In the premium service, we had over a 3x gain in Karuna Therapeutics (KRTX) stock when the company delivered strong results for its drug KarXT in a Phase 2 trial to treat acute psychosis in patients with known schizophrenia.
In the Phase 2 trial, 186 patients were enrolled in a double-blind, randomized, placebo-controlled trial. KarXT (a combination of Xanomeline, a muscarinic agonist, and Trospium Chloride, a muscarinic antagonist) was administered orally over 5 weeks. The primary endpoint, the total PANSS score was met with high statistical significance (p <0.001) and an effect size of 0.75. The results were published in the prestigious journal NEJM.
Blockbuster schizophrenia drugs can reach multibillion dollars in annual sales; for example, Abilify had a peak of $5 billion-plus in global sales. Compared to currently approved schizophrenia drugs, KarXT has advantages like higher efficacy (as shown by higher effect size) and a lower incidence of side effects like weight gain and extrapyramidal effects. These factors could help in gaining significant market share (the schizophrenia market is expected to reach $9.3 billion by 2025).
The company is conducting two Phase 3 trials for NDA submission. The data from the first Phase 3 trial is expected in mid-2022 (late June to early July). The second Phase 3 data is expected in Q4. I looked at the trial website on Clinicaltrials.gov. The patient enrollment is >200 (more than Phase 2). The design, comparator (placebo), drug dose, and treatment duration are similar to Phase 2. The strong Phase 2 results strongly derisk the two Phase 3 trials.
CEO Paul is an expert in CNS diseases. He served as the Executive Vice President for Science and Technology, and President of the Lilly Research Laboratories (LLY), and co-founded Sage Therapeutics (SAGE) and Voyager Therapeutics. Chief Medical Officer Brannan served as the Therapeutic Head of Neuroscience at Takeda. Founder and COO Miller has a Ph.D. in Chemical Engineering from MIT and served as COO of Tal Medical and Entrega, Inc. CFO Ignelzi served as the CFO at scPharmaceuticals (SCPH) and served in commercialization leadership roles at Eli Lilly. Chief Commercial Officer Lykins served as the Vice President, Global Product Planning, and Chief Marketing Officer for Acadia Pharmaceuticals (ACAD), and also worked in leadership positions at Lundbeck’s schizophrenia position.
I started a long position in the stock recently with an average price of around $120/share. Looking at the options activity, my near-term price target after a successful Phase 3 trial is $180, or 50% upside potential.
The stock is also a good long-term investment. KarXT is being tested as an adjunct therapy in inadequately controlled schizophrenia, and in dementia-associated psychosis, two blockbuster indications.
Cash reserves are approx. $500M and enough for the next 12 months, till the first Phase 3 trial in mid-2022.
I expect the drug to reach $2 billion in peak sales (Abilify was not approved in dementia-associated psychosis (8 million people in the U.S.), still reached $5B+peak global sales). At an average EV/peak sales of 4 for pharmaceuticals, this could translate into 2-3x upside potential in a 2-5 years timeframe. The management’s expertise brings confidence to their ability to effectively execute the development and commercialization of the pipeline in these large target markets.
Risks in the investment include lackluster data in Phase 3 trials from reasons like high placebo response (though P2 results showed wide separation from the placebo), unexpected side effects, etc. (though in Phase 2, these were similar in the drug and placebo arms).