Markets

Is Karuna Therapeutics Stock a Good Buy Now?

It doesn't happen every day, but surprisingly positive clinical trial results can more than double your money in minutes. Shares of Karuna Therapeutics (NASDAQ: KRTX) recently increased more than sevenfold after investors learned that its potential new schizophrenia drug, KarXT, produced a measurable benefit with a safety profile that was better than anyone was expecting.

Can Karuna Therapeutics stock keep climbing, or was the recent run-up just a flash in the pan? There are a lot of ins and outs to consider. Let's see how they add up.

A man weighs bags of money on a balance scale with the word risk spelled out on the other end and an umbrella in between, in an illustration of balancing financial gain against risk.

Image source: Getty Images.

Reasons to buy

Schizophrenia causes an estimated 2.7 million Americans to see and hear things that aren't real. Chronic psychosis can make developing relationships and maintaining a job extremely challenging. 

Recurring bouts of psychosis are schizophrenia's defining feature, but the root causes aren't identical from person to person. That's why around a third of patients don't respond to today's antipsychotic drugs. 

Even when the available antipsychotic drugs do work, their associated side effects lead a majority of patients to discontinue treatment. Despite its limitations, a popular antipsychotic called Invega Sustenna from Johnson & Johnson (NYSE: JNJ) is on pace to reach $3.3 billion in sales this year.

Karuna's lead candidate, KarXT, acts on muscarinic receptors that respond to acetylcholine, while J&J's antipsychotic drugs target dopamine and serotonin receptors. This fundamental difference could make KarXT a go-to option for millions of patients who aren't helped by available treatments.

Recently, Karuna Therapeutics shared positive results from a 180-patient phase 2 trial with moderately schizophrenic patients who were also experiencing acute exacerbations. The average score on the positive and negative syndrome scale (PANSS) among patients treated with KarXT was 11.6 points lower than the placebo group.

Repeating the observed benefit should be good enough to persuade the FDA to approve KarXT for this patient group. For comparison, during four studies with Invega Sustenna, average PANSS improvements ranged from 6.9 to 14.0 points better than the placebo. 

Lab technician holding up a collection of test tubes for observation.

Image source: Getty Images.

Not exactly new

KarXT behaves much differently from Invega Sustenna, but it isn't exactly new. Karuna's candidate is a combination of two molecules that have already been around the block a few times -- xanomeline and trospium chloride.

Xanomeline was an Eli Lilly (NYSE: LLY) candidate that activates muscarinic receptors in the brain to treat schizophrenia, but it also acts on similar targets all over the body. Karuna licensed xanomeline from Lilly and added trospium chloride, a drug used to treat an overactive bladder by preventing the activation of peripheral muscarinic receptors. 

Lilly shuttered its xanomeline program decades ago, after a majority of schizophrenic patients dropped out of a clinical trial because of frequent side effects. That's why Karuna was able to license it in 2012 for just $100,000 up front and a royalty percentage in the low to mid-single-digit range on any potential sales.

Reasons to remain cautious

Karuna's successful phase 2 results suggest that adding trospium chloride has the intended effect on safety, but it might be a good idea to wait for more details before diving in. Antipsychotic drug candidates have a tendency to show promise in smaller trials only to fail spectacularly in larger phase 3 studies. Karuna doesn't have any other candidates in clinical trials right now, so a phase 3 flop would be catastrophic.

Xanomeline is especially active at nerve endings that cause the stomach and intestines to contract. A troubling 54% of patients treated with KarXT experienced treatment-emergent side effects, and the most commonly reported issues included constipation, nausea, indigestion, and vomiting.

Patients treated with KarXT exhibited an average 17.4-point PANSS improvement, or about 18% lower than the group's average score at the beginning of the study. That was enough to go from markedly ill to moderately ill, but it's a long way from complete relief.

Person looking through a magnifying glass.

Image source: Getty Images.

Looking ahead

Betting against Karuna isn't a good idea, but at its present valuation, new shareholders could suffer swift and heavy losses if phase 2 results can't be replicated in a larger pivotal study. Unfortunately for investors, repeating its recent success isn't the only accomplishment Karuna needs to report to provide market-beating returns.

At the moment, Karuna Therapeutics sports a market cap that recently ballooned to $2.8 billion. To achieve sales that justify this valuation, KarXT needs to earn approvals for acute schizophrenic exacerbations plus patients who will take the drug on a long-term basis.

The improvement measured over the short term looks pretty good, but it might not be enough to put up with a permanently upset stomach. It's probably best to remain on the sidelines for a lower valuation, or a more convincing explanation of KarXT's safety profile.

10 stocks we like better than Karuna Therapeutics 
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Karuna Therapeutics wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

 

*Stock Advisor returns as of June 1, 2019

 

Cory Renauer owns shares of Johnson & Johnson. The Motley Fool recommends Johnson & Johnson. 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.

In This Story

KRTX LLY JNJ

Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More