Is this biotech a safe stock to buy?

youAt first glance, Axsome therapeutics (NASDAQ: AXSM) doesn’t exactly look like a candidate to be a safe stock ready to buy today. Currently, biotechnology has no approved drugs and no revenue. He also doesn’t have a lot of cash or any major collaborators to keep him afloat.

So how could he be sure? The short answer is that all of the above is subject to change for the better. And it all comes down to a subtle hint that was revealed recently.

Image source: Getty Images.

What could make Axsome a safe biotech choice(r)

Axsome is developing a handful of drugs to treat neuropsychiatric conditions such as narcolepsy and migraines. Its drug AXS-05 is its lead program, and it is being studied in a late-stage clinical trial for its usefulness in treating agitation in Alzheimer’s disease, as well as in another trial for smoking cessation.

According to an April 19 SEC filing, the company has accepted a set of post-marketing requirements proposed by the U.S. Food and Drug Administration (FDA) for its drug AXS-05, intended to treat depressive disorder. major (MDD). The fact that the FDA requires specific things to happen after the drug’s debut on the market means it is highly likely that regulators will consider approving the drug. It could also make investors wonder if Axsome is a safe bet, let alone a growth stock with huge potential.

After all, with regulatory approval (hopefully) almost in the bag, much of the clinical development risk that characterizes typical pre-product biotech stocks is mitigated. In other words, if all goes according to plan from now on, investors can get significant returns from the company’s commercialization of the AXS-05, but not as much of a chance of it all failing. And AXS-05 could be approved for sale as early as this quarter.

So goes the argument for buying this stock right now. Of course, things are a bit more complicated than that.

Which makes it less safe than it looks

Despite the positive preliminary news about AXS-05, there is still a small chance that the company will struggle to meet FDA approval requirements, which it has struggled with in the past. More recently, the FDA rejected its drug AXS-07, intended to treat migraines, due to issues with manufacturing data submitted by the company. But problems with AXS-07 probably won’t be serious enough to end the project. At this point, it’s hard to imagine an obstacle on that front with the AXS-05 program totally destroying its stock price, although a similar stumble would likely cause a bit of damage.

Regardless of the status of the approval, another issue with Axsome is that they don’t have a lot of money relative to their expenses, as shown below:

AXSM Cash and Short-Term Investment Table (Quarterly)

AXSM Cash and Short-Term Investment Data (Quarterly) by YCharts.

While its total debt load of $49.7 million is manageable, as is the amount of current debt due within a year, it looks like something will have to give for the company to pay its expenses this year. Even if the FDA gives AXS-05 its approval, commercializing the therapy to the point where it makes more money than it costs to produce it may take a few quarters. But gaining approval could provide a boost in its course of action. And here’s what management did the last time stock prices soared and cash was tight:

AXSM Chart

AXSM data by YCharts.

That’s right, he issued a boatload of new shares, diluting existing shareholders in the process. And the next time its shares soar, the risk of dilution will be very high. Of course, for veteran biotech investors, it’s business as usual, and nothing to worry about, but it should still be on the radar as a possibility.

For the record, management says the company has enough capital remaining through a $300 million term loan facility to run things through 2024. Therefore, it makes sense to anticipate an increase in the debt burden if the managers refuse to issue new shares.

Hedge your bets

At the moment, Axsome looks a bit safer than most (highly risky) biotech stocks, thanks to its likely approval for AXS-05 and its collection of late-stage pipeline projects. Although he may need to incur new debt or issue new equity to close the funding gap by the time he starts making a profit from the sales of his drugs, assuming that’s the case, it will remain in good shape.

Still, the above doesn’t exactly make Axsome a desirable stock for conservative or risk-averse investors. Its marketing, manufacturing and distribution capabilities are untested, as is its general ability to operate profitably. Similarly, at present, shareholders have little indication of what management intends to do with the expected profits from any new drug marketed.

Therefore, even though it is a safe biotechnologies Stock buy, it’s probably not a safe Stock buying in a more general sense, although I wouldn’t say it’s exceptionally risky either. So if you’re comfortable with a moderate level of risk that feels like calm waters compared to traditional biotech turbulence, I think it’s reasonable to dive in and buy a few stocks.

10 stocks we prefer at Axsome Therapeutics
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Alex Carchidi has no position in the stocks mentioned. The Motley Fool owns and recommends Axsome Therapeutics. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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