Axsome Therapeutics (AXSM 0.27%) is something of a rarity in the biotech world because it's starting to spread its wings for the first time thanks to recently commercializing a couple of new drugs. That is reducing some of the traditional risks associated with investing in biotech companies, like the risk of clinical trials going awry and tanking the stock's price.
But that shift also makes other concerns more important to pay attention to -- among them, the company's valuation, profitability, and ability to continue generating growth. The question for investors now is whether the window of opportunity to profit significantly from this biotech has already closed or if it's still wide open.
Why it might seem way too late to buy
Some investors are likely thinking that it's too late to buy Axsome stock because the market has already priced in the impact of all its recent advances. Given that its shares rose by 50% in the past 12 months compared to the market's fall of 5%, it's reasonable to be slightly skittish.
This company is on a bull run because it just brought two drugs to market: Auvelity, which it developed in-house, and Sunosi, for which it has the U.S. marketing rights. Auvelity has been approved as a treatment for major depressive disorder (MDD), while Sunosi is indicated for treating the pathological sleepiness that's a consequence of sleep apnea or narcolepsy. Axsome started commercializing both medicines in 2022, and made $44.8 million from Sunosi and $5.2 million from Auvelity during the year.
This year, the company will continue to ramp up sales of both medicines, and by the end of 2024, Wall Street analysts estimate that Axsome will have a top line of about $383 million -- a massive improvement from 2022's total of $50 million. That growth appears to be proceeding swimmingly, which has left some potential new investors skeptical.
After all, if everyone knows a company is growing like wild, people will bid up its share price such that its valuation rises well beyond what is justified by its actual near-term earnings. In the case of Axsome, its price-to-sales ratio of 48 is far above the biotech industry's average ratio of 8, so its high valuation seems like a real risk.
High valuations today don't guarantee that shareholders will suffer later. But they do leave stocks vulnerable to downward corrections if earnings come in below expectations, and in times of unstable markets, like now, that risk is heightened.
There's plenty of time left to start a position
Despite the elevated risks associated with its valuation, it isn't too late to buy Axsome because within the next few years, it might be able to launch new medicines that will ultimately juice further revenue growth and justify its current price tag.
For instance, in the second half of 2023, it plans to submit an approval packet to the Food and Drug Administration for its AXS-07 candidate as a treatment for migraines. Assuming it earns approval without unusual delays, Axsome could get the green light for AXS-07 and start earning revenue from it sometime in 2024 or early 2025.
Likewise, it has a pair of other programs in phase 3 trials, and a fibromyalgia treatment candidate that it's expecting to submit to regulators before the end of this year. So in late 2024 or early 2025, it could have another pair of drugs hitting the market, and another two that could be on deck after that.
Of course, any or all of those programs could fail to cross the finish line, which would lead to pain for shareholders. But it's unlikely that Axsome will whiff with 100% of its late-stage projects, which means that there is a good chance it will be growing its top line -- and eventually its bottom line -- at a rapid clip, perhaps as far out as 2027 or beyond.
In that light, there's a good long-term thesis for buying Axsome. So if you're willing to accept the (fairly modest) valuation risks and the execution risks with the commercialization of its latest medicines, it definitely isn't too late to buy a few shares.
