Acadia Pharmaceuticals: Post Pimavanserin Study Setback Selloff May Continue

Summary:

• Acadia Pharmaceuticals stock price dropped over 15% after its drug candidate, pimavanserin, failed to meet the primary endpoint in a Phase 3 study in negative symptoms of schizophrenia.
• The setback adds to previous rejections of pimavanserin for other indications, raising concerns about Acadia’s key asset, which loses patent protection in 2030.
• The failure of pimavanserin may impact Acadia’s revenue growth and future profitability, leading to potential downward corrections in the stock price.
• Daybue, approved to treat Rett Syndrome, has been forecast to earn $370 – $420m in 2024 by management. That may be over-optimistic.
• With a “blockbuster” revenue opportunity in schizophrenia now off the table, my suspicion is the current selloff in ACAD stock will continue in the absence of upcoming data catalysts.

Pimavanserin Study Setback Drops Acadia Pharmaceuticals’ Share Price To ~$20

Acadia Pharmaceuticals Inc. (NASDAQ:ACAD) stock has been tumbling today – down >15% at the time of writing, after the company reported that its drug candidate, pimavanserin – already approved to treat Parkinson’s Disease Psychosis, under the brand name Nuplazid, and earning revenues of $549m in 2023 – failed to meet the primary endpoint in a Phase 3 study in patients with negative symptoms of schizophrenia.

Nuplazid has been approved since 2016, and has been steadily growing revenues, earning $481m in 2021, $517m in 2022, and $549m in 2023. In March last year, Acadia secured commercial approval for a second drug candidate, trofinetide, in the indication of Rett Syndrome – a rare genetic disease that results in progressive loss of motor skills and language.

Marketed as Daybue, the drug earned $177.2m last year, helping Acadia – which recorded net losses of $(282m), $(168m), and $(216m) in 2020, 2021, and 2022, narrow losses to “just” $(61.3m) in 2023, for earnings per share (“EPS”) of $(0.37).

In April 2021, Acadia stock traded at >$50 per share, but sank to $20 per share after the company revealed that the FDA had declined to approve pimavanserin in the follow-on indication of hallucinations and delusions associated with dementia-related psychosis (“DRP”).

Management and Wall Street had believed approval was a foregone conclusion, especially given the FDA opted not to convene an Advisory Committee to discuss the Phase 3 Harmony study data, but ultimately, in its Complete Response Letter (“CRL”) outlining reasons for rejection, the FDA referred to a “lack of statistical significance in some of the subgroups of dementia.”

Acadia’s share price has never truly recovered from this setback. The company attempted to secure approval for pimavanserin in Alzheimer’s Disease related psychosis, but this application was also snubbed by the FDA, in August 2022.

In July 2023, when Acadia announced that it had acquired the ex-U.S. rights to trofinetide from Neuren Pharmaceuticals, in exchange for $100m up-front and royalties in the mid-teens to low-twenties percentages on ex-U.S. sales, the stock price briefly rose >$30, and again in December last year, when the company won a patent court case against generic drugmaker MSN Laboratories, preventing it from bringing a generic version of pimavanserin to market.

After today’s news, however, the stock price has once again fallen to ~$20 per share, valuing Acadia’s business at $3.3bn on a market cap basis.

Implications Of (Yet Another) Pimavanserin Setback

Despite the successful approval of Daybue, which analysts believe may have peak sales potential of ~$500m, and the progression of a third asset, candidate ACP-101, into a Phase 3 study in Prader-Willi Syndrome, another rare genetic disease characterised by muscle weakness and cognitive impairment, with an average life expectancy of ~30 years, its clear Wall Street views pimavanserin as Acadia’s key asset.

The drug will lose its patent protection in 2030, and it’s unclear – to me at least, after studying the company’s 2023 annual report / 10K submission – whether an approval in negative symptoms of schizophrenia could have extended protection beyond the beginning of next decade, but nevertheless, this latest setback for pimavanserin is a blow for Acadia.

According to Acadia’s press release announcing the study failure:

Pimavanserin did not demonstrate a statistically significant improvement over placebo on the study’s primary endpoint, the change from baseline to week 26 on the Negative Symptom Assessment-16 (NSA-16) total score (-11.8 vs. -11.1; p=0.4825; effect size=0.07).

Fuller detail was provided as follows:

ADVANCE-2 was a 26-week double-blind, randomized, placebo-controlled study of 34 milligram pimavanserin in 454 adult patients with predominant negative symptoms of schizophrenia who had achieved control of positive symptoms with their ongoing antipsychotic treatment.​

ADVANCE-2 used the NSA-16 scale, designed to measure change on the wide range of predominant negative symptoms that patients experience, which looks at 16 different items in five subscales and covers symptoms such as blunted affect, poor socialization and lack of motivation.​

The change from baseline observed in the pimavanserin arm of ADVANCE-2 was similar to the change from baseline observed at the 34 milligram dose in ADVANCE-1 (-11.8 vs. -11.6); however, the placebo effect in ADVANCE-2 was higher than the placebo effect observed in ADVANCE-1 (-11.1 vs. -8.5).

In a sense, this may be considered a double setback for Acadia since the drug’s inability to outperform placebo by a statistically significant amount may suggest the FDA was right to reject the drug in DRP, and Alzheimer’s related psychosis.

Management confirmed in the press release that “we do not intend to conduct any further clinical trials with pimavanserin,” although conversely, this may be a long-term benefit to the company at least from an operational cost perspective.

