KRTX - Karuna's KarXT: Limited Distinction In Schizophrenia Yet Warrants Hopeful Monitoring

2023-03-22 09:44:10 ET

Summary

• KarXT is a novel antipsychotic medication being developed by Karuna Therapeutics, focusing on M1 and M4 muscarinic receptors.
• It has the potential to address both positive and negative symptoms of schizophrenia with a potentially more favorable side effect profile than existing treatments.
• The Phase 3 EMERGENT-3 trial showed statistically significant and clinically meaningful improvements, but high TEAE and discontinuation rates warrant further investigation.
• Karuna Therapeutics plans to submit a U.S. marketing application for KarXT in mid-2023, aiming for a market launch in the second half of 2024.
• Despite promising results, investors should be cautious as more comprehensive data and additional research are required to validate KarXT's safety, tolerability, and long-term effectiveness. Karuna is a "Hold".

Introduction

Karuna Therapeutics (KRTX), a clinical-stage biopharmaceutical company, is dedicated to developing and providing innovative treatments for patients with psychiatric and neurological disorders. Their investigational oral drug, KarXT, is an M1/M4-preferring muscarinic agonist designed to treat conditions like schizophrenia and Alzheimer's disease-related psychosis. The novel dual mechanism of action of KarXT distinguishes it from existing therapies, as it does not rely on dopaminergic or serotonergic pathways. By merging xanomeline's therapeutic potential with trospium to manage peripheral side effects, KarXT has the potential to offer a unique treatment option and significantly enhance the lives of millions suffering from severe mental health conditions.

The following article will address KarXT's prospects for the treatment of schizophrenia - its lead prospective indication.

Financials

Let's first review Karuna's most recent financial report .

Karuna Therapeutics reported a net loss of $76.2 million for Q4 2022 and a net loss of $276.3 million for the year ended 2022, primarily due to higher operating expenses related to research and development and higher employee headcount. The company recognized licensing revenue of $5.3 million for Q4 2022 and $10.6 million for the year ended 2022, related to development milestones and related tax gross ups associated with their License Agreement with Zai Lab. Karuna Therapeutics ended 2022 with $1.1 billion in cash, cash equivalents, and available-for-sale investment securities, which is expected to fund its operating expenses and capital expenditure requirements through 2025. The company anticipates total operating expenses of $430-$470 million, including up to $70 million in non-cash stock compensation expense, for the full year 2023.

On March 21, Karuna announced the intention to raise $400 million in a stock offering.

KarXT: A Novel Antipsychotic Medication Targeting the Cholinergic System for the Treatment of Schizophrenia

The use of KarXT in treating schizophrenia is based on the hypothesis that activating M1 and M4 muscarinic receptors could produce antipsychotic and procognitive effects. Research indicates that stimulating these receptors can modulate the release of neurotransmitters, such as dopamine, glutamate, and gamma-aminobutyric acid ((GABA)), which are implicated in the pathophysiology of schizophrenia.

Xanomeline, the primary active component of KarXT, has shown efficacy in alleviating both positive and negative symptoms of schizophrenia in prior studies. However, its clinical development faced obstacles due to peripheral cholinergic side effects, including gastrointestinal issues and increased salivation. To overcome these limitations, Karuna Therapeutics combined xanomeline with trospium, a muscarinic antagonist that is restricted to the periphery and does not cross the blood-brain barrier, thus mitigating xanomeline's peripheral side effects.

KarXT's dual mechanism of action provides several benefits over traditional antipsychotic medications. By targeting M1 and M4 muscarinic receptors, KarXT can potentially address not only positive symptoms like hallucinations and delusions, but also negative symptoms such as social withdrawal and apathy, which often remain unresponsive to current treatments. Furthermore, since KarXT does not target dopaminergic or serotonergic pathways, it may present a more favorable side effect profile in comparison to existing antipsychotics, which are known to cause weight gain, metabolic disturbances, and extrapyramidal symptoms.

The Unmet Need for Safer and More Effective Schizophrenia Treatments

Currently, schizophrenia is primarily treated with antipsychotic medications, including first-generation (typical) antipsychotics, such as haloperidol and chlorpromazine, and second-generation (atypical) antipsychotics like risperidone, olanzapine, and clozapine. However, these treatments have significant limitations, including serious side effects like weight gain, extrapyramidal symptoms, and metabolic disturbances. Additionally, they tend to only address positive symptoms, leaving negative and cognitive symptoms inadequately treated. The need for more effective and safer treatments presents a considerable market opportunity for schizophrenia, which affects over 21 million people worldwide.

KarXT Shows Promise for Schizophrenia Treatment, but Safety and Tolerability Need Further Investigation

The Phase 3 EMERGENT-3 trial evaluated KarXT's efficacy, safety, and tolerability in adults with schizophrenia. The trial successfully met its primary endpoint, with KarXT demonstrating a statistically significant and clinically meaningful 8.4-point reduction in PANSS total score compared to placebo at Week 5. The drug also showed reductions in both positive and negative symptoms of schizophrenia, as measured by PANSS subscales. Although the negative symptom reduction did not reach statistical significance at Week 5, it demonstrated significance at Week 4. Overall, the side effect profile was consistent with previous KarXT trials (EMERGENT-1 & EMERGENT-2), and the drug was generally well tolerated.

While the topline data suggests that KarXT shows promise as a new treatment option for schizophrenia that may address both positive and negative symptoms, there are some potential concerns that warrant further investigation. The TEAE rates in both the KarXT and placebo arms were relatively high, with rates of 70% and 50%, respectively. Although the TEAE rates in the KarXT arm are not particularly high relative to the average TEAE rate reported in phase 3 schizophrenia trials, they are still relatively high and warrant further investigation.

