There might be something in our brains -- some fear of the unknown -- that keeps us from buying a stock at its all-time high. When you buy at the high, you have to realize that all the other holders of the stock got a better price than you did. You're in last place with the highest cost basis. Surely that's a bad place to be, right?
Axsome Therapeutics (AXSM -2.61%) was the best-performing stock in 2019. Investors who bought $5,000 worth of the stock at the beginning of the year (1,779 shares at $2.81) are now sitting on $176,000. Let's not let those fantastic gains -- or how cheap the stock used to be -- distract us from the important question: Is this biotech stock a good buy today?
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Buying at the high
Consider for a moment that anybody who bought Axsome last year was very likely buying at the high. You can find articles on the internet warning investors to stay away from Axsome, because the share price had gone from $2 to $8, and it had done so very, very quickly. "Do Not Buy Axsome Stock After Its Monster Rally," advised one Yahoo Finance writer. The quadruple in the stock price scared him off, and so that guy missed a 13-bagger. Because the stock went up, and up, and up.
When I bought my shares in Axsome, the stock was at an all-time high: $48.48 a share. I had missed that first 24-bagger, which was a little aggravating. And The Motley Fool had written plenty about the stock, describing it as a rocket ship back in January. That was after the first triple. And then the rocket was losing ground. It was still a rocket going up in April and May and July, too. So the news was out there. I had just managed to miss it.
In November there was a fall, but then the stock got back up and started running, which is when I bought my shares. And then in December, it was on fire, which is a good thing. In stock lingo, being on fire is always a positive. (Unless it's a dumpster fire, you don't want to buy into a dumpster fire.) After the stock was moving and on fire, it started jumping. And then, at the end of the year, the darn thing was up 3,600%.
Should you buy at the high? I hate to buy at the high. I didn't want to buy at the high when I bought at the high. But Axsome was cheap, relative to its market opportunity. And I really wanted the stock. So I bought at the high.
Ultimately these short term price gyrations are highly irrelevant. Either Axsome gets an approval and it has a billion-dollar molecule. Or it fails to get an approval and this stock drops through the floor. It's a binary event. And if we're right, all the buyers of the stock are going to be happy. And if we're wrong, all the buyers are going to be sad. These short term price gyrations aren't nearly as important as the question of whether you want to own this stock or not. That, as they say, is the million dollar question.
Sneaking past the blood-brain barrier
Nature devised a defense system in our brains to keep foreign objects out. It's called the blood-brain barrier. Scientists don't know how to get drugs past nature's defense mechanism. In fact, there's a company, Denali Therapeutics (DNLI -3.41%), whose main reason for existence is to figure out how to get drugs past the blood-brain barrier.
The founder of Axsome, Dr. Herriot Tabuteau, is a biochemist and molecular biologist. The company's lead molecule, AXS-05, is a synthesized combination of bupropion (the anti-depressant agent in Wellbutrin) and dextromethorphan (cough syrup). The two drugs have notorious interactions because cough syrup is able to sneak across the blood-brain barrier. What happens is that you get more anti-depressant than your brain needs, which is bad.
So what Axsome did was intentionally combine the two drugs, just using less bupropion. You've heard the expression "Less is more"? In this case, it's literally true. Less bupropion is needed because more of the drug is reaching the brain, as it piggybacks on the dextromethorphan.
Not surprisingly, Axsome's drug has been walloping Wellbutrin in clinical trials, because it's a smaller dose that does a better job of reaching the brain. And what makes this story even more exciting is that Axsome can use all the prior clinical data because Wellbutrin and cough syrup were both approved by the Food and Drug Administration a long time ago. This translates into far quicker clinical trials. (That "Fast Track" designation from the FDA didn't hurt, either).
The stock's meteoric rise pretty much tracks the drug's quick march through clinical trials. The stock started to jump after the phase 2 results were announced on Jan. 7, 2019. The positive phase 3 data was announced the same year, on Dec. 16, 2019. That's a remarkably successful trip through the FDA gauntlet. At the beginning of the year, all we had was phase 1 data on AXS-05. Now, one year later, the company is prepping for a new drug application on the molecule. So while there might be a bit of irrational exuberance, for the most part the incredible rise was just following the data.
After all, depression is a large, $15 billion market. And GlaxoSmithKline (GSK -0.92%) marketed Wellbutrin under another name, Zyban, for smoking cessation. At $18 billion dollars, quitting cigarettes is actually a larger potential market than depression.
While Axsome has drugs in its pipeline for migraine (a $3 billion market) and narcolepsy (a $2.5 billion market), those are small potatoes compared to AXS-05. Its twin markets, depression and smoking cessation, put its total addressable market at $33 billion a year.
That's a huge market opportunity relative to the company's $3.5 billion market cap. If you agree with me about the market opportunity, and the likelihood of approval, then don't be afraid to buy at the high. That's what I did.
