Should You Buy This Sinking Stock on the Dip?

Should You Buy This Sinking Stock on the Dip?

There are things that can affect and sink the stock prices of companies in most industries. One of them is a short-seller report. Axsome Therapeutics (NASDAQ: AXSM), a mid-cap biotech, was recently the target of one, and it already wasn't having a great year on the stock market. Though it might be tempting for investors sitting on the sidelines to purchase the drugmaker's shares while they are failing to keep pace with the bull market, some might argue that it would be best to take a patient approach.

Let's examine the allegations in the short-seller report more closely and consider whether Axsome's not-so-great performance since the year began presents an opportunity for investors.

Is Axsome inflating its revenue?

The report was from Culper Research, an activist short seller based in New York whose goal is to expose companies that are conning their shareholders and the market by using various shady business or financial practices. That's exactly what it is accusing Axsome Therapeutics of. According to Culper Research, the biotech's revenue in association with Auvelity, a therapy for depression first approved in August of 2022, is inflated. Here's a basic outline of Culper Research's argument:

Auvelity is a combination of two existing, cheap off-patent drugs. Yet, Auvelity's price tag far exceeds those of its separate component drugs. That's why health insurers have stringent requirements for their customers before they agree to cover Auvelity.

According to Culper Research, Axsome Therapeutics relies on mail-order pharmacies that circumvent insurer requirements to get Auvelity to patients. The biotech's sales rep directs physicians and patients toward these pharmacies, which use Axsome Therapeutics' copay cards to fill the prescriptions before obtaining authorization from insurers. Culper Research points out that Axsome Therapeutics' account receivables have grown rapidly, and the timing to collect payment seems too long.

The activist short seller says these allegations are backed by former Axsome Therapeutics employees (including sales reps), physicians, patients, and mail-order pharmacies.

Wait and see, or buy on the dip?

Culper Research's report is dated June 11. Since then, at least two separate Wall Street analysts have reacted the opposite way one would expect. Morgan Stanley's Vikram Purohit reiterated his buy rating on the stock, as did Citigroup's David Hoang. Both analysts think Culper Research's claims lack merit and Axsome Therapeutics' sales practices are in line with industry standards. Who should investors believe? It's worth noting that these claims aside, Axsome Therapeutics looks like a solid biotech stock to buy.

Besides Auvelity, the company is developing several other products. Its rich late-stage pipeline should help transform its lineup in the next couple of years if things go according to plan. Axsome Therapeutics is developing medicines for migraine, fibromyalgia, and narcolepsy. Auvelity is being tested in Alzheimer's disease agitation. Sunosi, Axsome Therapeutics' other approved product, which treats daytime sleepiness due to sleep apnea, is undergoing studies in ADHD.

Those are Axsome Therapeutics' late-stage programs, a couple of which have already delivered at least one phase 3 clinical trial win. It has several more in phase 2 studies. Sales for Auvelity and Sunosi aren't that impressive yet, but they have been growing steadily. In the first quarter, Axsome Therapeutics' total revenue of $75 million declined from the $94.6 million generated in the year-ago period.

But last year, it recorded a onetime upfront payment from Pharmanovia, a U.K.-based pharmacy that obtained the right to market Sunosi in Europe. In Q1, Axsome Therapeutics' net sales of $74.1 million were up by about 159% year over year. The company's market cap is just $3.72 billion as of this writing, which, in my view, underestimates the potential of its pipeline.

Now, circling back to the short-seller report, it adds a degree of risk and uncertainty to the biotech's prospects. However, Culper Research's claims and evidence also seem unconvincing to me. That's why I'd still think Axsome Therapeutics' shares can appreciate from here, especially as they have lagged the market this year.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Axsome Therapeutics. The Motley Fool has a disclosure policy.