KRTX - Karuna Therapeutics: Great Company But Not A Great Buy Right Now

2023-06-06 07:35:31 ET

Summary

• Karuna Therapeutics' KarXT for schizophrenia is a much-hyped asset.
• However, there are small signs of trouble - probably nothing, but they are there.
• The current price seems to have priced in all these major pros and minor cons.

Karuna Therapeutics ( KRTX ) develops medicines for psychiatric and neurological diseases. When I covered KRTX in a positive article last year, I said that although I like the company, the "ship has sailed" so far as new investments in the company are concerned. I meant that we are not going to see lower prices for KRTX stock. Obviously, I was wrong, because the stock went down 30% from last year's prices, although it is back up to almost that same level today.

I also covered KRTX in 2021, and between then and 2022, the stock had tripled after posting strong results in a schizophrenia trial, where it met the primary endpoint. The company did a huge $600mn secondary offering after posting strong results, and the bullish signal then was that the stock actually went up on this offering. I consider a positive price movement on a secondary offering one of the most bullish signals for emerging biopharma. Right after my article, however, the company did another $400mn offering. This time, though, the market wasn't as bullish, and the stock went down.

Looking through the news timeline of KRTX, one hallmark of a solid company is that its management is not supposed to suddenly resign just when the company is approaching regulators. Management does resign, when, for example, a research-oriented CEO makes way for a market-oriented one before approval. However, such things are planned, and a new CEO is identified long before the current one takes off; sometimes, the talent search is done by the former CEO (their)self.

Karuna seems to have done a similar smooth transition of its CEO. Steve Paul, MD, a veteran biopharma researcher and ex-Head of Eli Lilly's "overall research and development efforts", was replaced by Bill Meury, ex-Allergan executive with strong business development background. Dr. Paul is a founder of multiple biopharma companies, including Sage Therapeutics and Voyager. Described by Daniel Goleman at the New York Times as being "one of those at the forefront of the development of the coming breed of psychiatric medications," Steve Paul's role focuses on research, and he has done smooth transitions before, like at Voyager in 2018. Bill Meury, on the other hand, is a veteran business developer, whose focus is not research, but on selling products. Thus, Karuna's CEO transition was planned, opportune, and not a bad thing. However, the stock still went down on the news, because the CEO transition put paid to the speculation that KRTX could be bought out before, during, or immediately after the approval of its lead asset, M1-M4 muscarinic agonist KarXT.

In January, the CCO also quietly left the company. The CCO is ex-Eli Lilly, and was picked by the earlier CEO in November 2021. She was quickly replaced by an Allergan veteran by the current CEO, himself an Allergan veteran. These sympathetic transitions are copacetic, par for the course for market-approaching biopharma.

In some quarters, KRTX was something of a takeover candidate, given its successful trials and its near-term approach to the FDA for approval. When a company is bought out, however, it is not common to have management changes before the buyout because, one, the buyers have to get comfortable with management, two, existing management has no reason not to reap the rewards of the buyout, and three, the new owners will often transition management, anyway. A CEO transition where there is a buyout speculation is, therefore, a dampener of such speculation, and it sends a strong signal that the company plans to go it alone. Thus, a change at the helm came as something of a " surprise ", as Citi analyst Neena Bitritto-Garg said, citing unfulfilled takeover prospects. Stifel's Paul Matteis also speculated that "there must be no imminent buyer (why else would this happen now?)."

Karuna has important updates ahead. In March, they released topline data from the Phase 3 EMERGENT-3 trial for KarXT in schizophrenia, which showed that the registrational trial met its primary endpoint, with KarXT demonstrating an 8.4-point reduction in PANSS total score compared to placebo at Week 5 (p<0.0001). The company plans to submit a marketing application in mid-2023.

Interestingly, Cerevel Therapeutics, which I covered two days ago, has a selective M4-only receptor agonist that, in 2021, produced relatively better data than Karuna in a small trial. Karuna is way more advanced towards the market, however a key difference with Cerevel's CVL-231 is its selectivity for the M4 muscarinic receptor, which is theorized to improve its safety profile. Thus, as Charles Duncan of Cantor noted :

...emerging muscarinic candidates from Cerevel Therapeutics ( CERE ) and Neurocrine Biosciences ( NBIX ) with differentiated mechanisms and receptor selectivity "may complexify KarXT's ultimate market share capture."

In the EMERGENT trial, there was a very high rate of both discontinuation and treatment emergent adverse events, however, these rates were high in both the drug arm and the placebo arm. These rates were 37% and 29%, and 70% and 50%, respectively. Discontinuation rates due to TEAEs were 6 and 5% respectively. Thus, this is a discussion that needs to be explored further and in comparison with these competing therapies.

EMERGENT-3, whose data came out in March, also missed a key secondary endpoint in an otherwise successful trial, resulting in a " wobble " in the stock price. As the company noted:

KarXT also demonstrated reductions in positive and negative symptoms of schizophrenia as measured by PANSS positive, PANSS negative, and PANSS negative Marder factor subscales - secondary endpoints in the trial. KarXT demonstrated a clinically meaningful and statistically significant 3.5-point reduction in PANSS positive subscale compared to placebo at Week 5 (-7.1 KarXT vs. -3.6 placebo; p<0.0001). While not meeting the threshold for statistical significance at Week 5, KarXT did demonstrate a statistically significant reduction in PANSS negative subscale and PANSS negative Marder factor subscale compared to placebo at Week 4 (p<0.05).

Financials

KRTX has a market cap of $8.75bn and a cash balance of $1.5bn. The company offered $15mn for the lead asset of Goldfinch Bio, while Royalty Pharma offered it $100mn for royalties on KarXT. Research and development expenses were $85.5 million for the first quarter of 2023, while general and administrative expenses were $24.3 million. At that rate, the company has a cash runway of 12-13 quarters, or till at least 2026.

The company is almost wholly owned by institutions (95%). Key holders are FMR LLC, Vanguard, T Rowe Price and so on. Insiders do not buy much, except for a few large purchases. Sales are also few, and there are mostly option exercises, except for a major sale of $3mn+, for which the CFO became somewhat notorious last October.

Bottomline

After going down 30%, the stock is back to where it was last year when I said that the company's strong future potential is priced into the stock. I don't think I was wrong - the stock went down only because the market was speculating on a buyout, and the company signaled it won't be selling. That event is now over, the stock is back, and its future potential is already priced in. I will wish existing investors with low average prices good luck (keep watching that safety profile), but I will not be buying at these prices.

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