What happened? 

Shares of Axsome Therapeutics (AXSM -1.91%) are down 14% to $23.53 apiece as of 2:30 p.m. EDT after a brutal sell-off on Aug. 9 wiped out nearly 50% of its equity value. Investors are still upset that the U.S. Food and Drug Administration (FDA) outlined deficiencies in Axsome's New Drug Application filing for its central nervous system drug, AXS-05 -- which will lengthen the approval process. 

Seeking counseling for depression.

Image source: Getty Images.

So what 

The FDA issued neither a complete response letter nor a refusal to file -- leading many shareholders to wonder if the stock is oversold in the face of a small blunder. But the setback did bring up a few issues. Axsome planned to submit its NDA filing for AXS-05 last year after the drug succeeded in a phase 3 study to treat depression, but it got delayed due to a COVID-19-related logistical delay from one vendor. 

Now what 

But the more important problem that came to light is the drug's composition. AXS-05 consists of Wellbutrin (or bupropion, an antidepressant) and dextromethorphan, a common ingredient in cough syrups. The company could run into problems protecting its intellectual property even if AXS-05 makes it to approval. Nothing is stopping pharmacies from compounding the drug, or even for patients themselves to buy over-the-counter cough syrup and mix it with their Wellbutrin prescription. 

At this point, Axsome has a market cap of only $880 million. So investors are pretty much valuing the company's AXS-07 migraine drug and AXS-14 fibromyalgia drugs for next to nothing. And both drugs attained success in clinical studies. So even if AXS-05 fails to impress, the biotech stock is a good buy on the dip.