If you bought shares of Karuna Therapeutics (NASDAQ:KRTX) at or near its initial public offering price of $16, you’re loving life. Although KRTX stock disappointed early bird investors for the first few months, the payoff came around mid-November. That was when the equity value skyrocketed into a different dimension. And for a few brief moments, KRTX soared into triple-digit territory.
Since then, Karuna Therapeutics stock has given up much of its gains. Nevertheless, shares are still at a respectable price point at above $68. Considering that roughly a month ago, KRTX closed at $123.99, the equity is currently discounted by about 45%. Given its demonstrated potential to move on a moment’s notice, Karuna understandably appeals to speculative investors.
But unlike your typical ultra-risky trade, KRTX stock provides fundamental justification for its market premium. On Nov. 18 — when shares jumped 443% over the prior session — Karuna disclosed incredibly positive phase II clinical trial results for its KarXT drug. KarXT is designed to treat symptoms associated with schizophrenia, specifically acute psychosis.
However, the astonishing gain wasn’t just limited to a positive trial, but rather its implications. According to Jeffrey Lieberman, who is the chairman of Columbia University’s Department of Psychiatry and who also sits on Karuna’s scientific advisory board, KarXT may “represent a game-changing therapeutic advance in the treatment of patients with schizophrenia.”
Clearly, Wall Street believes him, which ultimately sent Karuna Therapeutics stock into low-earth orbit.
So, what brought KRTX stock a little bit lower into our atmosphere? Some classic profit-taking, along with a new stock offering, took the wind out of Karuna’s sails. Still, the thinking goes, the fundamentals are positive.
The Difficult Case for KRTX Stock
On one hand, I truly want to believe in Karuna Therapeutics stock. Better yet, the company is making such wishful thinking attractively palatable.
Here’s what I mean: yes, Karuna is an experimental pharmaceutical company and therefore, we should expect a high-risk, high-reward profile for KRTX stock. However, unlike other experimental companies, Karuna is focused on resolving a “lucrative” condition.
According to the Schizophrenia and Related Disorders Alliance of America, 3.5 million Americans are diagnosed with schizophrenia. Furthermore, it’s one of the leading cause of disability. More critically from the perspective of KRTX stock, the demographics of this condition are very favorable. Three-quarters of patients develop the illness between 16 years and 25 years old.
Basically, this demo suggests that Karuna can grow with their patients, providing long-term revenue opportunities.
However, the problem with schizophrenia is that it’s an incredibly difficult illness to address. Although the pharmaceutical industry has forwarded many medicines in the past, they have often created severe side effects. One positive to note about Karuna Therapeutics stock is that KarXT resolves psychosis symptoms without debilitating side effects.
Still, psychosis episodes among certain schizophrenia patients may prevent them from taking medication altogether. According to Donna A. Wirshing, M.D. and Peter F. Buckley, M.D.:
“The level of denial of illness among people suffering from schizophrenia is quite high. Research on the reasons why patients with schizophrenia do not take their medication has indicated that patients with grandiose delusions are most likely to reject medication so as to avoid confrontation with a reality that is not so glamorous.”
In a recent interview with Pharmacy Times, Dr. T Scott Stroup, M.D., MPH, noted that some schizophrenic patients don’t respond at all to medication. Thus, it’s possible that a phase III trial failure could cripple KRTX stock.
Perhaps Too High of a Risk for Most
Pharmaceuticals themselves have a schizophrenic nature. Although most people presumably love their potential to heal unaddressed diseases, most hate the volatility in their equity valuation.
For me, this is the case with Karuna Therapeutics stock. I love the science behind the underlying KarXT therapy. If this works as advertised for most patients, then yes, shares today represent a bargain.
But whether they can meet the glaring spotlight of additional clinical trials remains to be seen. Pharmaceuticals and biotechnology firms are wild for a reason: at any moment, good news or bad news can shift the paradigm of your investment.
Even more so, we should expect severe volatility for KRTX stock. Presently, Karuna doesn’t generate any revenue, so they must rely on “passive” means for cash flow. This also suggests that KRTX is an all-or-nothing gamble on the KarXT therapy.
Tactically speaking, equity opportunities like Karuna Therapeutics stock are best purchased near deflated price points. After a huge market value surge, there’s just too much risk baked into the stock price.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.