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Why Wall Street Thinks This Biotech Stock Can Triple Your Money

By Cory Renauer – Sep 23, 2021 at 6:43AM

Key Points

  • Axsome Therapeutics' stock price collapsed this year in response to an unexplained setback regarding its lead candidate, AXS-05.
  • The FDA might be slow to approve AXS-05 for major depressive disorder in order to incorporate recent data regarding treatment-resistant depression.
  • Axsome Therapeutics says it doesn't know the cause of the holdup, but mischaracterization of FDA communications is standard practice in the biopharmaceutical industry.

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The risks are huge, but so are the potential returns.

Axsome Therapeutics (AXSM 3.85%) is close to earning approval for a new depression drug that could generate billions in annual revenues. Unfortunately, the proposed action date for the Food and Drug Administration (FDA) to grant approval already came and went. 

Consensus price targets suggest Axsome Therapeutics' stock price could rise 197% if most investors begin seeing the company in the same light as the investment-bank analysts who follow it closely. But before you run out to buy the stock for your own portfolio, you should know this is a long way from a sure thing. The agency could be holding off to do Axsome Therapeutics a huge favor, or there could be huge problems the company hasn't communicated yet. 

Excited investor looking at stocks on his phone.

Image source: Getty Images.

What happened

This April, the FDA began reviewing an application from Axsome Therapeutics that could make AXS-05 a new treatment for millions of Americans with major depressive disorder (MDD). At the time, the company didn't mention applying for treatment-resistant depression (TRD) because it didn't have evidence of a benefit for this important sub-population.

The FDA was supposed to issue a decision regarding AXS-05 on Aug. 22, 2021. Instead, on Aug. 20, the agency told the company it wouldn't finish the review on time.

A favor?

The best possible scenario for Axsome Therapeutics and AXS-05 seems too good to be true, but here it is: The agency could have delayed the approval of AXS-05 for MDD in order to add treatment of TRD to the drug's new prescribing label.

On Aug. 9, 2021, Axsome Therapeutics read out positive results from a placebo-controlled trial with treatment-resistant depression (TRD) patients. The study showed that patients who responded well to AXS-05 in a preceding open-label trial were significantly more likely to relapse if switched to a placebo. 

A likely scenario

As a shareholder of Axsome Therapeutics, I would love to see the FDA approve AXS-05 for TRD and MDD. Unfortunately, the odds of this best-case scenario seem slim, at best.

On Aug. 9, Axsome Therapeutics told investors that the FDA had notified the company about deficiencies that preclude labeling discussions. Investors are still scratching their heads because according to the company, the agency didn't ask for more information.

Also according to the company, the agency hasn't mentioned any specific issues. Unfortunately, the FDA could have sent the company a complete response letter (CRL) already that simply hasn't been disclosed. I don't think this is what happened here, but failure to disclose devastating news from the FDA isn't unusual in this industry. Chances are you'd be surprised by how little actually reaches investors. 

In 2015, The BMJ published a study from an FDA official that pulled out key points contained in 61 CRLs issued over a five-year period. Investigators compared those points to subsequent press releases issued by the companies that received those CRLs. Here are just a few highlights:

  • When the FDA cited safety or efficacy as a reason for not approving a drug, less than one-fifth of the statements were conveyed in subsequent press releases.
  • The FDA specifically called for new trials to confirm safety or efficacy in 32 of the letters, but just 19 were followed by press releases that disclosed the request.
  • 18% of the CRLs issued weren't even followed by a press release disclosing the catastrophe.   

I don't think Axsome Therapeutics is the type of sponsor that would hide a CRL from its investors. The FDA recently began reviewing AXS-07, the company's migraine headache candidate, so the company isn't in a desperate position. If investors end up losing a bundle on this biotech stock because it's hiding bad news, though, they can't say they never imagined the possibility. 

Healthcare professional at work.

Image source: Getty Images.

Looking ahead

Axsome's candidate is a proprietary combination of two very well-understood drugs, bupropion and dextromethorphan. While Axsome Therapeutics showed clear evidence of a benefit with AXS-05 over bupropion on its own, Bupropion comes with a black-box warning because antidepressants, in general, have been associated with an increased risk of suicidal ideation.

Axsome Therapeutics' stock might seem super cheap right now, but it probably isn't worth the risk. If I had to wager a guess on the cause of the holdup, I'd bet an unforeseen safety issue is to blame. Unfortunately, we may never learn the details.

Cory Renauer owns shares of Axsome Therapeutics. The Motley Fool owns shares of and recommends Axsome Therapeutics. The Motley Fool has a disclosure policy.

Stocks Mentioned

Axsome Therapeutics Stock Quote
Axsome Therapeutics
AXSM
$78.16 (3.85%) $2.90

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