Axsome Therapeutics (AXSM 0.10%) stock recently shot higher on a generally lousy day for the overall stock market. The gains came in response to the FDA's approval of Auvelity, the first new line of treatment in years for millions of Americans with major depressive disorder.
Does the FDA's approval of Axsome Therapeutics' first drug make this a smart stock to buy now? Let's weigh the reasons to buy against the reasons to remain cautious.
Reasons to be cautious
It's been 15 months since the FDA began an expedited review of the drug formerly known as AXS-05 that was supposed to be much shorter. First, there was a common manufacturing issue the company needed to overcome.
Auvelity's approval was also held up longer than expected due to a complicated labeling process. Auvelity's main ingredients, bupropion and dextromethorphan, have been around for a long time and they're regularly taken by millions. As such, a lot of rare side effects have been uncovered over the years and prescribing physicians need to know about all of them.
Auvelity is Axsome's first attempt at actually selling pharmaceuticals. A list price from the company isn't available yet, but the drug will be up against a lot of cheap, albeit older generic treatments.
When it comes to first-time drug launches, disappointments are far more common than launches that meet lofty expectations. We won't know much about the company's ability to sell this drug for a while. Axsome doesn't expect to begin commercial sales until the fourth quarter of 2022.
Reasons to pound the buy button
Despite the difficult labeling process, the FDA approved Auvelity without any significant restrictions. This is why Wall Street analysts are predicting peak annual sales of around $2 billion annually as a treatment for adults with major depressive disorder.
At the moment, Axsome Therapeutics' market cap is still a spry $2.4 billion and biotech stocks tend to trade at mid-single-digit multiples of total revenue. In other words, reaching Wall Street's expectations could lead to big gains for patient investors.
Auvelity is a combination of two drugs that physicians are already relatively comfortable with. Auvelity inherited a warning from bupropion's label regarding suicidal thoughts and behaviors, but this black box warning hasn't prevented bupropion from being prescribed millions of times annually in the U.S.
Bupropion also racked up blockbuster sales as a smoking cessation treatment under the brand name Zyban. Axsome will start a pivotal study with Auvelity as a smoking cessation treatment.
In addition to Auvelity, Axsome could earn approval for a new migraine treatment currently called AXS-07 in the months ahead. The FDA began reviewing an application last year but it's been held up for manufacturing issues similar to the ones that delayed Auvelity.
Axsome also has positive clinical trial results from a fibromyalgia candidate called AXS-14. The company is putting together an application that will probably reach the FDA next year.
A buy now?
If Auvelity succeeds as a treatment for depression, Axsome could begin supporting the development of AXS-14 and AXS-07 without asking investors for additional capital. In the near term, the approval of Auvelity gives the company access to a term loan that should be able to fund operations into 2024.
If investors see reasons to assume Auvelity sales can't reach expectations, the stock could collapse. That said, an unrestrictive prescribing label gives Axsome's new sales team a better-than-average chance to succeed.
Even if Auvelity doesn't deliver strong sales in 2023, investors will still have news regarding the rest of Axsome's late-stage pipeline to look forward to. Put it all together and this looks like a good stock to buy as a relatively small part of a well-diversified portfolio.