Here's Why The Best Is Yet to Come for Axsome Therapeutics

The world is very different compared to what it was just a few short weeks ago. Chances are, that's true for your portfolio, too. But investors with a long-term mindset might see no shortage of emerging opportunities. 

One stock that's worth a much closer look is Axsome Therapeutics (AXSM 0.82%). The development-stage pharma began March with a market valuation of roughly $3 billion, which appeared to be a fairly attractive level considering the company's near-term potential. But the recent volatility has pushed the company's market cap down to about $2 billion. 

There are good, company-specific reasons investors have to think twice about the pharma stock in the midst of the unfolding novel coronavirus pandemic. But the best days are still ahead for Axsome Therapeutics.

Image source: Getty Images.

Will this promising pipeline be paused?

To be blunt, the U.S. Food and Drug Administration (FDA) has more important things to focus on at the moment than inspecting facilities, reviewing investigational new drug (IND) applications, and approving or denying new drug applications (NDAs). In fact, the agency has already suspended some of its inspection responsibilities both abroad and domestically. 

There's some concern that regulators will hit the pause button on INDs and NDAs, which would push back timelines across the industry. It's also worth asking whether running clinical trials exposes the patients involved to unnecessary risks right now, especially with social distancing being the rule of the land.

Either type of delay, however temporary, would affect Axsome Therapeutics more than most. The development-stage pharmaceutical company plans to file three regulatory applications -- one each for migraine, major depressive disorder (MDD), and treatment-resistant depression (TRD) -- for two separate drug candidates by the end of 2020. The next approval will be the company's first. It has two late-stage trials underway (each needed for a regulatory application mentioned above), one phase 2/3 trial underway in treating agitation related to Alzheimer's disease, and a phase 3 study in narcolepsy waiting to be initiated in 2020. 

Axsome Therapeutics has accelerated the completion of the phase 2/3 study of agitation related to Alzeimer's disease to protect elderly patients who are most at risk of serious or fatal outcomes from COVID-19. The study includes a group receiving a placebo, another receiving a different drug, and a third receiving the company's drug candidate, AXS-05. "The AXS-05 and placebo arms are fully enrolled," the company notes, adding that "more than 90% of patients in these arms are estimated to have completed the study." The company now expects the trial to wrap up in the second quarter of 2020, ahead of the original third-quarter expectation. 

As for the phase 3 trial in narcolepsy, there's flexibility. The trial hasn't started, which actually works in the company's favor during this time of uncertainty. It's one less thing to worry about for the business and investors. 

Even if Axsome's promising pipeline faces regulatory or clinical trial delays along with the rest of the industry, investors with a long-term mindset should see the stock's recent tumble as a great opportunity.

This potential hasn't been nixed

Axsome Therapeutics's lead drug candidate, AXS-05, is poised to become a leading treatment option for multiple types of depression. That's doubly true after Wall Street's former darling, SAGE-217 from Sage Therapeutics, suffered a catastrophic outcome in late-stage clinical trials, all but ending its bid to become a next-generation depression drug.

There's plenty left to prove. After all, Axsome Therapeutics has yet to earn marketing approval for any of its pipeline assets. It has also never commercialized a drug product, which has tripped up many companies along the transition to commercial operations. But the company is well positioned for success in depression and beyond. 

Data source: Press release.

If the Stride-1 phase 3 trial proves successful, then the company will file a supplemental new drug application (sNDA) for AXS-05 in TRD. It would be considered "supplemental" because the marketing application in MDD for the same drug candidate will have been filed by then. It would also position Axsome Therapeutics to become a leader in next-generation depression therapies. 

William Blair analyst Myles Minter sees AXS-05 achieving peak annual sales of $900 million in MDD in the United States. If the asset earns marketing approval in TRD as well, then it could earn well over $1 billion in peak annual sales. 

Axsome Therapeutics is far from a one-trick pony, however. Analysts expect the company's migraine drug candidate, AXS-07, to achieve peak annual sales of $300 million or more. That could be an underestimate. 

The drug candidate was pitted against placebo and rizatriptan, the standard of care, in the Momentum phase 3 trial. AXS-07 demonstrated statistical significance to both comparator arms of the study across a range of outcomes, including patients feeling free of pain and the absence of their most bothersome symptoms. Considering 90% of doctors would prescribe a new migraine drug if it demonstrated superiority to rizatriptan, Axsome Therapeutics could capture a significant chunk of the market with its fast-acting treatment.

Image source: Getty Images.

A gift for long-term investors

Could Axsome Therapeutics encounter delays as the FDA prioritizes its response to the novel coronavirus pandemic over other regulatory duties? Absolutely, but as far as setbacks go, that's a relatively acceptable one for investors. 

The business had $220 million in cash on hand at the beginning of 2020. It reported an operating loss of $67 million in 2019, which suggests the balance sheet is strong enough to weather a fair amount of uncertainty. 

In reality, the bigger risk facing investors is whether the inexperienced company can successfully launch and ramp up sales of its first new drug products. There's still a long way to go before investors get an answer: AXS-05 and AXS-07 wouldn't launch until potentially the second half of 2021, even in a best-case scenario. And even that timeline could be in doubt if COVID-19 pandemic delays are factored in.

Nonetheless, at a market cap of only $2 billion and with two promising assets on the cusp of earning marketing approval, Axsome Therapeutics is trading at an attractive valuation for investors with a long-term mindset.