Piper pt 2:
SCHIZOPHRENIA
Schizophrenia is a chronic and disabling mental disorder that is
characterized by distorted perceptions of reality, hallucinations,
delusions, disorderly thinking, and diminished emotional expression.
Schizophrenics often suffer paranoia such as hearing voices in their head
or believing that other people are reading their minds, controlling their
thoughts, or plotting to harm them. Scientists are currently unsure as to
the exact cause of schizophrenia; however, it is generally accepted that
at least a predisposition toward the disorder is inherited as family
lineage has been observed. Further, the balance of certain
neurotransmitters, including dopamine and serotonin, appears to be
implicated in the disease.
The NIH estimates that approximately 1% of the population develops
schizophrenia, afflicting over 2 million Americans and 25 million people
worldwide. Sadly, the recovery rate is low with fewer than 20% attaining a
full recovery and nearly 10% of patients committing suicide.
Currently approved anti-psychotic therapies for schizophrenia can be
categorized into either first generation (typical) or second generation
(atypical) therapies. The earliest drugs were introduced in the 1950s,
including haldol by Johnson & Johnson. These therapies function by
blocking dopamine (D2) receptors. Side effects of typical therapies
include various movement disorders, sedation, dry mouth, weight gain,
photosensitivity, hypotension, and epileptic fits.
The newer atypical antipsychotics include clozapine (Novartis), geodon
(Pfizer), seroquel (AstraZeneca), risperdal (JNJ), zyprexa (Lilly), and
abilify (Bristol-Myers Squibb). These drugs function by interacting with
both dopamine and serotonin (5-HT 2A ) receptors, and are less likely to
cause movement disorders. However, atypical therapies do not improve the
cognitive disturbances of schizophrenia and are associated with side
effects such as obesity, type II diabetes, and cardiovascular problems.
Figure 1: Schizophrenia Market Drugs - Competitive Landscape
In 2003, global sales of drugs to treat schizophrenia and psychosis topped
$12 billion. Several of the atypical therapies were blockbuster drugs
exceeding $1 billion in sales. Many of these drugs face patent expiration.
Further, there remains room in this market for new drugs with improved
side-effect profiles and enhanced efficacy. We believe that schizophrenia
represents a large opportunity for ACADIA. The company is currently
developing two drugs for the treatment of this disease: ACP-103 and ACP-
104.
ACP-103: Schizophrenia
ACADIA is also developing ACP-103 as an adjunctive therapy for
schizophrenia. It is widely accepted that serotonin (5-HT) plays a partial
role in schizophrenia as evidenced by the efficacy of atypical anti-
psychotic agents. As outlined above, ACP-103 is a selective 5-HT 2A
inverse agonist. ACADIA believes that excessive dopamine blockage of anti-
psychotic drugs leads to a range of negative side effects. The company's
goal is to develop ACP-103 for adjunctive use with anti-psychotics to
achieve a balance between dopamine receptor blockage and 5-HT 2A inverse
antagonism to improve efficacy and reduce side effects.
ACP-103 has completed several safety trials in the Parkinson's disease
program and has been found to be safe and well tolerated. ACADIA intends
to examine ACP-103's ability to reduce motor disturbances caused by
haloperidol therapy in both healthy individuals and schizophrenic
patients.
We look for ACADIA to advance ACP-103 into a Phase II trial for
schizophrenia later this year. The Phase II trial will be designed as a
multi-center, double-blind placebo controlled study to examine the ability
of ACP-103+ haloperidol to decrease psychosis while improving the side
effects of schizophrenia treatment. We look for the trial to enroll 250
schizophrenics in three cohorts who will receive either haloperidol alone
or in combination with ACP-103. The trial will seek to determine the
tolerability and the efficacy of combination therapy on the positive and
negative symptoms of schizophrenia.
A second Phase II trial will examine the ability of ACP-103 to improve
neuroleptic-induced akathisia (motor restlessness from anti-psychotic
drugs) in schizophrenia patients. This study will enroll two arms and a
total of 36 patients.
ACP-104: Schizophrenia
As mentioned above, clozapine is a second-line atypical therapy for
schizophrenia that was approved over 30 years ago and is now off patent.
