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Introduction
Acadia Pharmaceuticals (NASDAQ: ACAD) is a commercial-stage biotechnology company that specializes in developing treatments for diseases of the central nervous system. Among the FDA-approved products is Nuplazid (pimavanserin), which is used to manage hallucinations and delusions associated with the psychosis of Parkinson’s disease (PDP). Another product in Acadia’s portfolio is Daybue (trophinetide), a synthetic glycine-proline-glutamate analog that was approved by the FDA for the treatment of Rett syndrome on March 10.
In my previous assessment, I detailed a number of challenges facing Acadia, such as the failure to expand Nuplazid’s Alzheimer’s application, sales freezes and impending patent expiration. I also speculated that even though trofinetide is slated to enter the US market, it may not significantly increase Acadia’s overall value because of the large payments that will be owed to Neuren once the FDA gives its approval. This could potentially require additional funding. I also pointed out the potential scenario where profits from trofinetide may not be fully realized until Nuplazid begins to face competition from generic alternatives. As a result, I advised to “Sell”.
There have been several key developments since my February review, including a 14% jump in Acadia shares, the FDA’s green light for trofinetide, and the release of the company’s Q1 ’23 financials.
This article will delve into the analysis of Acadia’s Q1 ’23 financial results.
Acadia’s finances
In Q1 2023, Acadia reported Nuplazid net sales increased 3% to $118.5 million compared to Q1 2022, primarily due to increased patient enrollment. However, sales volume declined 2% due to reduced inventory in the channel. The company’s research and development expenses decreased significantly from $128.9 million in Q1 2022 to $69.1 million in Q1 2023, primarily due to an upfront payment of $60 million to Stoke Therapeutics in 2022. SG&A expenses for Q1 2023 was almost the same as Q1 2022, with lower costs across the Nuplazid commercial franchise offset by Daybue startup investments of $101.2 million and $96.7 million, respectively.
Despite the slight improvement in revenue and expense reductions, Acadia still reported a net loss of $43.0 million, or $0.27 per share, for Q1 2023, an improvement over the Q1 2022 net loss of $113.1 million, or $0.70 per share. action. Net loss in both periods included non-cash stock-based compensation expense of approximately $15 million.
As of March 2023, Acadia had $402.9 million in cash and cash equivalents, down slightly from the $416.8 million reported at the end of 2022. The company also reiterated its financial guidance from February 2023, which forecast net sales of Nuplazid between $520 million and $550 million, R&D expenses between $235 million and $255 million (including $20 million of stock-based compensation), and SG&A expenses between $360 million and $380 million ( including US$45 million of stock-based compensation).
Acadia Q1 2023 analysis: Marginal improvement offset by persistent losses
Upon closer inspection, Acadia’s financials show a marginal improvement when comparing Q1 2023 to the same period in 2022. Here are a few points to keep in mind:
- Moderate revenue growth: Acadia’s net product sales increased slightly from $115.5 million in the first quarter of 2022 to $118.5 million in the first quarter of 2023. While this growth is modest, it indicates some level of revenue expansion, likely driven by increased patient enrollments.
- The net loss remains, albeit reduced: Acadia’s net loss was reduced from $113.1 million in the first quarter of 2022 to $43.0 million in the first quarter of 2023. While this is a significant reduction, it is critical to note that the company is still operating at loss. The decrease was primarily due to the $60 million upfront payment to Stoke Therapeutics in Q1 2022, which is a non-recurring expense.
- Liquidity appears stable, but net loss continues: Despite the net loss, Acadia’s liquidity position appears stable. As of March 31, 2023, the company had $402.9 million in cash, cash equivalents and investment securities, down slightly from $416.8 million at the end of 2022. However, continued losses could ultimately expected to put pressure on that liquidity.
- Relying heavily on stock-based compensation: Acadia appears to be heavily dependent on stock-based awards, particularly within its SG&A expenses. While this strategy can help retain talent and align employee interests with shareholders, it can also dilute the equity of existing shareholders.
