AXSM - Axsome Therapeutics: Positive Q3 We Like The Launch Success Story

2023-11-27 10:41:32 ET

Summary

• Axsome Therapeutics reports robust Q3 earnings with record revenue of $57.8 million, driven by sales of flagship product Auvelity.
• The company plans to expand its sales force to deepen market penetration and reach a broader base of prescribers and patients.
• Axsome's diversified portfolio and strategic positioning in the specialty pharmaceutical market position it well for sustained growth.
• We maintain a buy rating on AXSM.

Thesis update and Q3 earnings review

In our previous articles (Sept 2023) and initiation report (April 2023) , we were bullish on the company's robust sales growth in the two key lead commercial products (Auvelity and Sunosi) and also the pipeline expansion opportunities (with the ongoing clinical trials). After reviewing the Q3 earnings, our confidence in the company has strengthened; as such, we maintain a buy rating moving into 2024.

In the third quarter of 2023 (Nov 6th), Axsome Therapeutics (AXSM) reported robust financial results, underlining the company's successful market strategy and effective product portfolio. The company achieved record revenue of $57.8 million, primarily driven by the impressive sales of Auvelity, its flagship product for Major Depressive Disorder, which generated $37.7 million. This performance exceeded our expectations, reflecting Auvelity's growing market acceptance and effective penetration.

Axsome's strategy of expanding its sales force is a crucial step in bolstering its commercial operations. By increasing the number of specialty account managers, the company aims to extend its reach and deepen its penetration in the market, thereby driving further growth. This expansion is especially significant for Auvelity, as it enables the drug to reach a broader base of prescribers and patients, cementing its position in the market. We highlight that the company reported about 69k total prescriptions for the quarter, with over 50k patients currently on the drug, reflecting its growing adoption across therapy lines, including significant use as a first or second line of treatment. Another key information that the management shared was updates around market access for Auvelity, which continues to expand, with AXSM now covering approximately 70% of potential patients, indicating significant room for further market penetration, when the access is completed, we see a significantly greater ramp up (we estimate around 2024). Furthermore, we highlight that, Sunosi, another key product in Axsome's lineup, contributed significantly to the revenue with $20.1 million in sales.

In terms of the bottom line, the quarter saw a net loss of $62.2 million, translating to a loss of $1.32 per share, mainly attributed to ongoing research and development expenses of $28.8 million and selling, general, and administrative expenses of $83.2 million. The company's cash reserves stood at approximately $417 million, positioning it well to fund ongoing operations and support future growth. These results demonstrate Axsome's strong commercial capabilities and its potential for sustained growth in the specialty pharmaceutical market.

Diversified R&D strategy

Besides Auvelity, Axsome is exploring potential indications for Alzheimer's disease agitation and smoking cessation, areas with limited approved therapies. Such diversification not only mitigates the risks associated with dependency on a single product but also broadens the company's market potential and growth opportunities.

Looking at the broader market context, the specialty pharma industry, particularly in the areas of neuropsychiatric and neurological disorders, presents significant opportunities for growth. Axsome's targeted approach to addressing unmet medical needs in these areas positions it well to capitalize on these opportunities. The company's focus on expanding into underserved areas like Alzheimer's disease agitation and smoking cessation further underscores its strategic positioning in the market. These areas, which currently lack sufficient therapeutic options, offer substantial market potential for Axsome. Additionally, the anticipated market entry of products like AXS-07 and AXS-12 adds to the company's growth trajectory. AXS-07, aimed at the acute migraine market, has the potential to establish itself as a preferred treatment option due to its faster onset compared to existing products. AXS-12, targeting narcolepsy, could also become a significant player in its segment, given the unmet needs in this area.

Financial

Increased Cash Reserves : The company's cash and cash equivalents stood at $416.6 million as of September 30, 2023 (raised mostly through public offering), a substantial increase from $200.8 million at the end of 2022. This significant increase in cash reserves demonstrates the company's ability to accumulate capital, which is essential for funding ongoing operations and future expansions. Considering that the company used ~$62M during Q3 2023 if we assume the cash burn rate to continue, we expect around $240M of cash burn annually. Considering that the company's recent drug launch continues bringing more revenue, we estimate the company to have ~2 years of cash runway, which is highly attractive for a mid-cap biotech company. Although the company has $185m in debt, we do not expect this to be a major concern, considering the robust market ramp and the strong cash balance.

Valuation

If we do a quick envelope calculation, considering the consensus peak sales of the two products is $1.5Bn, using BTVI's peak sales multiple of 3 (used as an industry standard in the biotech sector across the board - we used it to be conservative without giving additional premium to AXSM), BTVI's implied valuation of AXSM is around 4.5bn, which represents around 80% additional upside from the current enterprise value of $2.49Bn. With the current sales momentum continuing and the company's robust early launch performance, we believe reaching the $1.5Bn should be a high-likelihood scenario. Based on our observation, the first year of launch success usually indicates continued success, as early success usually indicates market access success (drug pricing and payor dynamics, which tend to be the most difficult hurdles for first-time launchers).

Risks

1. Clinical Trial and Regulatory Risks : Axsome's future success heavily depends on the clinical development, regulatory approval, and commercialization of its drug candidates. Any setbacks in clinical trials, such as unfavorable results, safety issues, or failure to meet primary endpoints, could significantly impact the company's prospects. Additionally, delays or failures in obtaining regulatory approvals from agencies like the FDA could adversely affect the company's ability to bring new products to market.

2. Market Access and Reimbursement Challenges : Successful commercialization of pharmaceutical products often depends on securing adequate market access and favorable reimbursement from payers such as insurance companies and government health programs. There is a risk that Axsome's products may not gain sufficient market access or that reimbursement levels may be lower than expected, which could limit the commercial success of the company's products.

3. Competition and Market Penetration : The pharmaceutical industry is highly competitive, with numerous companies developing and marketing treatments for similar conditions. Axsome faces competition from existing treatments and new drugs that may be developed by other companies. If competitors introduce more effective, safer, or less expensive products, it could impact Axsome's market share and revenue.

4. Dependence on Key Products : While Axsome has a diversified portfolio, its financial performance is significantly dependent on the success of key products like Auvelity and Sunosi. Any issues related to these products, such as unexpected side effects, manufacturing problems, or shifts in market demand, could disproportionately affect the company's financial health and growth prospects.

5. Intellectual Property Risks : The value of Axsome's products and pipeline is largely tied to its intellectual property [IP]. The inability to obtain, maintain, defend, and enforce patents and other IP rights, or the occurrence of IP-related litigation, could adversely affect the company's competitive position and financial performance. Furthermore, the expiration of key patents could expose the company to generic competition, potentially reducing revenue.

6. Sales ramp can slow down: if the sales ramp does not materialize during the next few quarters, it can plague the current launch success narrative and negatively impact the stock price. Furthermore, although the current cash runway is robust, the company may have to raise additional capital through public offering, which can lead to further dilution.

Conclusion

Net-net, Axsome Therapeutics presents a compelling investment case. The company's novel pipelines and robust market launch strategy (in-depth analysis in our initiation article ) to drug development, diversified product portfolio, robust financial performance, and strategic market positioning underpin our continued Buy rating. With multiple products in its pipeline and a strong market presence, particularly with Auvelity, Axsome is well-positioned for sustained growth and success in the specialty pharmaceutical industry. The company's ability to navigate the complex pharmaceutical landscape, combined with its strategic focus on areas of unmet medical need, makes it a promising investment choice.

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