Axsome Therapeutics (NASDAQ:AXSM) has been a zero-to-hero biotech stock. Over the past three years, its shares rose by as much as 3,600%, but have lost nearly half of their value from their January 2020 peak. It's still a company with a lot of potential, though -- it has four leading treatment candidates in its pipeline, all with high chances of earning regulatory approval.  So it's a bit peculiar that investors are shrugging the company off as if all is coming to an end. 

Should you buy the dip on Axsome stock or go with the crowd

Analyzing samples in a biolab.

Image source: Getty Images.

Why the sell-off?

2019 was a good year for Axsome. It announced top-line clinical trial results on AXS-05 for the treatment of depression (phase 2), AXS-07 for the treatment of migraine headaches (phase 3), and AXS-12 for the treatment of narcolepsy (phase 2). Due to pandemic-related logistical issues, however, the company didn't file its new drug application for AXS-05 until April 2021. In the first quarter, Axsome burned through about $30 million, and ended the period with about $164.7 million on the books.

Back in March 2020, AXS-05 failed to show statistically significant results in a phase 3 trial investigating its efficacy against treatment-resistant depression (which is differentiated from regular depression). On top of that, this month, the company announced that the U.S. Food and Drug Administration (FDA) had revoked its breakthrough therapy designation for AXS-12, citing the approval of a competitor's cataplexy in narcolepsy treatment.

More upside than downside 

These headwinds, though, should not be severe enough to offset Axsome's long-term potential. Keep in mind that AXS-05 did deliver fantastic results in combating major depression, with relatively few incidences of issues that would raise safety concerns. AXS-07 demonstrated effective pain relief against migraine headaches in most patients within two hours in another clinical study. Similarly, AXS-12 reduced the number of cataplexy attacks (collapses) by more than 50% per week in the majority of narcolepsy patients enrolled in a pivotal study. 

Aside from all this, Axsome is also developing AXS-14 as a treatment for fibromyalgia. That indication is heading for its NDA submission by 2022. During a 1,122-patient phase 3 study, fibromyalgia patients who received the experimental drug saw significant improvements in their weekly pain symptoms . So the company has a pretty promising pipeline.

Buy the dip? 

It looks like AXS-05, AXS-07, AXS-12, and AXS-14 have high chances of earning regulatory approval. Meanwhile, Axsome only has a market cap of $1.94 billion, so it's pretty undervalued compared to its potential. In a couple of years, I expect the company will have settled its cash burn issues and will have at least one product on the market. To put that into context, the anxiety and depression treatment market alone could reach $18.3 billion annually by 2025. For these reasons, I think healthcare investors might do well to double down on this promising biotech

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.