When the body metabolizes clozapine , it breaks down into ACP-104 (N-
desmethyl clozapine).
ACP-104 stimulates the m1 muscarinic receptor and appears to have a high
affinity to 5-HT 2A receptors. However, clozapine blocks the m1 muscarinic
receptor. So the relative concentration of clozapine versus ACP-104, which
depends upon each individual patient's drug metabolism, limits the
efficacy of clozapine therapy. Administration of ACP-104 skips the inter-
patient metabolic variability of clozapine by directly delivering the
active metabolite. As a result, ACP-104 may be dosed at lower plasma
levels and still prove efficacious. ACADIA believes that its new approach
will have the combined anti-psychotic effects of atypical therapy with the
potential for cognitive improvements.
As the major metabolite of clozapine , millions of patients have been
exposed to ACP-104 over the last few decades. Studies have demonstrated
the drug to be generally safe and well tolerated. Clozapine is associated
with a rare (1% of patients), but potentially fatal, blood disorder called
aganulocytosis - complete loss of white blood cells. As a result, patients
on clozapine are subject to weekly or bi-weekly blood tests. In addition,
an estimated 5% of clozapine patients get seizures. There is the potential
that ACP-104 therapy exhibits similar side effects and requires blood
testing.
Further, as the active metabolite of clozapine, ACP-104 has a proof-of-
concept for schizophrenia. Previously, ACADIA conducted two clinical
trials on schizophrenia patients treated with clozapine to demonstrate the
correlation between ACP-104 to clozapine plasma drug ratio and cognitive
function. In the studies, 92 schizophrenia patients were treated over a
period of six months. The study demonstrated that a high ACP-104-to-
clozapine drug ratio is directly related to improved cognitive
functioning, indicating that ACP-104 is responsible for the cognitive
benefits seen with clozapine therapy.
To further test this hypothesis, ACADIA will conduct four Phase II trials
in 2004 to examine the safety, tolerability, and PK of ACP-104, and
generate initial efficacy data in schizophrenia. The first two studies,
which should begin this summer, are single and multi-dose escalation
trials in schizophrenia patients to examine PK and to determine proper
dosing. Preliminary antipsychotic and cognitive efficacy will also be
measured. Following the completion of these trials, two additional Phase
II trials will be conducted to determine efficacy of ACP-104 in patients
with acute breakouts of schizophrenic symptoms and untreated cognitive
disturbances. If these trials are successful, ACADIA may advance ACP-104
into Phase III trials next year.
NEUROPATHIC PAIN
Neuropathic pain is a chronic pain condition thought to be caused by
abnormal nervous system function. The pain often appears to be related to
nerve damage caused by trauma, amputation or disease including diabetes,
cancer, irritable bowel syndrome, post-herpetic neuralgia, and HIV/AIDS.
Generally, the pain continues to persist even when the underlying cause
has disappeared and is often resistant to both opioids and NSAIDs. It is
estimated that 26 million people suffer from neuropathic pain, and yet it
remains a poorly understood and under-served market. Today, only Pfizer's
Neurontin is approved for the treatment of neuropathic pain. In 2003,
worldwide sales of Neurontin reached $2.7 billion and Pfizer expects to
launch pregabalin possibly this year.
AGN-XX/YY. Allergan and ACADIA are developing a series of orally active,
small-molecule drugs that act as selective alpha-adrenergic agonists to
relieve pain. Allergan has stated as its goal to take two preclinical
candidates - designated AGN-XX/YY - into the clinic this year. In animal
and preclinical models, AGN-XX and AGN-YY both appear to be more effective
than Pfizer's Neurontin at a lower dose with fewer side effects. Depending
upon success in man, Allergan intends to advance one of these compounds
into Phase II trials in late 2005.
GLAUCOMA
Glaucoma refers to a group of ocular disorders caused by damage of the
optic nerve and is the leading cause of blindness. The optic nerve is the
pathway that carries the electrical signals generated by light received by
the retina to the brain for processing. It is estimated that 3 million
Americans and 65 million people worldwide suffer from Glaucoma. The most
common form of Glaucoma is called primary open angle glaucoma and is a
result of clogged drainage canals to the eye. The poor drainage leads to
increased fluid build-up and intraocular pressure, which is what causes
the damage to the optic nerve.
