Axsome Therapeutics (AXSM -1.60%) wowed investors late last year with strong data from a phase 3 study of AXS-05, its candidate treatment for Alzheimer's disease agitation. AXS-05 met its primary and secondary goals in the study, and importantly, looked to be on track to enter the market with zero competition.

That last part is not going to happen.

The Food and Drug Administration (FDA) recently gave a different drug the nod as the first approved treatment for agitation linked to Alzheimer's disease: Otsuka Pharmaceutical and Lundbeck's Rexulti, a drug already being marketed for major depressive disorder. So if AXS-05 is approved, it won't have the Alzheimer's agitation market all to itself. This sounds like bad news for Axsome. But is it really?

A step ahead

First, it's important to note that this isn't too much of a surprise. Otsuka and Lundbeck reported positive data and completed their regulatory submission seeking a label expansion for Rexulti last year. So, they've been ahead of Axsome from a timeline perspective. AXS-05's phase 3 trial is incomplete, and Axsome still must collect additional long-term safety data. It expects to complete the trial in the first half of next year.

Analysts estimate Rexulti could generate peak sales of $500 million specifically for Alzheimer's disease agitation. So it probably won't reach blockbuster status for this particular indication. The same is likely true for Axsome's candidate. But, in both cases, these drugs also treat other conditions.

Axsome won regulatory approval for AXS-05 last year for use in major depressive disorder. As a commercialized drug, it's now called Auvelity. And as an antidepressant, Global Data forecasts peak sales may reach $1.3 billion by 2029.

Axsome also is studying AXS-05 to assist people with smoking cessation -- a phase 2 trial for that indication is underway. So, the product could eventually treat four conditions and bring in billions of dollars in total annual revenue.

Now, let's get back to the idea of competition with Rexulti. It may have a first-to-market advantage, but that doesn't mean Auvelity won't win a good share of the market. About 6 million people in the U.S. suffer from Alzheimer's disease, and that number is expected to reach 14 million by 2050. About 70% of those with Alzheimer's disease suffer from agitation.

Room for multiple players

In such a market, there's room for more than one treatment. And considering Axsome's timeline, if all goes smoothly, AXS-05 could be the second to launch in the indication. We also should consider AXS-05's positive trial data. Among those in the study, 66% showed improvement in symptoms at two weeks and 86% at five weeks. And only 7.5% of AXS-05 patients relapsed during the treatment period compared to nearly 26% of patients being given a placebo.

So is the Otsuka/Lundbeck victory bad news for Axsome? Maybe a bit. After all, the partners have gained access to the market first. But Axsome still may carve out a significant market share in treating Alzheimer's disease agitation. And that indication represents just one part of the Axsome picture. The company today sells two drugs -- and has six drug candidates/indications, all in phase 2 trials or farther along the development path.

All of this means Axsome's long-term revenue potential remains bright. Meanwhile, in spite of a triple-digit percentage gain over the past year, Wall Street remains bullish on the stock. The average price target on the stock points to a 40% gain in the coming 12 months. And for good reason: Axsome has reported positive momentum in sales for both Auvelity and its sleep disorder drug, Sunosi.

Since Axsome just started selling these two drugs last year and has a pipeline tilted toward late-stage candidates, it's fair to say the company is in the early stages of its growth story. That's why I wouldn't worry too much about a rival entering a single treatment market ahead of Axsome. There are still plenty of opportunities there and elsewhere for this up-and-coming biotech company.