Even in a struggling stock market, it is possible to find stocks that perform exceptionally well. That's been the case for biotech company Axsome Therapeutics (AXSM 2.48%) over the past year, with the company's shares more than doubling in this period. There were positive developments that helped lift Axsome Therapeutics in 2022; there will be more this year.

But do they justify a market cap of $2.9 billion for a company with just two products on the market that generate little revenue (just about $50 million last year)? Let's consider whether Axsome Therapeutics is worth investing in at current levels, or whether investors should wait for a better entry point.

Axsome Therapeutics' lineup has exciting potential, but there is a catch

While Axsome Therapeutics' revenue wasn't impressive last year, that's not too surprising. It became a commercial-stage biotech in 2022 thanks to the August approval of Auvelity, a fast-acting medicine for depression, and a therapy for narcolepsy called Sunosi it acquired in May 2022. Both of these products have a chance to earn new label expansions down the line.

Auvelity is being tested in a phase 3 clinical trial as a potential treatment for Alzheimer's disease (AD) agitation. Also, Axsome Therapeutics is preparing to start a phase 3 clinical trial for Sunosi in treating ADHD in the first half of the year. The biotech thinks Auvelity can exceed $1 billion in yearly sales in treating depression alone, and again in targeting AD agitation. Axsome also expects Sunosi to generate peak annual sales beyond $1 billion.

Potential annual revenue of more than $3 billion isn't bad for a biotech company whose market cap is just under that. But there are some risks to account for. Sunosi or Auvelity could run into clinical and regulatory roadblocks. Even if they don't, it will likely be years before they realize their sales potential. Axsome Therapeutics expects the completion of its ongoing late-stage clinical trial for Auvelity in AD to complete in the first half of 2024.

So it won't hit the market until early 2025 at best. Axsome Therapeutics' risk-adjusted revenue potential for Auvelity and Sunosi is much lower than $3 billion. Thankfully, there is more to look forward to for the company. 

Key pipeline progress on the horizon

Axsome Therapeutics is working toward other important approvals and clinical progress. The company expects two regulatory submissions later this year. The first is AXS-14, a potential treatment for fibromyalgia, a disease that causes pain, sleep problems, and other symptoms. Axsome Therapeutics also expects to resubmit its investigational medicine for migraine, AXS-07, to the U.S. Food and Drug Administration (FDA). The agency declined to approve it last year due to manufacturing issues.

Thankfully, the FDA is not requiring any additional clinical trials. Axsome Therapeutics plans to issue this resubmission in the second half of the year. These two medicines could substantially improve Axsome Therapeutics' prospects. Between them, AXS-07 and AXS-14 will target a total patient population of 42 million between them, compared to an upper bound of a little under 24 million patients Axsome's current medicines could target even with their expected label expansions.

Axsome Therapeutics' upcoming catalysts could send its stock price soaring

There is some risk but also plenty of potential upside 

Axsome Therapeutics started 2023 on a sour note. Its shares are down by 14% since the beginning of the year.

AXSM Chart

AXSM data by YCharts

Perhaps now that the excitement surrounding the approval of Auvelity has died down, the uncertainty surrounding the biotech's programs is dragging down its share price. Although there is unquestionably some risk involved with the company, with potential regulatory problems that could lead to its stock price falling even more, there are good reasons to be optimistic.

First, AXS-14 was successful in phase 2 and phase 3 clinical trials; AXS-07 initially failed to earn approval, but given the positive back-and-forth Axsome Therapeutics had with the FDA regarding this product, the probability that it will eventually earn the green light looks close to 100%.

Further, Auvelity has already shown positive results in one phase 3 clinical trial in treating AD agitation. That does not mean it will pass its ongoing late-stage trial with flying colors, but it certainly raises that probability. Overall, Axsome Therapeutics looks poised to earn at least a few approvals in the next two years and grow its revenue long after that.

That's why the biotech still looks like a buy right now.