In 2021, 2022, and 2023, Acadia has spent, respectively, $239m, $361m, and $352m on R&D, the majority of which was likely allocated to pimavanserin. The drug has a relatively unique mechanism of action, described as follows in Acadia’s latest 10K submission:

a selective serotonin inverse agonist/antagonist, preferentially targeting 5-HT2A receptors with no appreciable affinity for dopaminergic, histaminergic, or muscarinic receptors

The 10K suggests that Parkinson’s Disease Psychosis (“PDP”) “is a debilitating disorder commonly characterized by visual hallucinations and delusions that afflicts about 40% of the one million Parkinson’s disease patients in the United States.”

The drug apparently costs ~$30k per annum, which, given sales of $549m last year, suggests it may not have been especially widely used, and there have been questions asked about its safety, and value, ever since its 2016 approval. Nuplazid comes with a “boxed” warning from the FDA, that elderly patients with dementia-related psychosis (DRP) treated with antipsychotic drugs are at an increased risk of death.

While Nuplazid has very likely helped many patients with PDP, besides the R&D costs involved in testing the drug in other indications – none of which have been successful – Acadia’s SG&A spend over the past 3 years (working backwards from 2023) has been $407m, $369m, and $396m. In short, as well as being expensive to develop, pimavanserin has seemingly never been a profitable drug for Acadia, either.

Looking Ahead – How Does Latest Pimavanserin Setback Affect Acadia?

Likely, the Advance-2 study failure marks the beginning of the end of pimavanserin as the central focus of Acadia’s business. As mentioned, the drug’s patents will expire in 2030, and management has seemingly confirmed there will be no more label expansion opportunities.

On the negative side, that means that Nuplazid revenues may already have peaked – it could even be the case that the Advance study failure puts physicians off of prescribing the drug in PDP. On the positive side, Acadia may be able to reduce its R&D and SG&A spending by hundreds of millions of dollars per annum.

The reality is, however, that Wall Street does not generally like companies with shrinking top line revenues – even if the bottom line always looked messy for Acadia, management could make the argument that the losses were a precursor to label expansion for pimavanserin, which would translate to long-term revenue growth and eventually, profitability.

The Street may well conclude that, with pimavanserin revenues likely capped at $500m per annum until 2030, after which time they will decline substantially in the face of generic drug competition, and Daybue revenues unlikely to grow higher than $500m, plus a lack of profits, Acadia does not deserve its current valuation of $3.3bn, and keep selling the stock.

In fact, analysts at Mizuho have already downgraded the stock, citing a lack of catalysts after pimavanserin latest failure, although their price target of $25 represents a premium of 25% to current share price.

Mizuho suggests that Phase 3 ACP-101 Prader-Willi data may not be available until 2025, and Phase 2 data for another drug, ACP-204, indicated for Alzheimer’s disease psychosis, until 2026, and of course, there is no guarantee that either drug’s study results will support a push for approval.

The reality is that treating central nervous system conditions is exceptionally challenging, and it can be very hard to determine through the clinical study process what works, and what doesn’t – witness the post-marketing study failure of Amylyx’s drug Relyvrio, in Amyotrophic Lateral Sclerosis patients, or the commercial failure of Biogen’s Alzheimer’s therapy Aduhelm, or the FDA’s decision to convene an AdCom for Eli Lilly’s (LLY) Alzheimer’s therapy donanemab, delaying its expected approval, for example.

That can cut both ways – perhaps Acadia has been unlucky that the placebo arm in the Advance-2 study performed better than expected – had that not been the case, perhaps a label expansion into negative symptoms of schizophrenia would have been considered by the market as more likely than not, and Acadia’s share price made strong gains today, instead of falling.

Concluding Thoughts – Is ACAD Stock A Buy, Sell, or Hold After Yesterday’s News?

When a company’s biggest revenue-generating product suffers a setback, it is almost inevitable that a listed company’s share price will be negatively affected, even if, as is the case with pimavanserin, it may have been making the company poorer, not richer, due to SG&A and R&D costs.

Now that Wall Street can be almost certain that there will be no more label expansions for pimavanserin, it seems, from my perspective at least, that Acadia’s current ~$3.5bn market cap valuation is threatened.

It is probably reasonable to conclude that neither Rett Syndrome nor Prader-Willi syndrome are markets that support >$500m in peak annual sales, and there is a long wait for data in any other indications. Apparently, ~700k people in the US experience negative symptoms of schizophrenia, hence, now that Acadia’s biggest near-term revenue generating opportunity has been removed from the valuation equation, in the short-to-medium term, I can see Acadia’s share price suffering further downward corrections.

With that said, Acadia has provided the following guidance for 2024:

• DAYBUE net product sales in the range of $370 to $420 million.
• NUPLAZID net product sales in the range of $560 to $590 million.
• GAAP R&D expense in the range of $305 to $325 million.
• GAAP SG&A expense in the range of $455 to $480 million.

If Acadia hits these numbers, it will deliver revenues not far off ~$1bn in 2024, and, potentially, the business may be profitable for the first time. There is also potential for Daybue to be approved in Europe next year, and there are not too many credible challengers looking set to be approved in this indication in the near term.

As such, you could make a bull case for Acadia based on the fact that pimavanserin, an expensive drain on resources until now, may help the company become profitable by consistently driving $500m per annum of revenues alongside Daybue, which will drive a similar figure, while R&D costs are drastically reduced, perhaps even leaving room for some M&A activity to bolster the pipeline.

Unfortunately, my suspicion is that Acadia may not achieve its 2024 guidance, because Daybue may be just as expensive to market and sell as Nuplazid was, and just as difficult, meaning the company could miss on both the top and bottom lines this year, and be forced to downgrade longer term expectations.

Given there are no pipeline assets in development that we can place a high value on, given Prader-Willi is a small indication and ACP-204 has not progressed beyond Phase 2, in the toughest of indications, my conclusion is that Acadia Pharmaceuticals Inc. stock is likely to be trading <$20 come the end of 2024. Much will depend on the sales performance of Daybue.

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