Almost immediately after Karuna Therapeutics (NASDAQ:KRTX) soared to $152, the company priced a public offering of its stock. So, after the cash raise torpedoed the stock lower, investors need to evaluate the merits of Karuna stock.
On Nov. 18, Karuna Therapeutics reported KarXT demonstrated statistically significant results in Phase 2 clinical trials. Patients showed an improvement in a Total PANSS (Positive and Negative Syndrome Scale) score. The results sent the stock from ~ $18 to as high as $152.
On Nov. 21, the company took advantage of the sharp rise in KRTX stock by pricing a $250 million public offering. It priced 2.6 million shares at $96 a share. Although KRTX stock ended last week at $67.53, the company needs the funds to support continued research activities and the eventual commercialization of the therapy.
What is KarXT?
Karuna’s KarXT is a therapeutic that targets CNS indications. Patients suffering from psychosis and cognitive deficit have a potential drug that will treat psychosis in schizophrenia.
If the company achieves an end-of-phase 2 meeting expected for Q2/2020, it will follow with Phase 3 started by the end of 2020. KarXT has five potential indications: three relate to schizophrenia, one for Alzheimer’s Disease and another for pain. If Karuna brings a schizophrenia drug to the market, it faces minimal competition. Antipsychotics enjoy blockbuster sales but with little innovation; the market has an unmet need.
KarXT is a combination of two drugs. Xanomeline, licensed from Ely Lilly (NYSE:LLY), targets muscarinic receptors in the brain. A generic drug called trospium chloride, also a muscarinic antagonist, is combined with xanomeline. KarXT then selectively activates various receptors in the brain. By increasing activity in the central nervous system, salivation glands, sweat glands, GI tract, and bladder, the patient has improved psychosis and recognition. The subject also has higher tolerability.
On its press release, a member of Karuna’s scientific advisory board said: “The effectiveness of antipsychotics has been limited by the frequent and serious side effects of first- and second-generation drugs.”
Further, Jeffrey Liberman, M.D., professor, and chairman of the Department of Psychiatry of Columbia University, said: “KarXT could be a new therapeutic option that has the potential to offer robust efficacy devoid of weight gain, metabolic effects, and extrapyramidal side effects.”
KarXT’s Phase 2 Study Explained
Karua enrolled 182 schizophrenia patients with acute psychosis, with 90 on KarXT and 92 on placebo. After 8-35 days, patients optionally received an increased dose. At week 5, total PANSS improved compared to the placebo. The rate of patients discontinuing treatment due to a serious adverse event is similar to the placebo, suggesting a good safety profile.
Looking ahead, Karuna will complete a final analysis of the data. From there, it will have a Phase 2 meeting with the FDA in Q2/2020. At that time, it will have a development plan that includes a Phase 3 trial design.
Valuation and Your Takeaway on Karuna Stock
At a ~$2 billion market cap, Karuna stock is underpriced relative to the market it targets. Antipsychotic drugs may top $14 billion by 2025. So, if the company were to address the entire market, the stock trades at 0.14 (or one-seventh) peak sales. On Wall Street, only two analysts offer a “buy” rating and a price target that averages $121.50 (per Tipranks).
Speculators could bet that KRTX will try to make another run higher that is driven by sentiment. And since the company is a few years away from profits, short-sellers may question its fundamentals. Nevertheless, add KRTX stock on the watch list and await updates on its future clinical studies.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.