Shares in anxiety drug developer Bionomics Ltd (ASX: BNO) soared 43% yesterday after the company released its phase II trial results, which found that its BNC210 drug outperformed the current standard of care, lorazepam, in treating Generalised Anxiety Disorder (“GAD” or ‘anxiety’).

Why should I care?

To understand why shares shot up 40%, you need to understand a little bit about anxiety. It’s one of the fastest growing health concerns in Western nations, and a number of other conditions including panic disorders, PTSD, and phobias are all fundamentally anxiety disorders. So the potential target market is massive, and growing rapidly both as awareness grows (more people seek treatment) and additional resources are funnelled to the sector.

Also, current drug therapies for anxiety disorders are sub-par, with benzodiazepines (lorazepam et al) being essentially tranquilizers with the potential for significant long-term cognitive impacts from repeat use.

Bionomics’ BNC210 results were exciting because they significantly suppressed brain activity in the amygdala, which is thought to be the key brain region involved in anxiety disorders. BNC210 additionally led to significantly reduced anxiety-related defensive behaviours on a performance task. Defensive or avoidance behaviours are a classic feature of anxiety disorders, and one of the biggest contributors to reduced quality of life.

The real kicker is that BNC210 performed significantly better than the current standard of care, lorazepam. So we can pretty easily see why the market was excited about Bionomics’ results yesterday.

That was the carrot, now here’s the stick

There are several key drawbacks. One is that the recent trial was only a phase II test, with a sample size of just 24. At least one large phase III trial with more than 100 participants will be required to properly evaluate BNC210. These trials are costly and often take around 1-2 years to organise, conduct, and evaluate.

Many hurdles will have to be overcome. To name just one potential risk, suppression of the amygdala might prove to be maladaptive over the long term if reduced anxiety leads to increased risk-taking behaviour. Even if the drug were found to be safe and effective, it still has to run the gauntlet of medical agency approval worldwide. Medical Developments Limited (ASX: MVP) is on that merry-go-round at the moment.

Secondly, Bionomics is a loss-making business, although in a better financial position than many other similar companies. It also carries $21 million in debt which is a bit unusual.

Third, the company appears quite expensive, although it is well funded. In 10 years if its treatment is highly successful and adopted worldwide, today’s prices will likely appear cheap. However, given the significant hurdles ahead, Bionomics market cap of $182 million appears high. Medical Developments is valued at $300 million, despite having a similar potential market size and being several years closer to tapping those markets than Bionomics.

I’m still in the process of researching Bionomics so would not like to offer an opinion either way. Suffice to say that it appears to have real potential, but also carries significant risks that would-be investors should not overlook.

How 1 Man Turned $10K Into Over $8 Million

Discover how one man turned a modest $10,600 investment into an $8,016,867 fortune. Learn more about this man and how you can start down the path toward financial independence. Simply click here to learn more.

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.