Makhbubakhon Ismatova
Axsome
Makhbubakhon Ismatova
Axsome
“Price is what you pay. Value is what you get.” – Warren Buffett.
In biotech investing, there are certain stocks that break the bear-market trend. These special equities have certain traits that allow them to rally while other stocks tumble. One of these traits is the ability to gain FDA approval for a novel drug (one that can be disruptive to competitors). Another trait is that they have multiple catalysts stacked on top of one another to drive continuous upsides.
Axsome Therapeutics (NASDAQ:AXSM) epitomizes the aforesaid phenomenon. In recent months, Axsome gained FDA approval for Auvelity (a stellar drug to treat depression). Hence, that event galvanized market bulls around the world in a vigorous rally. As one of the best drugs for depression approved in the past 60 years, Auvelity is set to make big waves in the market. There are also other pipeline catalysts to continuously fuel additional growth. In this research, I’ll feature a fundamental analysis of Axsome and share with you my expectation for this intriguing growth equity.
StockCharts
StockCharts
Figure 1: Axsome chart
As usual, I’ll present a brief corporate overview for new investors. If you are familiar with the firm, I recommend that you skip to the next section. I noted in the prior research,
Operating out of New York, Axsome dedicates its efforts to the innovation and commercialization of novel medicines to fulfill the unmet needs in psychiatry. Powering the pipeline are four promising molecules in development, including AXS05, AXS07, AXS12, and AXS14. As the crown jewel of this pipeline, AXS05 is either being assessed or approved for various disorders such as major depressive disorder (“MDD”), agitation associated with Alzheimer’s disease (“AD”), and smoking cessation. By experimenting with multiple uses for a single drug, Axsome can maximize the value of its innovation. That is to say, it increases the chances at least one indication would become a bonanza. That aside, there is another new and commercialized drug (i.e., the Sunosi acquisition).
Axsome
Axsome
Figure 2: Therapeutic pipeline
As you know, Auvelity was approved three months prior and only recently available. As such, all the sales for Q3 came from Sunosi which was $16.8M for the said period. For a small company commercializing its drug in-house, you should give the firm two to three years to see significant traction. That’s just the norm for this industry. Commenting on the latest performance, the CEO (Dr. Herriot Tabuteau) remarked,
… While it is still extremely early days in the Auvelity launch, we are very encouraged by the interest and reception from the prescriber community thus far. Our first-in-class DCC, or digital centric commercialization, platform is already demonstrating the effectiveness and efficiency of a contemporary, integrated, omni-channel approach to meaningful customer engagements.
Axsome
Axsome
Figure 3: Auvelity making history in psychiatric medicine
As you can tell from Dr. Tabuteau’s comment, Axsome is leveraging the digital revolution via DCC to enhance launch success. I like this move because nowadays, there is tremendous growth in digital marketing for therapeutics. Solely relying on the traditional shoes-and-leather approach would prevent the company from enjoying rapid growth.
Aside from DCC, I like the fact that Axsome is pricing Auvelity at roughly $1000. At that premium, the company would enjoy a sizeable profit margin. Due to the fact that Auvelity can manage even treatment-resistant depression (i.e., TRD), it made sense for the drug to be handsomely rewarded. After all, paying roughly $1000 to regain your mind (and a sense of well-being) is prudent.
GoodRx
GoodRx
Figure 4: Auvelity pricing
As of 2021, there are 80M patients suffering from MDD. If you assume that Auvelity reaches only 500K (i.e., <1% of the total addressable market), the drug should garner $6B in annual sales. I got that figure by simply multiplying 500K patients with $12K annually (i.e., $1K monthly).
Another way you can size up Auvelity’s sales potential is to take a fraction of the $16B global depression market. Even garnering $1B of sales from the $16B market, that’s still sizeable revenue for the small company, Axsome. Now, this approach is much more conservative than the former.
Regardless of which strategy, you can see that therapeutic prowess and differentiation of Auvelity (i.e., rapid-acting as early as Week 1 on the drug) put the drug in a great position to garner more market shares than my estimates.
Axsome
Axsome
Figure 5: Auvelity’s market differentiation
Beyond MDD, you can appreciate that Axsome is positioning Auvelity to become a mega blockbuster with additional label expansions (i.e., for Alzheimer’s agitation and smoking cessation). Of Alzheimer’s, Axsome already finished the Phase 3 (ACCORD) trial. Therefore, you can expect topline results to be reported very soon. If positive, that’ll spark another huge rally.
As to AXS07 for migraines, Axsome already met with the FDA and intended to file a New Drug Application (i.e., NDA) in 3Q2023. With a 6-months review, AXS07 should be approved in 1Q2024. AXS12’s development for narcolepsy is also progressing well. Here, the Phase 3 (SYMPHONY) study is enrolling patients with topline results projected in H1 next year. Moreover, Axsome is set to file an NDA of AXS14 for fibromyalgia next year. Highly enthused with ongoing pipeline advancement, Dr. Tabuteau stated,
In parallel with our commercial efforts, our industry leading neuroscience development pipeline is progressing, setting the stage for continued potentially significant value creation over the near, intermediate and long term. This late-stage portfolio comprises five differentiated, product candidates, including AXS-05 for Alzheimer’s disease agitation and smoking cessation, solriamfetol for ADHD, AXS-12 for narcolepsy, and AXS-14 for fibromyalgia. We anticipate this portfolio to generate multiple clinical trial readouts, clinical trial initiations, and NDA filings over the remainder of this year and through 2023.
