JAZZ - Axsome Therapeutics: SYMPHONY Catalyst Unlocking

2023-03-09 14:52:53 ET

Summary

• Given that Axsome Therapeutics, Inc. is launching Auvelity with a small in-house team, you can expect a substantial sales increase in the next three years.
• In a highly favorable deal, Axsome recently out-licensed its ex-USA rights of Sunosi to Pharmanovia.
• The upcoming SYMPHONY catalyst can give Axsome Therapeutics shares more fuel to run.

If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes. - Warren Buffett.

Author's Note : This article is a shortened version of a research originally published for members of the Integrated BioSci Investing Group on March 08, 2023.

In biotech investing, I find it thrilling to follow a company from its earliest day of clinical investigation to product launch. It's like taking care of a child from infancy, and seeing how she grows into old age. Despite the higher risks of investing in clinical-stage companies, you'd make the most sizeable profit here. Now, a commercialized-stage innovator can still be a great investment with much more upsides. Provided that its approved therapeutics can generate blockbuster results. Moreover, there have to be other catalysts to boost further growth.

That being said, Axsome Therapeutics, Inc. ( AXSM ) epitomized the aforesaid phenomenon. As you can see , I've been covering AXSM stock for the past five years, even when Auvelity has not even posted any advanced data. I discovered Axsome during an expert interview with a fellow Seeking Alpha analyst who is a trader scientist (Biotech Beast). Fast forward to today, Auvelity is FDA-approved and launched. Since 2017, Axsome shares have increased by 2,167.86%. Nevertheless, there is still a flurry of catalysts to power further growth in the next few years. In this research, I'll feature a fundamental analysis of Axsome while sharing with you my expectation of this intriguing growth equity.

Figure 1: Axsome chart.

About The Company

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).

Figure 2: Therapeutic pipeline.

Auvelity Approval

Contrary to the market expectation, you know that Axsome overcame the odds to receive the Auvelity FDA approval for treating MDD in August 2022. As you can appreciate, the approval is special because it's the first time in six decades that an MDD drug with a novel mechanism of action is approved. Notably, the regulatory decision is based on the robust Phase 3 (GEMINI) trial data in which there is an overwhelming number of patients who achieved complete remission.

Figure 3: Robust Auvelity data for MDD.

Interestingly, Auvelity works as soon as Week 1 which is superior to most antidepressants. Precisely speaking, it usually takes over one month (i.e., 4-6 weeks) for those medicines to kick in. That aside, you can see that the Auvelity label is pretty clean, which fosters strong sales growth.

Figure 4: Excellent Auvelity product label.

As you can imagine, COVID exerts tremendous pressure on the global population. It is estimated that as many as 32.8% of adults in the U.S. suffers from elevated depressive symptoms at the start of the pandemic. Importantly, the majority of patients failed both their initial (i.e., 63%) and second-line therapy (69%). Putting those dynamics together, you can see that there would be robust demand for Auvelity.

Figure 5: High prevalence of MDD.

Commercialization Progress

As you can see, Axsome began to commercialize Auvelity in October last year. In the 4Q2022 filing, the company disclosed that Auvelity sales registered at $5.2M. While this is a small figure, Auvelity is on the market for only three months. For a firm launching its drug in-house, it'd take much time for professional reps to develop relationships with physicians to foster prescription. Typically, you would expect at least three years for Axsome to enjoy significant market traction.

Figure 6: Auvelity's launch approach.

Asides from Auvelity, the Sunosi sales for the said quarter tallied at $19.2M. Despite that Axsome recently acquired Sunosi from Jazz (i.e., only as recently as May 2022), the drug is already generating $44.8M. As shown in the figure below, the biggest opportunity for Axsome is to serve over 60M of patients worldwide. While that won't occur overnight, each clinical and regulatory milestone success would get the company close to that lofty goal. Commenting on the recent development, the CEO (Dr. Herriot Tabuteau) enthused,

The past year was a landmark for Axsome, which saw us bring our first fully in-house end-to-end developed drug to market, potentially transforming the treatment landscape for depression and providing the potential to improve the lives of millions of patients and their loved ones. With two differentiated products in Auvelity and Sunosi now commercialized, encouraging early launch metrics for Auvelity, a broad and advancing late-stage CNS pipeline, and a strong financial position, Axsome is well positioned to continue to deliver significant value to patients and shareholders. We are looking forward to another milestone filled year which has already kicked off with an important licensing agreement for Sunosi in Europe that serves to expand patient access to this important treatment while providing significant potential future value to Axsome. Over the next 12 to 18 months, we look to continuing to execute on the commercialization of Auvelity and Sunosi, initiating or reading out at least four registration trials in indications of high unmet need, and potentially filing four new NDAs.

Figure 7: Axsome's total potential addressable patients.

Selling Ex-US Rights of Sunosi to Pharmanovia

On February 22, Axsome disclosed that the company entered an agreement to out-license Sunosi to Pharmanovia for a total of $66M plus a potential milestone/sales-based royalty up to another $101M. As you know, Axsome in-licensed Sunosi's worldwide rights from Jazz Pharmaceuticals ( JAZZ ) for $53M.

Figure 8: Sunosi's therapeutic merits.

