Original Recommendation

Karuna Therapeutics

Karuna Therapeutics (KRTX)

our opinion

buy

current price

$20.19

target price

$26.00

market cap

$455M

div yield

0.00%

  • Karuna Therapeutics is developing novel approaches to treat patients suffering from psychosis. The addressable market size is currently in excess of $10 billion annually.
  • Analysts are very bullish on the prospects of KarXT, the company's leading drug candidate. All analysts rate the stock a "Buy", with one analyst projecting 100% upside in the company's share price.

trade details

Each year 100,000 Americans will be diagnosed with schizophrenia. Globally, the disease currently impacts over 30 million people. The prognosis for schizophrenia remains poor as only 30 percent of patients live independently and only 10 to 20 percent maintain full-time employment. Additionally, up to 50 percent of the estimated 5.7 million patients with Alzheimer’s Disease in the United States experience psychosis at some point during the course of their disease, which often leads to institutional care in a hospital or nursing home.

Current medicines have undergone very few enhancements since their introduction in the 1950s. What’s also notable is at least half of patients fail to adequately respond to antipsychotic drugs, while many experience severe side effects including sedation, motor rigidity, tremors, slurred speech, and significant weight gain resulting in complications.

There is a desperate need for new treatments in schizophrenia and psychosis that not only address positive, negative, and cognitive symptoms of the disease, but are also safer than existing medicines.

Fortunately, Boston-based Karuna Therapeutics has spent the better part of the last decade creating a formulation to improve the the lives of patients suffering from schizophrenia and psychosis. Their primary drug candidate, KarXT, is an oral approach targeting muscarinic receptors that are located both in the central nervous system, and various peripheral tissues. Below you can preview the status of KarXT trials.

Karuna made its public debut on June 28th, 2019 under the ticker symbol KRTX. The company issued 5,578,124 shares at a price of $16 per share, raising $89.2 million for the company. Proceeds from the IPO are expected to help the company advance their clinical trials, currently in various stages of Phase I and II trials.

Karuna Therapeutics is a pre-revenue company, but has several promising use cases for its drug therapies. The company is focused on developing novel therapies to address disabling neuropsychiatric conditions like schizophrenia, Alzheimer’s disease, bipolar disorder, Parkinson’s disease, and multiple sclerosis, to name a few.

Needless to say the addressable market size is significant. The World Health Organization ranks psychosis as the third-most disabling medical condition in the world. Worldwide sales of antipsychotic drugs exceeded $11 billion in 2015 and are expected to exceed $14 billion by 2025. Unfortunately, these medicines are highly ineffective and dangerous. We’ve already outlined several issues with current drug therapies. It doesn’t surprise us to learn that, according to a study conducted by National Institutes of Health, approximately 75% of patients reported discontinuing their antipsychotic medication within 18 months of starting treatment.

We believe Karuna will be able to capture a significant portion of their addressable market with KarXT. The company is targeting a Phase III trial in 2020 and, if successful, sales should exceed $1 billion within two years of their launch. Additional applications and use cases for KarXT will substantially increase revenue as they’re approved by the FDA.

While we’re bullish on the company’s prospects, sell-side analysts are downright gushing with enthusiasm.

Analyst Reports Published on July 23rd, 2019.

*Citi analyst Mohit Bansal started Karuna Therapeutics with a Buy rating and $28 price target.
*Salveen Richter of Goldman Sachs rates the stock a “Buy” with a $34 price target.
*Wells Fargo analyst David Maris started Karuna Therapeutics with an Outperform rating, and set a $29 price target.
*Finally, we come to Wedbush analyst Lianna Moussatos – the most bullish of the bunch. Moussatos sees blockbuster sales potential for KarXT. She assigned a buy rating and $38 price target, implying nearly 100% upside from its current price.

We are a firm believer that investors will generate huge gains by holding shares of Karuna Therapeutics. However, we need to be prepared to hold shares for the foreseeable future. It could take years until we reach $38/share, as predicted by Lianna Moussatos. We can certainly take short-term gains if the stock continue to climb, but be prepared to hold.

Along with the potential upside in this stock comes several risks. It goes without saying this investment is not for the faint of heart. Here is a list of our top concerns.

1) While KarXT is treating symptoms of psychosis for patients with Alzheimer’s Disease – not the actual disease – there are countless failures for treatments aimed at Alzheimer’s patients. From 1998 to 2017 there have been over 146 failed attempts at developing Alzheimer’s drugs, and 2018 marked another half-dozen or so. We’re going into this trade with the expectation that KarXT may not be effective in treating all patients. That could impact the company’s future sales along with its valuation and stock price.

2) The funds raised from Karuna’s IPO should help them prove critical endpoints in their Phase Ib, II and III trials. However, the company will likely need an additional infusion of cash to bring their drugs to market. This will be dilutive to existing shareholders when it happens.

3) Recent Phase I and II trials have met endpoints that assess improvements in symptoms and cognitive functions compared to the placebo. As the studies and trials advance, there’s a significant risk that the drug fails to meet additional endpoints. Failed trials would surely result in significant losses for shareholders.

Despite these numerous risks to our trade, we will sleep easy at night knowing we’ve made an investment in Steven Paul, Karun’s CEO. Dr. Paul has spent his entire career – over 40 years – dedicated to mental health. He has published over 500 papers on the topic, and was among the fifty most-cited scientists in the field of neuroscience between 1980 and 2000.

Dr. Paul has worked in senior positions at the National Institute of Mental Health and Eli Lilly, co-founded Sage Therapeutics (public company with a $9 billion dollar valuation), and currently holds board seats at 10 different biotech companies.

What’s most notable is his strategy for avoiding failures in Phase II clinical trials. While at Eli Lilly, Dr. Paul helped lead the company toward a new model of drug discovery and development, focusing on proof of concept as early as possible to avoid failures in Phase II trials. Considering Karuna is currently in its Phase II trial, this process and methodology is especially noteworthy.

Lastly, Dr. Paul is showing his belief in Karuna with his wallet. He bought over $230,000 worth of shares at $23.04. Insiders buy for one reason – they believe the stock is going higher. We’re about to get into KRTX at 14% below the CEO’s purchase price. We’ll take that entry price all day.

We are recommending readers buy shares of Karuna Therapeutics (KRTX) up to $20.00. This is a very speculative trade, and we recommend making Karuna 2 to 4 percent of your total portfolio value. This means a $100,000 portfolio would own $2,000 to $4,000 dollars worth of Karuna Therapeutics stock.

It’s worth noting that Dr. Paul recently made open market purchases of Karuna stock at prices higher than our current entry price. On June 28th Dr. Paul bought 10,000 shares at an average price of $22.86. Dozens of insiders are accumulating more shares – over 16 million to be exact. There have been exactly no insider sales of stock since the IPO. That’s exactly what we like to see from people who have intimate knowledge of  the company’s operations.

We are setting our first price target of $26.00 per share. To protect against potential losses, we will set a protective stop at $15.50.

**We do not currently own shares at the time of this writing. We may buy shares in the next 48 hours.