HCW $ACAD An Episode of Brief and Transient Agitation/Aggression
Our key takeaway from Acadia’s change of gear. Ending a two-day rollercoaster of M&A speculation catalyzed
by its absence at recent investor conferences, yesterday, Acadia reported the departure of CEO Uli Hacksell, and a
delay in the submission of the Nuplazid NDA in Parkinson’s psychosis from 1Q15 to 2H15. The interim CEO, former
CFO/CBO Steve Davis, emphasized that the filing delay was not related to issues with drug formulation, safety and
efficacy. Rather, the deliberate delay accommodates additional work to support the expansion of manufacturing
operations to support commercial scale production of the drug (all processes which must be submitted as part
of the NDA proper, though they are reviewed by a different part of the agency than the safety/efficacy dossier).
Following the totality of yesterday’s news, we highlight to investors what in our view is an underappreciated
variable: Nuplazid still has a Breakthrough Therapy designation (BTD) from the FDA. Then, since there are no
changes to the formulation or safety and efficacy data of the drug, nothing has changed with the agency’s regard
for the drug, and in our view, its approvability. More importantly, as we understand it, the BTD program is designed
to maintain an open channel for dialogue between a sponsor and the FDA, allowing for a default rolling NDA
submission with communication/feedback at every step. While we agree that the BTD would not eliminate the
need for a complete manufacturing dossier, it could in theory allow the company to begin a rolling submission of
what they do have (assuming that all parts of the NDA except the manufacturing dossier are ready, as reported
on yesterday’s call). While such strategy would not allow receipt of a PDUFA date (as happens only once all parts
of the NDA are in), it could certainly help sooth investors, and perhaps even give Acadia and the agency a head
start in their regulatory interaction on those parts of the NDA that are in fact ready (as per BTD process). We
look forward to further granularity on such potential developments, which would remind everyone that none of the
fundamental components of the bull thesis have changed.
The devil’s advocate corner. In our view, the departure of CEO Hacksell has many elements of a hostile sacking
[at least, optically]. This is in line with his departure from both the management team and the board, his absence
from yesterday’s call (which would have projected some continuity and/or good will), and the commentary from
current management (“mistakes were made, and the company should have been better prepared”). Importantly,
while the new management reiterated that there is no change in the strategic direction of the company, it is not
unreasonable to assume that the departure of the former CEO may generate new optionality in strategic directions,
and, in our view, optionality is always good.

Nuplazid’s formulation, safety and efficacy have not changed, thus, neither has our Acadia thesis.
We believe that Acadia represents a good long opportunity in the near-to-medium term, and an excellent
long opportunity in the distant term. The company’s main value driver, Nuplazid, is aimed at the untapped
sub-indication of psychosis in Parkinson’s disease (Phase 3 win in 2013, Breakthrough Therapy designation
in 2014, NDA submission pending in 2H15, launch in 2016 assuming approval), while also setting its
sight on the more lucrative, albeit challenging, psychosis in Alzheimer’s disease (Phase 2 readout in
1H16). Importantly, aside from the long opportunity, we highlight that catalysts in the next 12 months may
present opportunities and trading patterns appealing to short-term investors. Specifically, while we hold no
reservations on Nuplazid in Parkinson’s, we note that the following events are likely to create a choppy path
for shares: (1) a Nuplazid AdCom panel at the FDA (if any); (2) speculations on launch and market size in
Parkinson’s; and (3) a readout of the high-hurdled Alzheimer‘s study. Overall, we believe that Nuplazid’s
commercial potential in Parkinson’s alone offers upside to current trading levels, with the Alzheimer’s
indication offering a high risk/high reward free call option.
Valuation and risks to achievement of the target price. Our $50 PT is based on an equally weighted
composite of: (a) $53/share, as a 35x multiple of taxed and diluted FY22 GAAP EPS of $6.50 discounted
back to FY15 at 20%; and (b) an NPV of $47/share (discount rate 12%, growth rate 2.5%). While we currently
base our Acadia valuation on PD+P only and discount all AD+P value to zero, we highlight that each 20%
step in the probability of success for AD+P adds $11 to our current price target (e.g. assuming a 40%
probability of success in AD+P adds $22 to our current $50 PT). Risks to our investment thesis and target
price include: (1) failure of Nuplazid in clinical studies; (2) failure of Nuplazid to secure regulatory approval;
and (3) failure of Nuplazid to achieve peak commercial revenue estimates in our model, due to market size,
penetration rates, and pricing.

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