Axsome
Axsome
Figure 6: upcoming catalysts
Subsequent to my merger and acquisition (M/A) speculation, Axsome shares took off and have been on a tear. I elucidated that the macroeconomic environment highly favors more M/A toward year-end and into next year. I explicated in the prior research,
Fiscal Year 2022 is a prime year for more acquisition activities because of the current Corona Bear market. That is to say, the macroeconomic factors are causing great uncertainty, thus increasing market fear. Consequently, investors are fleeing the stock market en masse which created excellent bargain-hunting opportunities for sophisticated investors and larger companies having cash with a long-term investment horizon.
Accordingly, Axsome is my top buyout speculation because it has two approved psychiatric medicines and other pipeline catalysts. Due to its differentiation, Auvelity is one of the best, if not the best, medicine to treat major depressive disorders (i.e., MDD). As you know, Axsome is aggressively expanding its label for other conditions like Alzheimer’s and smoking cessation. There are also other advanced pipeline drugs like AXS07, 12, and 14 to add value. A powerhouse pharma dominant in psychiatric medicine like Jazz Pharmaceuticals (JAZZ) can scoop up Axsome for roughly $3B.
As you know, the strong efficacy & stellar drug quality coupled with its differentiated characteristics would enable AXS07 to thrive in competition. As to Auvelity, I noted in the prior research,
Competition in the psychiatric medicine niche is intense because there are many established and emerging innovators. Intra-Cellular Therapies (ITCI) is one such example. Riding its stellar medicine (Caplyta), Intra-Cellular delivered robust and differentiated solutions to patients. Jazz Pharmaceutical (JAZZ) is another powerhouse psychiatric medicine innovator with a strong track record. Though the competition is strong, Axsome offers differentiated and superb medicines like Auvelity. That aside, there is plenty of room in this space for many successful innovators.
Just as you would get an annual physical for your well-being, it’s important to check the financial health of your stock. For instance, your health is affected by “blood flow” as your stock’s viability is dependent on the “cash flow.” With that in mind, I’ll analyze the 3Q2022 earnings report for the period that ended on September 30.
As follows, Axsome procured $16.8M in revenue compared to none for the same period a year prior. That aside, the research and development (R&D) for the respective periods registered $14.8M and $13.1M. I viewed the 12.9% R&D increase positively because the money invested today can turn into blockbuster profits tomorrow. After all, you have to plant a tree to enjoy its fruits.
Additionally, there were $44.8M ($1.07 per share) net losses compared to $34.8M ($0.93 per share) net declines for the same comparison. You can see that the widening bottom line depreciation made sense because Axsome invested more money into its R&D.
Axsome
Axsome
Figure 7: Key financial metrics
About the balance sheet, there were $227.5M in cash and equivalents. Against the $59.2M quarterly OpEx and on top of the $16.8M quarterly sales, there should be adequate capital to fund operations into 4Q2023 prior to the need for additional financing. Simply put, the cash is adequate relative to the burn rate.
While on the balance sheet, you should check to see if Axsome is a “serial diluter.” After all, a company that is serially diluted will render your investment essentially worthless. Given that the shares outstanding increased from 37.6M to 41.7M, my math reveals a 10.9% annual dilution. At this rate, Axsome easily cleared my dilution cutoff for a profitable investment.
Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strengths. More importantly, the risks are “growth-cycle dependent.” At this point in its life cycle, the main concern for Axsome is whether the company can quickly ramp up sales growth for its lead medicine, Auvelity.
Though it’s a great drug, it’s difficult to fully/quickly unlock its value in an in-house launch. The other concern is if other franchises would continue to generate positive data. I ascribed an overall 30% chance of a negative clinical readout for ACCORD.
In all, I maintain my buy recommendation on Axsome with a 4.8 out of five stars rating. Axsome Therapeutics is a highly bear-deterrent stock. Despite market concerns, Axsome gained Auvelity approval for MDD. Coupled with Sunosi, Axsome is now a commercialized-stage operator that is eager to deliver leaping sales growth. As you head into year-end, the upcoming results for the ACCORD trial can give the share price another boost. That aside, you can expect other pipeline assets (AXS07, 12, 17) to deliver more wins. Overall, the future is bright with Axsome if you have a long-term investment horizon.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: As a medical doctor/market expert, I’m not a registered investment advisor. Despite that I strive to provide the most accurate information, I neither guarantee the accuracy nor timeliness. Past performance does NOT guarantee future results. I reserve the right to make any investment decision for myself and my affiliates pertaining to any security without notification except where it is required by law. I’m also NOT responsible for the action of my affiliates. The thesis that I presented may change anytime due to the changing nature of information itself. Investing in stocks and options can result in a loss of capital. The information presented should NOT be construed as recommendations to buy or sell any form of security. My articles are best utilized as educational and informational materials to assist investors in your own due diligence process. That said, you are expected to perform your own due diligence and take responsibility for your action. You should also consult with your own financial advisor for specific guidance, as financial circumstances are individualized. That aside, I’m not giving you professional medical advice. Before embarking on any health-changing behavior, make sure you consult with your own doctor.