Profiting From a Knee-Jerk Market Reaction

Acadia Pharmaceuticals ACAD is one of my biopharma names. Not because the company has stellar management or because the shares are hugely undervalued. Not because the company would make a logical acquisition for a larger player that wanted to expand their footprint in the central nervous system (CNS) space, which they would. 

I love ACAD because at least twice per year the stock gets oversold on negative news. I highlighted one of those opportunities in mid-May when the shares briefly dipped below the $15 level. Over the next couple of months, the shares rose back up to nearly $19 a share.

ACAD fell 15% this week following the company posting their second-quarter results on Tuesday. This feels like a knee jerk selloff, though, as Acadia actually beat both top and bottom-line expectations for the quarter. For me this sets up another "rinse, wash, and repeat" trade. 

The other thing I like about the stock is that options against the equity have very good liquidity and lucrative premiums. I can set up a trade where I take my over 15% "Vig" by mid-March even if the shares move down slightly from their current trading level, let alone rebound.

Let’s take a look at what caused all the ruckus that triggered the pullback. Acadia has two products on the market. Its flagship compound is called Nuplazid. This drug was approved in 2016 by the FDA. It is the one and only approved treatment for hallucinations and delusions associated with Parkinson's disease, which occurs in approximately 40% of this population. In early 2023, its compound Daybue became the first-ever treatment approved for Rett Syndrome. This is a rare but truly dreadful neurological disorder.

Not all that surprisingly given it is early stage in the rollout, Daybue’s revenues came in around $5 million shy from the $90 million the analyst community was expecting for the quarter. Management also reduced its 2024 guidance for Daybue sales by $30 million to a new range of between $340 million and $370 million. 

However, on the other side of the coin, Nuplazid sales for Q2 came in at $157 million, approximately $10 million more than the analyst consensus. In addition, management boosted 2024 revenue guidance for Nuplazid to a new range of $590 million to $610 million from $560 million to $590 million previously. This made overall sales guidance for 2024 basically a wash.

Now Morgan Stanley MS did downgrade ACAD to "Neutral" on the news and chopped their price target to $20 a share, from $28 previously. However, JP Morgan JPM and a half dozen other analyst firms maintained their "Buy" ratings, albeit several took their price targets down a few bucks a share. New price targets mostly reside in the mid-to-high $20s with a couple above $30 a share. 

Acadia is moving into being profitable in 2024 on sales growth of around 30%. Thne company had net income of $33.4 million for the second quarter and its cash balance grew to some $500 million. The company listed no long-term debt within its second quarter 10-Q. 

Equating for cash, the shares are now valued at a bit over two times forward revenues — a rather cheap valuation in the biopharma sector.

Option Strategy:

This is how one can execute a covered call position in ACAD. As a reminder, covered call orders involve buying an equity and simultaneously selling just-out-of-the-money call strikes against the new position.

Using the March $15 call strikes, fashion a covered call order with a net debit in the $12.75 to $12.85 a share range (net stock price - option premium). 

This strategy provides downside protection of 18% with upside potential of 17% even if this stock falls a bit from here over the next six months.

At the time of publication, Jensen was long ACAD.