What happened

Shares of Sage Therapeutics (NASDAQ:SAGE) lost over 62% today after the company announced top-line results from the phase 3 MOUNTAIN study evaluating SAGE-217 as a treatment for major depressive disorder (MDD). The drug candidate did not meet its primary endpoint. 

While executives were clearly disappointed by the results, they did attempt to calm investors by noting that SAGE-217 is an "active drug" based on statistically significant findings in certain other metrics. But investors weren't buying it, especially now that the door is wide open for a competitor to walk through.

As of 11:41 a.m. EST, the pharma stock had settled to a 57.4% loss.

A disappointed scientist sitting in the lab.

Image source: Getty Images.

So what

The phase 3 MOUNTAIN study of SAGE-217 in MDD had a primary endpoint of achieving a statistically significant reduction compared to placebo in the Hamilton Rating Scale for Depression (HAM-D) total score at day 15. But the drug candidate barely outperformed placebo at the checkpoint. 

To be fair, two other completed studies for SAGE-217 were successful, while three more are ongoing. The drug candidate has also received Breakthrough Therapy designation from the U.S. Food and Drug Administration. 

Still, this is a big setback for Sage Therapeutics. SAGE-217 is an oral drug with a novel mechanism of action compared to depression drugs currently on the market. If it proved successful, it could have achieved billions of dollars in annual sales. 

The failure of the promising drug candidate in MDD creates an opportunity for competitor Axsome Therapeutics (NASDAQ:AXSM). Its lead drug candidate, AXS-05, works differently from SAGE-217. But it's also administered orally and has also received Breakthrough Therapy designation from the FDA. The company expects to report phase 3 data in MDD before the end of 2019, with late-stage results in treatment-resistant depression (TRD) in early 2020. Success isn't guaranteed, but AXS-05 now has a huge opportunity to steal the market.

Now what

Are investors getting a little ahead of themselves by cutting the share price of Sage Therapeutics in half today? Perhaps, but perhaps not. Much of the company's $7.5 billion market valuation (before today) factored in the success of its oral depression therapy. While SAGE-217 isn't necessarily heading to the scrap heap, its market potential has taken a massive hit today. Therefore, the company's new market valuation of about $3.3 billion seems reasonable -- or even a little frothy.