On June 15, shares of Sage Therapeutics (SAGE 0.66%) fell by as much as 20% in a single day after the company released phase 3 top-line data for zuranolone, an oral neuroactive steroid and GABA receptor modulator for the treatment of depression. 

Even though the study met its primary endpoints, investors were not impressed by what they saw. So just what exactly is behind the bearish sentiment? 

Wife comforting depressed husband.

Image source: Getty Images.

How do the results look? 

The primary endpoint of the phase 3 study was a change from baseline on the 17-item Hamilton Rating Scale for Depression (HAM-D, also known as HDRS), measuring the severity of depression after approximately two weeks of treatment. The scale ranges from 0 to 52.

On day 15, patients with severe depression who took zuranolone saw an average HAM-D score reduction of 14.1 points compared to 12.3 for placebo, leading to a treatment difference of 1.7 points. The difference was statistically significant. 

That said, the results do not look good in context. Although it's not possible to directly compare clinical studies for different treatments, patients with severe depression who took approved antidepressant Wellbutrin demonstrated a 13.6-point reduction in HDRS score compared with 9.7 for placebo, leading to a treatment difference of 4.7 points. 

The trial design also excluded patients who had active psychosis or pregnancy-related depressive symptoms, were at risk of suicide, had failed previous courses of antidepressive therapy, or had a history of bipolar disorder or schizophrenia. Moreover, zuranolone failed a key second endpoint measuring the severity of the illness.

That's not all: Patients receiving zuranolone experienced far higher rates of somnolence, dizziness, headaches, and sedation compared to placebo. There was also a 23% dose reduction due to adverse events across the board and a dropout rate of 14% in the treatment cohort, compared to 1% and 6%, respectively, in the placebo cohort.

Overall, it looks like the drug has a small, variable effect on relieving depression with some downside risk. Zuranolone failed a phase 3 clinical study in 2019 for treating depression.

Is the stock a no-go? 

Unfortunately, zuranolone is Sage's flagship drug candidate. The below-expectation results really did not go over well with shareholders. Sage also has one -- and only one -- drug on the market, Zulresso, for the treatment of postpartum depression. However, Zulresso is a hard sell to patients because it is an injection that requires administration at a clinic. In the first quarter of 2021, Zulresso generated $1.6 million in sales, representing a 30% decline from the year-ago period.

Along with Biogen (BIIB -1.38%) and Japanese pharma Shionogi, Sage secured $1.59 billion in cash and investments to develop zuranolone. The biotech is also eligible for $2.085 billion in milestone payments from the two companies for commercializing the drug. The agreements were secured individually, and the two would be entitled to royalties and/or profit sharing from zuranolone if it clears the regulatory pathway.  

Sage only has a market cap of $3.5 billion after the sell-off. Its enterprise value (EV) is even smaller after adjusting for the $2 billion in cash and short-term investments on its balance sheet. At this point, it is beginning to look like a hollow-shell biotech company. Investors should know that it would be tough for zuranolone to achieve the necessary revenue milestones even if approved, especially considering the plethora of antidepressants on the market. The stock is a hard pass for me.