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Is This Why Axsome Therapeutics Is Losing Ground Again Today?

By Maxx Chatsko - Updated Apr 16, 2019 at 9:08PM

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The tiny pharma company splashed onto the radar of investors this week with great trial results, but a maturing drug pipeline has one inescapable downside.

What happened

Shares of Axsome Therapeutics ( AXSM -1.33% ) lost as much as 19.7% today, which marks just another day for the small-cap pharma this week. The stock delivered a 187% total gain on Monday and Tuesday, then declined 14.5% on Wednesday. Today's slide is simply following that course correction in the midst of a wild week.

It all started when the company announced that its lead drug candidate, AXS-05, had successfully wrapped up another phase 2 trial. The study found that 47% of patients with major depressive disorder (MDD) that took the experimental therapy achieved remission after six weeks. That compared favorably to remission in just 16% of patients taking a prior-generation depression medication, which also happens to be one of the two active components of AXS-05.

While investors are excited to see Axsome Therapeutics on the road to advancing its lead drug candidate to its third phase 3 trial, the maturing drug pipeline brings with it a new obstacle for the tiny company: drug development costs. As of 12:58 p.m. EST, the stock had settled to a 10.7% loss.

A roller-coaster against a blue sky.

Image source: Getty Images.

So what

The results from the phase 2 trial evaluating AXS-05 in MDD immediately drew comparisons to Sage Therapeutics, which has earned a nearly $6 billion market cap for its impressive work developing next-generation therapies for the same depression disorders. Whether the lead drug candidates from each company, which differ in mechanism of action and development milestones, can be directly compared is up for debate.

What cannot be debated is that Axsome Therapeutics is going to need a lot more cash to fund the development of its busy pipeline. The company is evaluating AXS-05 in two phase 3 trials for central nervous system diseases, and that doesn't include the just-finished phase 2 trial in MDD that sparked this week's epic run. Drug candidate AXS-07 is ready to begin a phase 3 trial for migraine, while AXS-12 and AXS-09 are ready to begin phase 2 trials for various disease targets.

While focusing all of its bandwidth on AXS-05 programs should save capital for the time being, the business ended September 2018 with $15 million in cash and an annual cash burn rate of approximately $27 million. Management wisely took advantage of the stock surge this week to raise $23.3 million from a share offering (it's not clear whether the amount is gross or net of fees), but it may need to raise additional funds in 2019, especially if investors consider that later-stage trials are more expensive to conduct than early- and mid-stage studies.

Now what

As far as clinical-stage pharma companies go, needing more capital to toss successful mid-stage drug candidates into late-stage trials is a good problem to have. Shareholders of small-cap pharma companies are accustomed to experiencing at least some amount of share dilution but would happily trade that for successful clinical outcomes. Will it matter that Axsome Therapeutics is inexperienced and lacks a track record of success? Or will Wall Street and investors learn that sometimes when it comes to drug development, simple drug formulations based on well-developed theses are best? Everyone will find out soon enough.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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