AXSM - Axsome Therapeutics: Costs Outpacing Auvelity Growth (Rating Downgrade)

2023-11-07 05:00:00 ET

Summary

• Axsome's Q3 earnings show strong Auvelity sales but with significant SG&A cost increases and net loss expansion.
• Axsome's balance sheet is solid, with ample cash reserves and assets exceeding liabilities, suggesting a stable financial position.
• Market sentiment is cautious with underperformance versus S&P 500 and high short interest, reflecting investor skepticism.
• Recommend a 'Hold' on Axsome stock, with a 40/100 confidence score, citing financial and clinical risks versus potential future growth.

At a Glance

In my previous assessment of Axsome Therapeutics ( AXSM ), I underscored Auvelity's promise in the major depressive disorder [MDD] market, while advising caution due to patent and financial uncertainties, recommending a "Buy" position. Since then, the landscape has evolved. Axsome's Q3 earnings continue to reflect a striking narrative of clinical ambition against financial practicalities. With a noteworthy revenue boost largely from Auvelity, which I had anticipated as a game-changer, the company's commercial prowess has become more apparent. However, the scaling up costs are evident in increased SG&A expenses. Auvelity's market penetration and R&D vigor toward indications such as ADHD and fibromyalgia remain bold yet carry risk, as reflected in their financials—a substantial net loss and equity dilution. Clinical milestones for AXS-05 and solriamfetol are imminent, capable of tipping investor sentiment. Institutional investments display cautious optimism, suggesting investors are aware of and considering the potential I highlighted previously. At this juncture, Axsome's strategic pivot must marry clinical progress with fiscal prudence to foster sustainable growth and maintain market relevance.

Q3 Earnings

To begin my analysis, Axsome's Q3 2023 earnings reflect a robust revenue uptick to $57.1M, primarily driven by a 36% sequential increase in Auvelity sales to $37.7M. Yet, operating expenses swelled to $119.9M, with a pronounced rise in SG&A costs to $83.2M. The net loss expanded to $62.2M, and the net loss per share increased to $1.32, reflecting a widened deficit. Share dilution is evident with a notable year-over-year increase in the weighted average number of shares.

Financial Health

Turning to Axsome's balance sheet, 'Cash and cash equivalents' is at $416.6M. The 'Current Ratio' is a healthy 4.46, as total current assets of $511.8M significantly surpass total current liabilities of $114.7M. Comparing assets to debts reveals a stronger asset position with $600.9M against total liabilities of $331.3M, including long-term debt of $177.4M.

At the time of writing, net cash used in operating activities has not been provided, precluding a precise calculation of the monthly cash burn rate.

Nonetheless, the firm's assertion of sufficient cash into cash flow positivity suggests a low probability of additional financing being needed within the next year. It is important to note that this analysis is based on historical data, and the actual cash flow development will need close monitoring to confirm this outlook.

Market Sentiment

According to Seeking Alpha data, Axsome exhibits a market capitalization of $3.07 billion, a level that suggests investor confidence relative to the company's size and industry segment, especially given the high revenue growth prospects indicated by analysts, with a projected increase to $261.14 million in 2023 and $391.38 million in 2024. However, the stock's momentum is underperforming the SP500, as indicated by a -13.47% change over three months compared to SP500’s -3.19% for the same period, reflecting some investor reservations. A high short interest of 21.74% with 7.59 million shares short and a days-to-cover ratio of 11.03 underscores market skepticism, possibly due to the substantial investments in SG&A and R&D without proportionate revenue realization yet.

Technically, AXSM shows a bearish trend as it trades below both 50-day (70.75) and 200-day (70.85) moving averages. The RSI at 40 suggests a lack of momentum, while the descending MACD indicates continuing bearish sentiment. The recent cross of the 50-day MA below the 200-day MA could signal a further downtrend.

