Hype Cycle Alert: Play This Biotech Breakout For Big Gains

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Driven by a spate of high-profile buyouts since spring, biotech has been hot! The S&P Biotech ETF, which tracks the biotech sector, has risen 20% since early April. 

Biotech buyouts are driven by Big Pharma greed. Commercial-stage pharmaceutical companies own perishable assets in the form of patent drugs, drugs which can suddenly be worth much less when they come off patent and generic competition hits.

So, besides internal research and development, pharmaceutical companies with enough cash often go out and buy promising junior players—biotechs--with assets either looking like they will succeed in the market, or are already doing so. 

Axsome Therapeutics (NASDAQ: AXSM) could be one of those companies. The $3.69 billion company has been trading in a range all year, but earlier this month started to break out, suggesting higher share prices are in its future.

Investors have good reason to get excited about Axsome. The company has been developing a new drug to treat major depressive disorder. The drug, called AXS-05, targets receptors of the central nervous system. 

AXS-05 is a proprietary formulation consisting of two components. One is dextromethorphan (DM), a common component of cough suppressants. The second is bupropion, an existing antidepressant. The combination drug is formulated in such a way as to inhibit the metabolism of DM, so it can stay in the brain longer, where it can modulate an array of cell receptors and neurotransmitters. Bupropion itself is used to treat depression, where it affects neurotransmitters like dopamine as well as norepinephrine. Combining the two is synergistic, with bupropion increasing the bioavailability of DM.

In Phase 3 trials AXS-05 showed a marked diminution in depressive symptoms, with 53% scoring improvements compared to only 33% on placebo. On another measure, 47% of patients reported feeling much, or very much improved when taking the drug.

Success in this Phase 3 trial sets Axsome up for a new drug application at the FDA, something it plans to do in the fourth quarter of this year. Since AXS-05 has already received Breakthrough Therapy Designation from the FDA, I believe it is highly likely Axsome will see this drug receive priority review, too. Priority means the review and decision on AXS-05’s application would only take 6 months instead of 10 months.

The FDA approved Axsome’s depression treatment last October, and the company is steadily growing sales numbers. But AXS-05 is also in Phase 3 clinical development for Alzheimer’s Disease agitation, as well as a smoking cessation aid. Add to that an additional three drugs in the pipeline. One drug is AXS-07, which the company expects to file for regulatory approval next quarter for migraines. Another, AXS-12, is expected to generate results from a Phase 3 trial in narcolepsy later this month.

But the real shocker is what Axsome believes its drugs will generate in terms of sales. Axsome expects that once approved, its stable of new drugs could pull in up to $11.5 billion, implying a huge upside from its current price. Even analysts' forecasts, which don’t include the sales potential for all of Axsome’s drugs, range up to $4.5 billion per year—still a huge opportunity at current prices. 

That makes this month’s breakout in AXSM shares a great buy opportunity.

Consider buying shares of Axsome Therapeutics (NASDAQ: AXSM)

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