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Sage Therapeutic Com(SAGE-Q)
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Is Sage Therapeutics a Contrarian Buy?

Motley Fool - Tue Aug 8, 2023

Monday was a dark day for Sage Therapeutics(NASDAQ: SAGE), a company that focuses on developing therapies for brain disorders. The stock plummeted by more than 53% after the company revealed that its blockbuster drug candidate, zuranolone, failed to win approval from the U.S. Food and Drug Administration (FDA) for the treatment of major depressive disorder (MDD).

Zuranolone, which Sage Therapeutics developed in collaboration with Biogen(NASDAQ: BIIB), is a novel antidepressant designed to offer fast and durable relief from depressive symptoms, with a short course of treatment and minimal side effects.

A depressed person in a kitchen.

Image Source: Getty Images.

Is this regulatory setback an opportunity to buy a high-quality biotech company at a bargain price? Let's take a closer look at the pros and cons of investing in Sage Therapeutics after this major blow.

The case for buying Sage Therapeutics

Despite the disappointing news about zuranolone's MDD indication, Sage Therapeutics still has some promising assets under its roof. The company now has two FDA-approved drugs in its portfolio, Zulresso and Zurzuvae. Both drugs are indicated for the treatment of postpartum depression (PPD). Wall Street analysts think PPD represents a $250 million to a $500 million commercial opportunity for the company.

Sage Therapeutics is also developing SAGE-718, an oral drug that targets NMDA receptors, which are involved in learning, memory, and cognition. SAGE-718 is being evaluated in multiple neurological disorders, such as Huntington's disease, Parkinson's disease, and Alzheimer's disease. Although the drug is several years away from reaching the market, each of these conditions represents a blockbuster sales opportunity for the biotech.

Sage Therapeutics also has another ongoing collaboration with Biogen to develop and commercialize SAGE-324, which is being evaluated in a midstage trial for essential tremor, a neurological disorder that causes involuntary shaking of the hands and other body parts. Next up is SAGE-689, a GABA receptor-positive allosteric modulator in early-stage development for acute GABA hypofunction. Lastly, the biotech is also evaluating the compound known as SAGE-319 in an early-stage trial for social interaction disorders.

On the financial side of the ledger, Sage Therapeutics is reasonably well capitalized, with approximately $1 billion in cash, cash equivalents, and marketable securities at last count. The company thinks this amount is sufficient to cover its operating expenses until late 2025. After this regulatory setback, management announced a series of cost-saving measures to extend its cash runway even further.

The case against buying Sage Therapeutics

While Sage Therapeutics has some potential growth drivers in its pipeline, there are also significant risks and uncertainties associated with its business. The most obvious one is the fate of zuranolone, which was supposed to be the company's blockbuster drug for MDD. The FDA's rejection of zuranolone was a major setback for Sage Therapeutics, as it delays the launch of the drug by at least two years. Moreover, there is no guarantee that Biogen will even be willing to see the drug through another late-stage trial, given its recent emphasis on cost-cutting.

Another risk for Sage Therapeutics is its high cash burn rate. The company posted a $160.3 million net loss in the second quarter of 2023, and its PPD franchise isn't expected to ramp up quickly enough to significantly offset its sizable operating expenses. That doesn't mean a capital raise is imminent, but the biotech may have to consider cutting some programs to save money. Shaving off deep value through the elimination of one or more assets isn't exactly ideal.

Verdict

Sage Therapeutics is a high-risk, high-reward biotech stock that could offer huge returns if its pipeline bears fruit in additional indications outside of PPD. However, the company also faces significant challenges and uncertainties that could derail its growth prospects. Therefore, only investors with a high tolerance for volatility and a long-term horizon should consider buying this beaten-down biotech stock right now.

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George Budwell has no position in any of the stocks mentioned. The Motley Fool recommends Biogen. The Motley Fool has a disclosure policy.

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