What happened

Shares of Axsome Therapeutics (NASDAQ:AXSM) declined more than 20% in the first six months of the year, according to data provided by S&P Global Market Intelligence. The plunge was significantly worse than the 4% drop of the S&P 500 in that span, but investors shouldn't be too alarmed.

The stock's poor performance thus far in 2020 can be chalked up to two factors. First (and primarily), the stock ended 2019 at an all-time high, which suggests shares are simply cooling off a bit. Second, Axsome Therapeutics announced mixed results for its lead drug candidate in an important clinical trial. Can the pharma stock rebound before the end of the year?

A chart on a chalkboard showing a steady increase and then a sudden decline.

Image source: Getty Images.

So what

Axsome Therapeutics was easily one of the best investments of 2019, with a gain of 3,570%. The epic leap was driven by a combination of promising results from the pipeline and the general obscurity of the company. But as investors have found out the hard way, the meteoric rise last year also set the stage for a sizable correction in 2020. 

Shares of Axsome Therapeutics slid from the beginning of the year through March stemming from a predictable cooling off and the broader market uncertainty triggered by the coronavirus pandemic. However, on the final day of March, the development-stage company announced disappointing results from the STRIDE-1 phase 3 trial of AXS-05. 

After AXS-05 emerged victorious in a late-stage study of major depressive disorder (MDD), investors penciled in a victory lap in treatment-resistant depression (TRD). But the drug candidate failed to meet primary endpoints in the STRIDE-1 study compared to an active comparator. The results forced investors to reconsider their rosy expectations for the asset, although a second phase 3 trial is expected to begin in the third quarter of 2020.

Now what

Despite the setback in TRD, the future appears bright. Axsome Therapeutics is poised to earn regulatory approval for AXS-05 in MDD and AXS-07 in migraine in the next year or so. It also recently earned Breakthrough Therapy designation for AXS-05 in Alzheimer's disease agitation, for which there are no approved treatments. 

The company's asset diversity has no doubt played a role in the stock's rapid recovery. As of the first week of July, shares are down 18% since the beginning of 2020. Investors just have to remember that earning marketing approval and successfully executing market launch activities will be crucial to the company's success. 

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.