now this all remains on the back-burner.
The second thing we expect, if the -020 trial is successful, is for Acadia to quickly find a partner. We remind investors that Acadia was originally partnered with Biovail on pimavanserin development prior to the failure of the -012 study. Biovail paid Acadia $30 million upfront with the potential for $365 million and 15-20% royalties on sales back in May 2009 (press release). Acadia also had a co-promotion option. Much of the back-end potential was based on expanding the label into ADP and schizophrenia.
We think Acadia will be looking for a similar deal in early 2013. Management believes that pimavanserin is a pipeline product, and ADP and schizophrenia are as important to the future potential of the drug as the current plans in PDP.
What's It Worth?
Acadia is currently trading with a market capitalization of nearly $140 million (using 56.6 million shares outstanding as of the Nov 5th Form 10Q filing). We have built a 10-year discounted cash flow (DCF) model to value the shares of Acadia Pharmaceuticals. Some key assumptions in our model include:
- Risk Free Rate of 1.75% (source)
- Equity Risk Premium of 6.0% (source)
- Firm Risk Premium of 150% (best guess based on market beta)
- Acadia partners pimavanserin in 2013 for $20 million upfront, $30 million approval milestone in 2015, and $200 million in back-end commercial milestones through 2022.
- Acadia collects a tiered royalty on worldwide sales of pimavanserin between 15% and 20%
- Pimavanserin worldwide sales of $712 million in 2022 (which we consider to be very conservative with respect to the opportunity in ADP).
Here is a screen-shot of our DCF model, showing the shares fairly-valued at around $2.64 going into the data:
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Working Off Our Assumptions
What investors need to do ahead of the data is adjust to meet their own assumptions. For example, adjusting the pimavanserin ramp up by 10% (so that sales in 2022 are $783 million instead of $712 million) results in approximately +$0.40 per share in fair-value. Adjusting sales down 10% reduces the fair-value in our DCF model by -$0.35 per share. The adjustments up and down are close, but not exactly 1:1 based on our assumptions for sales-related milestone and upticks in the royalty rate. If investors believe that pimavanserin will post sales of $1 billion in 2022, the fair-value on our DCF model increases to $4.25 per share. We have purposefully made our assumptions around sales in ADP conservative due to the lack of phase 2b data. As noted above, the opportunity in ADP alone my put pimavanserin into the billion-dollar category.
The other key assumption investors may want to play with is our Firm Risk Premium of 150%. This results in a discount rate (based on CAPM) of 16.8%. If investors believe this rate is too aggressive, adjusting the discount rate down to 15% increases our target fair-value to $3.33 per share. If investors believe our adjustment is too lenient, increasing the discount rate to 18% reduces our fair-value target to $2.26 per share.
Below is a pivot table that shows some adjustments to our model based on changing both worldwide sales of pimavanserin in 2022 and the discount rate used for present-valuing the cash flows:
As noted above in our key assumptions, we are working off a Firm Risk Premium of 150%. The current beta is 2.6x, signifying that Acadia's stock has a correlated volatility of +160% to the S&P-500. This is essentially where we pulled our risk premium from. We suspect that if the data from -020 are positive, Acadia's stock will quickly move to a new valuation based on a dramatically lower risk profile.
We believe that a beta of 1.75x (+75% correlated volatility to the S&P-500) makes sense. Inserting the assumption of a 75% Firm Risk Premium into our model yields a discount rate of roughly 12.5%. Based on our previous modeling that pimavanserin will post worldwide sales of $712 million in 2022, this would make Acadia's stock worth just over $5 per share. This is where we would suspect the stock to trade shortly after positive data from the -020 study.
Negative results from the -020 study, essentially causing us to remove all pimavanserin-related sales and partnering activity completely from our model, causes a negative DCF value. If failure of the -020 were to be the case, we suspect that Acadia's stock will down to the residual cash balance at year-end 2012. We model cash at year-end 2012 of $20 million. This equates to around $0.35 per share. We note that Acadia does have a research collaboration with Allergen Pharmaceuticals, but with investor attention focused squarely on pimavanserin and -020, we expect that the punishment for failing -020 will be swift and painful.
Results from the phase 3 -020 trial are expected to be a true binary event. The stock is easily worth north of $5 per share on positive data. However, a failure could send the shares below $0.50. We believe the odds favor positive results based on the redesign of the trial and the fact that 90% of the patients completing the trial have elected to enroll in the open-label safety extensions study, dubbed -015.