AC-262271. ACADIA is working in collaboration with Allergan to develop AC-
262271, a small-molecule drug to reduce intraocular pressure. AC-2622771
appears to interact with and activate muscarinic receptors that control
intraocular pressure. Preclinical data demonstrate the compound to have
efficacy and we look for the collaboration to file an IND and to initiate
a Phase I trial in the near term.
Figure 2: ACADIA's Drug Pipeline
Source: Company Reports
COLLABORATIONS:
Allergan. ACADIA and Allergan have entered into three partnerships since
1997.
In the 1997 collaboration, Allergan and ACADIA agreed to develop
therapeutics for neuropathic pain and ophthalmic indications. In this
initial collaboration, Allergan made a $6 million equity investment in
ACADIA and agreed to pay the company up to $20.5 million in license fees
and milestones in exchange for a single drug candidate. Through December
31, 2003, ACADIA had received $9 million. This collaboration was amended
under last year's collaboration agreement.
In July 1999, Allergan and ACADIA signed a second research collaboration
to develop ocular drugs based on muscarinic receptors. ACADIA is
responsilbe for discovering two compounds in exchange for up to $24
million in license fees, research support, and milestone payments. ACADIA
has received $8.7 million as of the end of 2003 and retains the rights for
all non-ocular indications.
In March 2003, ACADIA and Allergan signed a new three-year extended
research collaboration. Under the agreement, Allergan has the right to
develop, commercialize, and exclusively license three drug targets in
exchange for up to $60 million in research support, license fees, and
milestone payments. Approximately $4 million has been received to date.
This collaboration is renewable by agreement of both parties and ACADIA
will be eligible for additional future royalties.
To date, the collaboration has led to the discovery and development to
AGN-XX/YY and AC-2622771 for neuropathic pain and glaucoma respectively.
Under the agreement, Allergan has rights to three additional compounds and
ACADIA can potentially receive up to a total of $110 million in additional
funding from the collaboration. To date the company has received $27.7
million from this collaboration.
The Stanley Medical Research Institute. ACADIA and the Stanley Medical
Research Institute (SMRI) entered into an agreement in May 2004 for the
development of ACP-104. SMRI is a nonprofit organization that helps fund
basic research on schizophrenia. In exchange for the research funding,
ACADIA is responsible to pay SMRI future royalties upon the successful
development of ACP-104. To date, ACADIA has issued a $1 million
convertible promissory note to SMRI, which converted into shares of ACAD
common stock on the IPO.
DRUG DISCOVERY PLATFORM
Importantly, all of the drugs and clinical candidates highlighted above
were discovered by ACADIA's proprietary chemical-genomics platform.
ACADIA has turned the traditional drug discovery process around. Rather
than determining the function of each gene target, ACADIA first conducts
high-throughput screening using its proprietary R-SAT (Receptor Selection
and Amplification Technology) functional cell assay system. ACADIA has
developed a comprehensive set of R-SAT assays for members of the G-protein
coupled receptor (GPCR) and the nuclear hormone receptor families. R-SAT
assays are multiplexed, and are therefore cost-effective. ACADIA screens
these assays in parallel against its library of over 300,000 diverse
compounds. Right off the bat, ACADIA knows which gene targets are
"druggable."
From there, ACADIA works "backwards" to validate the target through more
traditional techniques. Importantly, we believe this "reverse" approach
saves time and money because ACADIA does not waste effort on targets that
are not tractable. The fact that researchers already have target-specific
chemistry also facilitates target validation.
ACADIA has also used its Reference Drug Library to generate the most
extensive database of CNS gene/drug interactions. This collection of
marketed and failed CNS drugs enhances the company's understanding of
target mechanism and potential adverse events.
The integration of this chemical-genomics platform enables ACADIA to
prioritize the most attractive programs based on both biological
validation and chemical tractability. ACADIA also has significant
medicinal chemistry capabilities centered outside of Copenhagen in Denmark
to optimize its lead candidates.
