Baker Brothers recently acquired a 22.6% stake in ACADIA Pharmaceuticals, a move that has sent positive signals to investors regarding the potential of the biotech firm.
Investing without a safety net
Despite the wild optimism surrounding ACADIA Pharmaceuticals and its wonder drug Pimavanserin, I would advise investors to tread with caution when it comes to placing their bet in this basket. For starters, the firm’s $1.53 billion market cap is inflated for a company with zero sales. Granted, the Pimavanserin NDA (New Drug Application) filing is likely to be approved by the FDA, but here is the rub with all the wild optimism surrounding the company: ACADIA has never had any of its pipeline drugs approved before!
Previous trials for Pimavanserin itself fell flat on their face. Although this wonder drug seems to be bringing home the bacon right now, only a clairvoyant can tell with 100% certainty whether this will translate to real sales come late 2014 or early 2015 when it is supposed to officially hit the markets.
Risks
Cash flow is typically a very important indicator of a biotech company’s health. ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD) has a strong cash flow and increased year-on-year cash flow by more than 200% from just $31 million last year to $108 million this year. The company also has zero debt, meaning they can continue to spend cash freely on their clinical trials for Pimavanserin. The financial indicators seem to say that the company is doing well.
However, let us not forget that ACADIA has been here before and lost. Early phase III trials for Pimavanserin did not perform very well, since the drug failed to meet its efficacy endpoints despite proving to be very safe. ACADIA has pointed out that the dosages used were too low, hence the less-than-impressive efficacy results. There is no way of guaranteeing that the FDA will approve Pimavanserin for the treatment of PDP (Parkinson’s Disease Psychosis). As an investor, keep in mind that rejection by the FDA is a very real possibility.
The market for Pimavanserin as the potential drug for the treatment of PDP is rather small — $2.5 billion per year. The good news, however, is that if Pimavanserin proves to be effective against schizophrenia, with a much bigger market, its sales could very well skyrocket. Right now, ACADIA Pharmaceuticals has no revenue to speak of and has a high cash burn rate. This does not augur well for the company in the long run.
Conclusion
Right now, its all systems go for ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD) and Pimavanserin. There is a case to be made for the company’s stock considering the almost [infallible] record the Baker Brothers have in picking out winning biotech stocks. But, remember that there is nothing like a foolproof method of picking out winners or losers in this business. It would not be prudent to hold the stock for now and wait till one and half or two years later to find out whether Pimavanserin will actually be approved by the FDA for sale. The current strong showing by the company is purely based on sentiment. I would strongly advise to sell the shares now but keep an eye on the company and developments on Pimavanserin.
Naomi Warmate-Igwe has no position in any stocks mentioned. The Motley Fool recommends Seattle Genetics, Inc. (NASDAQ:SGEN). Naomi is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Look Before You Leap With This Company originally appeared on Fool.com and is written Naomi Warmate-Igwe.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
