What happened

Shares of Axsome Therapeutics (NASDAQ:AXSM) were sinking 6.8% lower as of 11:29 a.m. EDT on Tuesday. The company announced a $225 million loan facility with Hercules Capital before the market opened. The main reason for Axsome's shares falling, though, was that Bank of America analyst Ashwani Verma initiated coverage on the stock with an underperform rating and a price target of $66 -- more than 13% below the stock's closing price on Monday.

So what

It's usually best to avoid focusing too much on analysts' ratings and price targets. On the other hand, investors are wise to try to understand the rationale behind analysts' views.

Finger pointing to frowning face emoji on a touchscreen tablet

Image source: Getty Images.

In this case, Verma thinks Axsome's expected launches next year of AXS-05 in treating depression and AXS-07 in treating migraine will be underwhelming. Verma doesn't believe that either drug will stand out in their respective markets, both of which already have several approved therapies.

But Axsome isn't just targeting those two indications. What about the potential for AXS-05 in treating Alzheimer's disease agitation? Verma views the indication as probably the biggest opportunity for the biotech. However, the analyst also thinks other companies could achieve success with their pipeline candidates.

Verma's pessimism could prove to be right. Keep in mind, though, that his opinion is a contrarian one. Most analysts are much more bullish about Axsome's prospects.

Now what

Negative analysts' updates tend to take a toll on small biotech stocks like Axsome. However, the company has multiple opportunities coming up to change the story. Axsome expects to file for FDA approvals of AXS-05 in treating major depressive disorder and AXS-07 in treating migraine in the fourth quarter of this year. It also should report results from three phase 2 studies of AXS-05 in Q4. 

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.