Figure 3: ACADIA's Drug Discovery Platform
Source: Company Reports
FINANCIALS
Revenues. We look for 2Q:04 revenues of $1 million earned from ACADIA's
collaboration with Allergan. For the year ending December 31, 2004 we
expect total revenues of $3.9 million.
Research & Development. As ACADIA advances its clinical pipeline, we look
for R&D expenses to grow significantly from those reported in 2003. In
2004, we expect R&D expenses to be back-end loaded due to the timing of
clinical trials. We have budgeted $6.3 million in R&D expenses in 2Q:04.
We believe that R&D expenses should climb as the clinical pipeline
progresses and forecast total year expenses of $25.5 million for the year,
a 50.6% increase from 2003.
General & Administrative. We expect ACADIA's G&A expenses to increase
slightly as the company expands its operations. We look for G&A expenses
of $950K and $3.9 million for 2Q:04 and the year, respectively. The annual
estimates represent a 38.3% increase from the $2.8 million reported in
2003.
Stock-Based Compensation. Under SFAS #123, ACADIA expenses stock-based
compensation costs. ACADIA must thus disclose the difference between the
original exercise price per share determined by its BOD and the revised
estimated fair value per share. This line will not affect cash flows, but
will have an effect on operating income and net income on the income
statement.
During 1Q:04 Acadia recognized a $695K non-cash, stock-based compensation
expense related to previously amortized deferred stock compensation.
Disclosures indicate expected charges of $1.8 million for the remainder of
the year, and $1.3 million, $649K, $255K and $29K for the years ending
December 31, 2005, 2006, 2007 and 2008, respectively.
We now look for 2Q:04 non-cash stock-based compensation expenses of $600K,
resulting in a total of $2.5 million for the year. Going forward, we
expect future stock compensation to be issued at fair market value and
look for this expense to move towards $0 over the next few years.
Net Loss. In 2Q:04, we look for ACADIA to report a net loss of $6.7
million or ($0.73) per share. For the year, we expect ACADIA's net loss to
increase to $21.9 million or ($1.95) per share. On a pro forma basis,
excluding stock-based compensation, net losses should total $6.1 million
or ($0.66) per share and $19.4 million or ($1.95) per share for 2Q:04 and
2004, respectively.
Balance Sheet. With the completion of its $35 million initial public
offering, ACADIA has an estimated cash position of $49 million. We
forecast ACADIA should have sufficient cash resources to fund operations
through to the end of 2005. With an advancing clinical pipeline, multiple
phase II trials, and no significant leverage on its balance sheet, we look
for ACADIA to access the capital markets at some point over the next year.
VALUATION
We are initiating coverage on ACADIA with an Outperform rating and 12-
month price target of $11 per share. We project ACADIA's enterprise value
should increase to $180 million based on its clinical pipeline, supporting
a target market cap of $200 million. Today, ACADIA's CNS peer group is
trading at an average market capitalization of $197 million. Thus, our
forecast market capitalization for ACADIA is in-line with its peer group.
We look for ACADIA to create value by advancing three Phase II trials,
filing two INDs with partner Allergan, and potentially entering into new
collaborations. (Please refer to ACADIA's Comparable Company Valuation
Analysis attached.)
INVESTMENT RISKS
Among the risks associated with shares of ACAD are those typical with all
drug discovery companies including developmental, clinical, and regulatory
risks, particularly in CNS. ACP-103 and ACP-104 could fail in clinical
trials or to gain FDA approval. Even if ACADIA's drugs reach the market,
CNS is a competitive arena and the drugs could be commercial failures for
other reasons. Further, drugs could be pulled from the market in case a
previous unknown or long-term side effect is discovered. ACADIA may not
enter into new collaborations or achieve milestones in existing alliances.
The company will require additional funding, which would likely dilute
current shareholders. ACADIA could face future unforeseen litigation that
could adversely impact business. As a recent IPO company, we believe there
could be an overhang on shares of ACAD on its lock-up expiration, which is
180 days from the IPO date on November 22, 2004. |