As a dual-acting dopamine and norepinephrine reuptake inhibitor, solriamfetol (i.e., Sunosi) gained FDA approval for treating excessive daytime sleepiness (i.e., EDS) associated with narcolepsy and obstructive sleep apnea (i.e., OSA) in the US back in 2019 and in the EU in 2022. In expanding its label, Axsome is currently studying the safety and efficacy of Sunosi in a Phase 2 trial for adults suffering from attention deficit hyperactivity disorder (i.e., ADHD).

Figure 9: Sunosi's upcoming development.

You should keep in mind that Axsome only out-licensed Sunosi's "ex-USA" rights to Pharmanovia. As such, Pharmanovioa will take over the development/commercialization of Sunosi in Europe and certain countries in the Middle East and North Africa (i.e., MENA). Highly enthused by the deal, the CEO of Pharmanovia (James Burt) remarked,

We are proud to be able to deliver Sunosi, a novel, first-in-class neurological medicine, to the millions of patients suffering from EDS due to narcolepsy or OSA in Europe and soon in MENA. We are delighted to partner with Axsome, a leading CNS-focused biopharmaceutical company, and to expand the overseas launch and further the clinical development of Sunosi. A pivotal Phase 3 study and longer-term extension study, exploring the safety and effectiveness of Sunosi in children with narcolepsy, will be initiated by Pharmanovia, with the aim of bringing this breakthrough therapy to young people affected by this debilitating disease.

As you can see, I love analyzing deals. And, I strongly believe that this deal is highly favorable for Axsome. First, you can see that it takes Axsome $53M to buy the global rights to Sunosi. In a matter of months, the company then sold only the rights in Europe and MENA to Pharmanovia for $66M. As such, Axsome gets to pocket the $13M difference right off the bat.

Given that Axsome only out-licenses the Ex-USA rights to Sunosi, the company strategically retains its rights in the most lucrative market (i.e., the USA). After all, medicines that are marketed in the U.S. tends to get the highest premium. By retaining rights in the most lucrative market, Axsome can ensure a healthy profit margin. That, my friend, is solid proof in the pudding that Axsome management is great at executing and making solid deals.

Upcoming Clinical Catalysts

From the figure below, you can see that Axsome Therapeutics, Inc. is a unique investment. After all, it always has multiple catalysts stacked in close sessions. That is to say, there are two upcoming big data releases. The first and most immediate one is the AXS-12's Phase 3 (SYMPHONY) trial data reporting for narcolepsy that is scheduled for H1. Simply put, you'll get data results from SYMPHONY within the next 3-4 months. If positive, you can anticipate the stock to enjoy another modest rally.

In 1H2024, you can expect another Phase 3 (ADVANCE-2) trial data results for Auvelity's Alzheimer's disease (i.e., AD) franchise. Here, it's likely that the stock would undergo another aggressive run. That aside, the other catalysts (i.e., application submission and trial initiations) typically do not move the stock. Though gradual, the stock usually runs up toward approval once the application is filed.

Figure 10: Upcoming catalysts.

Financial Assessment

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 assess the 4Q2022 earnings report for the period that ended on December 31.

As follows, Axsome procured $24.3M compared to no revenue for the same period a year prior. That aside, the research and development (R&D) for the respective periods registered at $14.6M and $13.7M. I viewed the 6.5% R&D increase positively because the capital invested today can turn into blockbuster profits tomorrow. After all, you have to plant a tree to enjoy its fruits.

Additionally, there were $61.2M ($1.41 per share) net losses compared to $33.9M ($0.90 per share) net declines for the comparison. As you can see, Axsome invested much more capital into launching Auvelity which cuts into the bottom line.

Figure 11: Key financial metrics.

About the balance sheet , there were $200.8M in cash and equivalents. Plus the $350M credit facility from Hercules Capital, the cash position is boosted to $550.8M. Against the $84.2M quarterly OpEx and on top of the $24.3M quarterly revenue, there should be adequate capital to fund operations into 3Q2026. Simply put, the cash position is strong relative to the burn rate.

Potential Risks

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 Therapeutics, Inc. is whether the company can quickly ramp up sales growth for its lead medicine, Auvelity.

Despite being a great drug, it's difficult to rapidly ramp up Auvelity sales with the small in-house team. As such, it'll likely take at least 3 years to see significant sales traction. That aside, there is a risk that both AXS12 and Auvelity could post negative data for their corresponding studies, SYMPHONY and ADVANCE-2.

Concluding Remarks

In all, I maintain my strong buy recommendation on Axsome Therapeutics, Inc. with a 4.8/5 stars rating. Axsome has successfully transitioned from a clinical-stage company to a commercialized operator. The firm is currently launching two approved drugs: Auvelity for MDD and Sunosi for EDS. Being a special investment with "catalysts stacking," Axsome is moving aggressively to expand its labels for the approved drugs.

The next immediate catalyst for Axsome Therapeutics, Inc. is the H1 data release for SYMPHONY. If positive, this catalyst can provide fuel for another modest run. Going into H1 next year, the AD agitation data is most interesting. It can galvanize a highly aggressive runup. The other molecules (AXS07, AXS12, AXS14) are also entering their advanced stage of development. Though you'll encounter periodic volatility, the future of Axsome Therapeutics, Inc. is bright. Your patience and courage should be handsomely rewarded.

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