Stone Energy Upgraded to Buy

We are upgrading Stone Energy Corp.'s (SGY) shares to Buy from Hold following the company's better-than-expected second quarter 2008 results. The stock's recent pullback (down more than 20% in the last month alone), primarily due to commodity-price weakness, has made its valuation very attractive.

We like the acquisition of Bois d'Arc Energy (BDE). The strategic rationale of the transaction is compelling, given the complementary asset bases, strategies, and skill sets of the two companies. The new Stone Energy will be more diversified with a significant Gulf of Mexico exploration exposure. Our price objective remains unchanged, though we have raised our estimates.

In the quarter, Stone Energy reported recurring earnings of $2.91 per diluted share, compared to $1.29 per diluted share in the year-earlier quarter. The year-over-year gain was driven by higher commodity price realizations and lower operating costs, which more than offset weak volumes.

Prices realized during the quarter averaged $110.10 per barrel of oil (up approximately 71% year-over-year) and $11.46 per Mcf of natural gas (up nearly 53% year-over-year).

Post merger (with Bois d Arc), the company expects to produce more than 300 MMcfe of natural gas per day and own in excess of 700 Bcfe of natural gas equivalent in estimated proved reserves, about 275 Bcfe of estimated probable reserves as well as material leasehold position of over 800,000 net undeveloped acres.

Acadia Regrouping After Hit

After the failure of the ACP-104 program and the lack of partnering interest in pimavanserin for schizophrenia, Acadia Pharmaceuticals, Inc. (ACAD) has undertaken a massive restructuring program. The company will reduce headcount by 50 percent and streamline its research and development efforts on pimavanserin for Parkinson's disease psychosis (PDP). Development in schizophrenia remains on hold until after the phase III PDP data in the second half of 2009.

It has been over a year since the phase IIb data came out showing the encouraging results when pimavanserin is added to risperidone. However, since that data in March 2007 risperidone has lost patent exclusivity and the management has done very little (publicly) to push forward with development of the compound. We can only conclude that upon further analysis the data are not as robust as originally presented and potential development partners are not interested in the molecule at this time.

Given the dramatic slowdown in the sleep maintenance / insomnia market and the development of competing agents, there seems little value in moving pimavanserin into more advanced development for this indication.