Rising Payer Pressure And Costly Pipeline Will Restrain Long Term Profitability

Catalysts

About Axsome Therapeutics

Axsome Therapeutics develops and commercializes central nervous system medicines across psychiatry and neurology.

What are the underlying business or industry changes driving this perspective?

• Heavy reliance on AUVELITY, which generated US$136.1 million of the US$171 million quarterly revenue, leaves Axsome exposed if growth in prescriptions or net pricing in major depressive disorder slows. This could restrict top line expansion and delay earnings breakeven.
• Rising gross to net discounts for AUVELITY and SUNOSI, expected to move from the high 40% range to the low 50% range, together with SYMBRAVO remaining in the mid 70% range, point to sustained pricing pressure from payers. This could cap net revenue growth and weigh on net margins.
• The broad late stage pipeline across Alzheimer’s agitation, narcolepsy, ADHD, binge eating disorder, shift work disorder and fibromyalgia requires multiple Phase III programs and potential launches at the same time. This could inflate R&D and SG&A expenses faster than revenue and prolong net losses.
• Plans to expand the sales force for a possible AXS 05 Alzheimer’s agitation launch and to build a dedicated long term care team, on top of existing DTC spending and recent sales force expansion, could push operating costs higher than anticipated. If uptake is slower than expected, this could increase the cash burn rate and pressure future earnings.
• Growing dependence on payers and group purchasing organizations for broader coverage across AUVELITY and SYMBRAVO, as access moves through additional GPO contracts and P&T decisions, could force further concessions on price and rebate levels. This may limit revenue per prescription and constrain operating margin improvement.

Assumptions

This narrative explores a more pessimistic perspective on Axsome Therapeutics compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Axsome Therapeutics's revenue will grow by 40.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -40.9% today to 28.0% in 3 years time.
• The bearish analysts expect earnings to reach $433.1 million (and earnings per share of $5.46) by about January 2029, up from $-229.5 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.4 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.3x on those 2029 earnings, up from -38.8x today. This future PE is greater than the current PE for the US Pharmaceuticals industry at 20.1x.
• The bearish analysts expect the number of shares outstanding to grow by 3.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• AUVELITY is already showing strong prescription and revenue momentum, with 209,000 quarterly prescriptions, 46% year over year growth, and 9% sequential growth while the broader antidepressant market is roughly flat. If this outperformance continues, it could support sustained revenue growth and a path to improved earnings.
• The company is expanding its addressable markets across multiple late stage programs in large, underserved CNS indications such as Alzheimer's agitation, narcolepsy, ADHD, binge eating disorder, shift work disorder and fibromyalgia. If even a portion of these programs are approved and launched, that breadth could support higher long term revenue and earnings than a bearish view assumes.
• Management expects current cash of US$325.3 million to fund operations into cash flow positivity based on the existing plan, and net loss already reflects significant non cash items. If operating leverage continues to improve as revenues grow, the impact on future earnings and net margins could be more favorable than a pessimistic scenario suggests.
• SUNOSI and SYMBRAVO are showing early signs of durable use, with SUNOSI growing prescriptions faster than the wake promoting agent market and SYMBRAVO gaining traction among headache specialists. If payer coverage continues to broaden for both, it could provide additional recurring revenue streams alongside AUVELITY.
• The company is building commercial synergies across psychiatry and neurology, particularly in sleep disorders and primary care. If this shared infrastructure lowers per product selling costs as more indications come on line, it could support better net margins and earnings resilience than a thesis focused only on rising SG&A would expect.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Axsome Therapeutics is $148.0, which represents up to two standard deviations below the consensus price target of $201.29. This valuation is based on what can be assumed as the expectations of Axsome Therapeutics's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $248.0, and the most bearish reporting a price target of just $148.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $1.5 billion, earnings will come to $433.1 million, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $176.82, the analyst price target of $148.0 is 19.5% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.