Institutional ownership is substantial at 76.64%, denoting a strong institutional belief in Axsome's prospects. The active positions reveal that institutional holders have increased positions by 7,728,652 shares and sold out 862,556 shares. Notable institutional investors include RTW Investments, with an increase of 503,422 shares, Vanguard, and BlackRock, both of which have significantly increased their holdings, reflecting a positive sentiment among major market participants.

Insider trades over the past three and twelve months show a net activity of (29,588) shares sold, which could indicate some concerns among those with intimate knowledge of the company. However, the volume of insider selling is relatively small, suggesting it may not be a significant indicator of company trajectory at this time.

The Cost of Innovation: Axsome's R&D and SG&A Surge

Axsome's strategic endeavors to penetrate the market with Auvelity and its pipeline in complex indications such as ADHD, fibromyalgia, narcolepsy, and migraine come with an inherently high level of risk and investment. Their Q3 performance showcases a determined effort to capitalize on the MDD market with Auvelity, which saw a substantial sequential increase in prescriptions. Despite this uptick, concerns linger due to the surge in SG&A expenses associated with scaling up commercial operations.

These SG&A expenses, which have more than doubled year-over-year, are partly fueled by the expansion of the sales force and the implementation of their Digital Centric Commercialization platform. This aggressive push is pivotal for expanding Auvelity's footprint but could strain financial resources if the growth in prescriptions does not accelerate accordingly to offset the high costs.

R&D costs, while essential for clinical advancement, have spiked notably. Axsome's venture into notoriously challenging indications adds a layer of complexity and financial burden. ADHD and fibromyalgia, for example, are therapeutic areas characterized by subjective endpoints and high placebo response rates in trials, often leading to significant obstacles in demonstrating efficacy. This is reflected in the substantial R&D expenditure, which has nearly doubled from the previous year's quarter, evidencing the hefty investment required to navigate these turbulent waters.

Moreover, the migraine treatment landscape , targeted by AXS-07, is fiercely competitive and riddled with established players, making market penetration and patient switch-over a costly endeavor. Similarly, their foray into the narcolepsy space with AXS-12, despite holding FDA Orphan Drug designation, will require rigorous clinical validation due to the complexity of the disorder and the limited patient population.

The concern is not just the magnitude of investment in R&D and SG&A but also the rate at which these costs are escalating. This trajectory, if not matched with a significant and sustained increase in revenue, could exacerbate financial strain. The emphasis on indications with historically high clinical and commercialization hurdles further compounds the risk, suggesting that Axsome's strategy, while ambitious, may face significant headwinds without careful financial navigation and successful market adoption of their products.

My Analysis & Recommendation

In conclusion, Axsome's Q3 financials cast a shadow on its near-term prospects. The sharp rise in SG&A expenses, albeit a common narrative for a company transitioning from development to commercial stage, heightens the burn rate. Investors should monitor if subsequent sales growth can justify these investments. The robust current ratio indicates a cushion against short-term liabilities, but the widened loss and share dilution point to a precarious balance between growth and financial sustainability.

Clinical pipeline advancements remain a double-edged sword. Forthcoming trial results for AXS-05 and solriamfetol present potential upside catalysts, yet the market's tepid reaction—suggested by underperformance and high short interest—implies skepticism. The clinical success of AXS-07 and AXS-14 is crucial, given the fierce competition in the migraine and fibromyalgia markets. Investors might consider a cautious approach until Axsome clears regulatory hurdles and demonstrates commercial viability in these areas.

Mitigation strategies should include a diversified biotech portfolio and readiness to pivot based on trial outcomes. With regulatory milestones ahead, I'm tempering expectations, factoring in financial health, clinical progress, and market dynamics. Investment strategies should reflect resilience to potential volatility. Leveraging a 'Hold' stance, I assign a confidence score of 40/100, now leaning slightly bearish and indicative of a wait-and-see approach amidst Axsome's attempt to balance growth with financial prudence.

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