The topline data also shows higher discontinuation rates in the KarXT arm (37%) compared to the placebo arm (29%). High discontinuation rates can impact treatment adherence and efficacy, which is another important consideration in the evaluation of KarXT.

Overall, further studies are needed to fully evaluate the safety, tolerability, and efficacy of KarXT compared to existing treatments for schizophrenia. Future studies should also explore ways to reduce discontinuation rates and manage TEAEs to maximize patient outcomes.

Karuna Therapeutics plans to submit a U.S. marketing application for KarXT, in mid-2023, using data from the EMERGENT-3 trial as well as EMERGENT-1 and EMERGENT-2 trials. They aim for a market launch in the second half of 2024. The application will also incorporate long-term safety data from the ongoing EMERGENT-4 and EMERGENT-5 trials.

Revenue Projections for KarXT in the Schizophrenia Market

To estimate the potential revenue KarXT could generate in the schizophrenia market, various factors need to be considered, including the target patient population, market share, pricing, and competition.

Globally, schizophrenia affects around 21 million people, with about 2.8 million residing in the United States . Assuming KarXT gains regulatory approval and captures 10% of the U.S. schizophrenia market in its initial years, equating to approximately 280,000 patients, we can attempt to project its revenue.

The pricing for KarXT is currently unknown, but existing antipsychotic medications can range from $340 to $1,400 per month, depending on factors like the specific drug and dosage. For our projection, let's assume a conservative average monthly cost of $500 for KarXT.

Based on these assumptions, the annual revenue from 280,000 patients in the U.S. market would be $1.68 billion. This estimate only takes into account the U.S. market and a 10% market share. The potential revenue could be higher if KarXT gains a larger market share, has a higher price, or expands into other global markets.

It's important to note that these revenue projections are speculative and rely on several factors, including KarXT's successful development, approval, pricing, and adoption. Furthermore, the competitive landscape, including the introduction of new schizophrenia treatments and potential improvements to existing therapies, could also impact KarXT's market share and revenue generation.

My Analysis & Recommendation

KarXT, a novel antipsychotic medication developed by Karuna Therapeutics, has shown promise in addressing the unmet need for safer and more effective treatments for schizophrenia. By targeting the cholinergic system, specifically M1 and M4 muscarinic receptors, KarXT has the potential to treat both positive and negative symptoms of schizophrenia while presenting a potentially more favorable side effect profile compared to existing antipsychotics.

The recent Phase 3 EMERGENT-3 trial demonstrated statistically significant and clinically meaningful improvements in PANSS total score, as well as reductions in both positive and negative symptoms. However, the relatively high TEAE rates and discontinuation rates, in my view, warrant further investigation to fully evaluate the safety, tolerability, and efficacy of KarXT.

Given the significant market potential due to the demand for improved schizophrenia treatments and the encouraging clinical findings thus far, KarXT offers a compelling investment opportunity. However, investors should exercise caution since more comprehensive data and additional research are required to validate KarXT's safety, tolerability, and long-term effectiveness compared to current treatments. Furthermore, it is essential to tackle the high discontinuation rates and manage TEAEs to optimize patient outcomes and guarantee KarXT's commercial success.

In summary, KarXT holds the potential to revolutionize schizophrenia treatment, warranting investors' attention. While investment carries risks such as the need for further safety and tolerability assessments, the prospect of substantial improvements in schizophrenia treatment and a vast market make KarXT an appealing option for potentially high returns. However, based on the EMERGENT-3 data, KarXT did not deliver the anticipated differentiation in areas like negative symptoms and safety profile. Although additional data may surface in the future, in my view, KarXT has not yet demonstrated substantial differentiation that would set it apart in the market. As a result, my recommendation for Karuna is a "Hold".

Risks to Thesis

There are several risks that may affect the outlook for KarXT for treating schizophrenia:

1. Regulatory hurdles: Gaining regulatory approval for new drugs can be complicated and uncertain. KarXT may face challenges in obtaining approval from authorities like the FDA, or the approval process could take longer than anticipated.

2. Unforeseen side effects: As KarXT advances through clinical trials, unexpected side effects might surface, potentially delaying its development, limiting its market potential, or even leading to its withdrawal from the market.

3. Competition: The schizophrenia treatment field is continuously evolving, with new therapies and enhancements to existing treatments emerging. If a competitor develops a drug with superior efficacy, safety, or tolerability, KarXT's market potential could be significantly impacted.

4. Pricing and reimbursement: KarXT's pricing and reimbursement by insurance providers and government healthcare programs can influence its adoption and market share. If KarXT is too expensive or inadequately reimbursed, it might struggle to gain traction in the market.

5. Intellectual property: Karuna Therapeutics' intellectual property rights related to KarXT might be contested or invalidated, which could affect the company's exclusive marketing rights and revenue generation.

6. Manufacturing and supply chain issues: The production and distribution of KarXT could encounter challenges, such as manufacturing problems or supply chain disruptions, leading to delays or shortages that could impact the drug's commercial success.

7. Market adoption: Even if KarXT is successfully developed and approved, healthcare providers, patients, and payers may not necessarily adopt the new treatment. Market adoption can be influenced by factors like clinical data, cost, ease of administration, and patient and provider preferences.

In summary, while KarXT has the potential to be a breakthrough in treating schizophrenia, investors should be aware of the various risks that can change the outlook for the drug. Assessing these risks and monitoring the progress of KarXT's development and approval process is crucial for making informed investment decisions.

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