Acadia Pharmaceuticals Daniel Berrios, Xianming Li, Ryan Matsumoto, Sunny Huang, Kojo

Osei, Ariana Bhatia

Introduction: ACAD

Acadia Pharmaceuticals ACADSmall cap, relatively young, bio pharmaceutical company

Price (2/15/15): $37.78Founded: 1993Headquarters: San Diego, CAMarket Cap: $3.41bilEmployees: 95

ACAD stock performance from 2013 to present, image from Yahoo Finance

Our Investment Thesis: Despite risks associated with small cap, high volatility stocks, we believe ACAD has a high chance of success, far beyond their peers, given their impending FDA approval for Pimavanserin and their niche position

in the Parkinson’s and Alzheimers market.

Healthcare Industry Overview

● Mergers and acquisitions of hospitals/health care systems/physician groups

● Incentives○ Economies of scale○ Hospitals can

increase prices○ ACA care

coordination● Implications

○ Rising healthcare costs

○ 3% higher payments to hospitals

Consolidation Tax Inversion

● Companies shift incorporation abroad to avoid US tax rates

● Taking advantage of lower foreign tax rates

● 9 out of 13 deals relating to tax inversion are in health care

● US: 35% Ireland 12.5%● September 2014: U.S.

Treasury curtailed tax breaks from international deals

● Orphan Drug Act of 1983 provides financial incentive for investigating rare disease treatments

● Blockbuster drugs more difficult to develop

● Potential for small market monopolies

● Larger companies have been acquiring startups to move into niche markets

● Trending towards “nichebuster” rather than “blockbuster” drugs

Niche Drugs

Government Policies / Population Trends

● Uninsured rate dropped from 18% to 12.9%

● 11 million+ more people have insurance

○ 67% from Medicaid expansion○ 33% from insurance exchanges○ Figure expected to grow in future

● Implication -> Increased demand for prescription drugs for newly insured

● Implication -> New enrollees, gov’t taxes could decrease profit margins for insurance companies

● Lower Medicare reimbursements to hospitals -> Pressure for M&A

Affordable Care Act● People ages 65+

○ 12.4% of the U.S. population in 2000

○ 19.0% of the U.S. population in 2030 (projected)

● Medicare enrollment○ 47.7 million seniors in 2010○ 81.5 million seniors in 2030

(projected)● Parkinson’s Disease

○ Average age of onset is 60○ 1 million Americans○ Parkinson’s Induced Psychosis

affects 1 in 5 Parkinson’s patients

Population Trends

Management Team

● CEO (2000): Uli Hacksell○ 1991 to 1999: Executive positions at Astra (pharmaceutical company)○ PhD in Medicinal Chemistry from Uppsala University

● Executive Vice President (2014): Stephen R. Davis○ Chief Financial Officer and Chief Business Officer○ Previously an executive at Heron Therapeutics, Ardea Biosciences, Neurogen Corporation (CEO)

● Executive Vice President (2006): Roger G. Mills○ Executive VP of Development, Chief Medical Officer○ Previously VP of Development at Pfizer Global R&D○ Key role in development of Sutent at Pfizer, Tamiflu at Gilead Sciences

● Executive Vice President, Chief Commercial Officer (2013): Terrence O. Moore○ 25 years of experience as senior member of sales and marketing at several pharmaceutical companies○ Helped build multibillion dollar brands including Prozac, Zyprexa, and Effexor XR

● Executive Vice President, General Counsel and Secretary (2004): Glenn F. Baity○ Previously a senior associate at Cooley LLP, experience with M&A, financings, corporate governance

Strengths

● Nuplazid (Pimavanserin): ○ Currently working towards Stage IV FDA approval for Parkinson’s disease○ “Breakthrough Therapy” Designation by FDA○ Market size for effective Parkinson’s treatment: 1 mil U.S., 4-6 mil globally ○ Potential applications in both Alzheimer's as well as Schizophrenia, both of

which stage II approved, working towards stage III● Stock Sales

○ Early 2014 as well as in 2013 multiple stock sales have resulted in good balance sheet figures

○ $355 million in cash○ Projected enough for Pimavanserin development and general costs through

2017● Robust Pipeline....

Image from http://www.acadia-pharm.com/pipeline/

Strengths: Pipeline

Risks

● Future value priced in○ $2.18 in Oct. 2012, $34.21 as of 2/15/15○ Stock’s value entirely dependent on future approval of Pimavanserin and stock

price has already risen significantly ○ No earnings currently

● Stock volatility due to trial success & regulatory approval○ 2009 previous trial failure due to high placebo results and drug deficiencies ○ Stock dove from nearly $16 in 2006 to a low of $0.67 in 2010○ Risk capital stock

● Future Competition○ Models and revenue projections do not acknowledge potential for future

competition○ Widespread assumption that ACAD would dominate Parkinson’s market for at least

next 5-7 years

Competitor Environment

● Neurocrine - Two stage three products; none NDA filed; none directly applied to psychotics. Not likely to detract from Nuplazid market share.

● Stemline Therapeutics Inc. - Products focused on cancer treatment. Also not likely to affect Nuplazid sales.

In terms of drug similarity:● AstraZeneca

● Eli Lilly

● Janssen

All have similar drugs with black box warnings due to side effects.

Comparables AnalysisSummary of Results Key Comparables

• Comparables pose a difficult approach for Acadia and its competitors because they are all early-stage

• Earnings somewhat irrelevant because all these companies are reinvesting for growth, with high R&D, but Acadia is moving in the right direction

• Looking at management effectiveness comps, such as return on assets/equity, can be more telling, and Acadia leads here

*As of 2/26/15

Acadia Pharmaceuticals

(ACAD)

• Price = $37.78• Market Cap = $3.77B• Revenue = 0.11M• EPS = -$0.80 (ttm)• Return on Assets (Equity) = -17.75% (-29.79%) (ttm)

Neurocrine Biosciences

(NBIX)

• Price = $40.05• Market Cap = $3.09B• Revenue = N/A• EPS = -$0.81 (ttm)• Return on Assets (Equity) = -20.24% (-36.79%) (ttm)

Stemline Therapeutics

(STML)

• Price = $16.20• Market Cap = $209.94M• Revenue = $0.28M• EPS = -$2.30 (ttm)• Return on Assets (Equity) = -24.59% (-40.11%) (ttm)

Dynavax Technologies

(DVAX)

• Price = $17.50• Market Cap = $460.13M• Revenue = $11.60M• EPS = -$3.51 (ttm)• Return on Assets (Equity) = -46.35% (-84.02%) (ttm)

M&A’s, Precedent Transactions

•Expand market share•Technology•96 deals worth more than $5bn completed over the past 12 months-- 37% of the overall volume of corporate transactions.•Tax strategies

Drivers of M&A

Recently, larger companies have more to spend on research development•Fewer hospital and provider options for patients•Given premiums of recent transactions, expect Acadia’s share price to increase if acquired•Approval of new PDP drug makes Acadia an attractive acquisition target•Potential acquirer: AbbVie

Potential Effects

Selected Transactions•Kindred Healthcare acquired Gentiva ($7/share, 64% premium)•Gilead’s acquisition of YMI BioSciences ($2.95/share, 81% premium)

DCF Analysis

Sensitivity Analysis

Several numbers from Jefferies Analyst Report

Recommendation

Price Target: $62

Sell: Phase 4 FDA approval of Pimavanserin fails or price falls below $20

Time Horizon: 24-36 months

Questions