When it comes to hot biopharma businesses in 2022, Axsome Therapeutics (AXSM 0.81%) is near the top of the list. After reporting a grand total of bupkis for its revenue in 2021, the company is looking at better prospects this year. And there are two big reasons why, both pertaining to its recently marketed medicines.
But does that make it a buy, especially when considering that the market's expectations are sky-high? Let's answer this question by exploring what investors are so excited about for the year ahead and beyond.
Plenty of revenue growth is in sight
The investing thesis to buy Axsome stock today is that it'll soon be realizing a massive amount of revenue growth as a result of its two new products. The first medicine, Auvelity, treats major depressive disorder (MDD), and the company just got the green light from the U.S. Food and Drug Administration (FDA) to commercialize it as of Aug. 19. Management is aiming for a U.S. launch in the fourth quarter, which means that sales should start to roll in during early 2023.
The drug is also being investigated in a pair of late-stage clinical trials for its utility in smoking cessation and for treating agitation in patients with Alzheimer's disease, so the company could potentially see further gains from it over the coming years if the trials go as planned. And given that the patient population with MDD is at least 21 million people in the U.S. and that a majority don't get their symptoms fully addressed by existing treatments, this should help further the drug's potential market reach.
The second drug, Sunosi, treats narcolepsy, and Axsome acquired it in early May from Jazz Pharmaceuticals. It's also responsible for the company's first revenue from sales of a therapy. Sunosi brought in $8.8 million in domestic sales during its first partial quarter on the market, and it won't even be selling abroad until after sometime in Q4. When Sunosi's international markets open up, it should also contribute significantly to even more top-line growth; in 2021, it made $57.9 million for Jazz Pharmaceuticals.
Upcoming gains might already be priced in
So with sales of its two medicines on the verge of ramping up, now might seem like a great time to buy a few shares of Axsome. The only trouble is, everyone else on the market has more or less thought the same thing since the mid-summer. The shares are up 36% in the past month and 129% over the last year -- most of which occurred since the acquisition of Sunosi and the approval of Auvelity.
As investors looked at the future expected growth derived from these two candidates, they bid up the stock to match their expectations. Per an average of the revenue estimates made by 14 financial analysts, Axsome is anticipated to make above $206.3 million in 2023. With that yardstick in hand and early signs looking extremely favorable for big sales growth to come, now one of three things must happen.
One option is that the business' earnings reports will confirm that revenue growth is happening at a faster-than-predicted pace, which would catalyze further appreciation of its shares. The decisive factor in that scenario would probably be the effectiveness of the company's commercial organization, which serves to educate healthcare providers, market the therapy to patients, and get insurers to cover and perhaps market it too.
The second option is for the growth to be as expected, and the final option is for sales to be underwhelming, both of which would likely dampen the share price. There are many reasons why launch campaigns don't work as well as hoped to drum up demand, including many economic factors that businesses don't control, so those two outcomes don't necessarily mean that the stock isn't worth buying afterward.
The only problem is, with its shares pumped up so much by enthusiasm, it might not take much in the way of bumps in the road to cause a significant drop. Then, meeting or exceeding future sales expectations might take quite a long time to contribute to the stock's recovery.
Therefore, the main issue for investors is one of risk tolerance. If you're a typical biotech stock investor who's comfortable with taking on substantial risks for exposure to significant upside from Axsome's commercialization operations over the next couple of years, this is a great company to invest in now. Its near-term looks strong, and the risks associated with hype have already deflated a bit from their peak.
On the other hand, investors with average risk tolerances or more conservative dispositions should look for something else to buy. Beating already elevated expectations isn't easy, and those expectations tend to become a treadmill that biotechs are often ill-suited to match.