Sometimes the experts get their growth stock predictions right, and sometimes they miss the mark. An average of Wall Street analyst forecasts suggests share prices of Axsome Therapeutics (AXSM -2.61%) could rise by 47% over the next 12 months. But so far this year, the stock price is instead down by 6.6%.
That raises the question: Will this biotech startup's stock rally like there's no tomorrow in the near term, or are new shareholders bound for disappointment? The answer depends on which arguments for and against you find most credible. Let's take a look at some of them in more detail and see which way the answer leans.
Why the bulls might be right about Axsome Therapeutics
Wall Street's consensus estimate about Axsome's future stock price isn't too outrageous, since it has a couple of powerful new drivers of revenue growth, and more on the way, assuming that its proposed drug therapies finish clinical trials successfully.
In particular, it has two medicines that came on the market relatively recently. Sunosi was launched in May 2022 after the purchase of its U.S. commercial rights. It treats the daytime sleepiness caused by narcolepsy or obstructive sleep apnea. Auvelity, which was developed in-house and launched in October 2022, offers a treatment for major depressive disorder (MDD).
In its pipeline, its most advanced program is AXS-07 for treating migraines, which the company is going to submit to regulators for approval in the second half of this year. It also has a program in phase 3 trials that treats fibromyalgia, and four other mid-to-late-stage candidates.
To give you an idea of how rapidly its revenue is ramping up from Auvelity and Sunosi, in 2022, the company brought in $50 million in sales (it had $0 sales in 2021), $24.4 million of which was from the fourth quarter alone. 2023's revenue should easily top last year's, as in the fourth quarter it secured the rights to commercialize Sunosi in the E.U. as well as in some parts of the Middle East and North Africa.
It has already licensed those rights to a local player in the area, Pharmanovia, which could yield $101 million in milestone payments on top of the $66 million it has already earned. Plus, it will get roughly 25% of any sales that Pharmanovia makes.
In total, the analysts expect that Axsome could have revenue of $177.4 million in 2023, and a further $383.5 million in 2024 if everything goes according to plan. And so far, things are going according to plan.
There are risks worth mentioning
There are things that might muck up the works and prevent Axsome from growing by as much as Wall Street is expecting. As I've suggested in previous articles about this stock, its valuation could already be pricing in the additional revenue that it is likely to generate. Its price-to-sales (P/S) multiple is a sky-high 49.5 presently.
If one takes its market cap of $2.6 billion and divides it by its expected revenue of $177.4 million, it results in a forward P/S of 14.6, which is much higher than the biotech industry's average of 8. But it's reasonable for its valuation to be higher, as the company is in the process of penetrating the market with two new medicines.
Still, its valuation being on the high side means that any hiccups or delays with rolling out Sunosi and Auvelity are likely to make the stock price volatile. The company isn't yet profitable, and is not likely to be until shortly after the end of 2024 if the analysts are to be believed. That also increases the likelihood of stock price volatility, especially in the current macroeconomic environment. Lastly, there's always the risk that its clinical trials might not go as planned, which tends to elicit a negative reaction from the market.
Investors should expect Axsome's shares to continue rising for a while and maybe even outperform the market, but not without some high-level volatility related to whatever news comes out about the company. But investors should also be somewhat skeptical that shares will actually grow by as much as Wall Street is predicting simply because the market is just too fragile at the moment.
The stock is on the risky side for conservative investors, and its valuation also suggests bargain-sensitive buyers should look elsewhere. On the other hand, if you have the stomach for investing in biotech generally, this stock is ripe for purchase since its future looks pretty bright and its pipeline could drive growth for years to come.