Static sales of Nuplazid, rising SG&A costs and high-priced Daybue marketing
Unfortunately, Acadia’s Q1 report didn’t significantly change my view of the company. Sales of Nuplazid have remained largely static compared to the previous year, and there is no forecast that this trend will change before key patents expire later this decade. While Acadia expects data on Nuplazid related to negative symptoms of schizophrenia this year, achieving such an indication is known to be particularly challenging.
The company’s general and administrative expenses, which already exceed $100 million each quarter, are expected to increase with Daybue’s ongoing launch. Acadia’s list price for Daybue, approximately $375,000, is well above my conservative estimates, but is in line with the pricing of rare disease treatments. Assuming 20% of the 6,000-9,000 Rett patients in the US take Daybue at a cost of $375,000 per year, expected peak sales would range between $450 million and $675 million.
UpToDate, a renowned resource among clinicians, recommends that Daybue treatment decisions be personalized and involve collaboration between the treating physician, family, and caregivers. This advice is based on the results of the LAVENDER study, which UpToDate reported showed modest benefits over a short period of time and a significant incidence of side effects, especially diarrhea. Also, in my opinion, the high cost of the drug may present financial barriers for Rett patients. As a result, the $450 million and $675 million estimates for Daybue are likely optimistic estimates.
My analysis and recommendation
In conclusion, Acadia Pharmaceuticals’ outlook remains uncertain despite modest financial improvements, including a slight increase in net product sales and a significant decrease in expenses between Q1 2022 and Q1 2023. Although the company is still reporting net losses, the magnitude has decreased. Although the liquidity position appears stable, current losses can affect the company’s financial position in the long term. Regardless, investors can take heart from Acadia’s solid cash position, which gives the company both opportunity and time.
Acadia’s lead product, Nuplazid, has reached a sales plateau near $500 million, which is likely to continue until key patents expire later this decade, indicating limited near-term growth potential. With generic drugs likely to enter the market within a few years, sales of Nuplazid could potentially take a significant hit in the coming years.
Meanwhile, Acadia’s new product, Daybue, has the potential for peak annual sales of $500 million, but may not significantly increase profitability due to its high cost, potential side effects and modest short-term benefits. Daybue’s profitability may be further hampered by principal payments and royalties owed to Neuren.
Although Acadia’s enterprise value of about $3 billion does not indicate a clear overvaluation, the company’s outlook remains uncertain due to challenges surrounding Nuplazid, the impending patent expiration and the uncertain outlook for Daybue. Therefore, my investment recommendation for Acadia remains Sell.
Investors should monitor the company’s ongoing research and development efforts, potential changes in its strategic direction and market acceptance of Daybue to gain more clarity on whether Acadia can overcome current challenges and deliver long-term growth and value for its shareholders.
Risks for the thesis
When the facts change, I change my opinion.
While I have a negative rating on Acadia Pharmaceuticals right now, there are several potential factors that could challenge this outlook:
- Stronger-than-expected sales for Nuplazid: While I believe its revenue may have peaked around $500 million a year, Nuplazid could exceed expectations due to increased adoption by prescribers or more eligible patients.
- Enhanced Intellectual Property: Acadia could improve Nuplazid’s intellectual property or extend its patents, deterring generic competition.
- Successful extension of Nuplazid application: If approved for use in other central nervous system diseases, Nuplazid could significantly increase revenue and growth potential.
- Positive results for Daybue in additional studies: If more studies show significant efficacy and fewer side effects, Daybue could see higher acceptance and revenue for Acadia.
- Stronger-than-expected sales for Daybue: Despite my belief that $500 million in peak annual revenue is optimistic, Daybue could exceed those expectations, boosting Acadia’s profitability outlook.
- New product development: If Acadia develops a new product with strong potential for central nervous system disorders, it could lead to significant revenue and growth potential.
- Mergers and acquisitions: A larger pharmaceutical company aiming to expand its neurological portfolio could acquire Acadia at a premium.