About Karuna Therapeutics
We’ve dipped our toes into the biopharmaceutical company pool in recent stock analysis articles and we see no point of return.
Heck, these companies are vastly interesting, especially the younger, less established and inherently more risky entities that the pundits hardly ever cover throughout their daily segments.
Karuna Therapeutics isn’t any sort of exception in any of these regards.
According to TD Ameritrade’s platform, Karuna is “focused on creating and delivering transformative medicines for people living with psychiatric and neurological conditions. Its lead product candidate, KarXT, is an oral modulator of muscarinic receptors that are located both in the central nervous system (CNS) and various peripheral tissues.”
Whatever that means.
Also, the key word in the paragraph above is “candidate.”
Namely, “candidate” in the context of the pharmaceutical industry implies that it is awaiting regulatory approval, usually from the Food and Drug Administration (FDA).
This appears to be the case with Karuna and its flagship medication, KarXT.
According to the company’s website, it’s focused on providing medications related to schizophrenia and dementia, which, of course, are likely in high demand and deeply important to many of those both directly and indirectly affected by the aforementioned disorder.
Upon performing some further general research, it appears as though Karuna has a lot of interesting medications within its pipeline awaiting regulatory approval. Specifically, the company seemingly has a handful of medicines in the early, pre-clinical stages along with being in the later phases of development, Phase 3, namely its prized KarXT product.
Now that we’ve provided a general overview of Karuna Therapeutics, its medical focus(es) and some of its current and prospective products and their respective roads to approval and (hopefully) eventual commercial sale, let’s gain a little more familiarity with the company’s financials so as to gather more information in hopes of figuring out whether or not Karuna’s stock is worth considering investing in for the long-term.
Karuna’s stock financials
Trading at a relatively expensive share price of nearly $188, Karuna has a market capitalization of $6.47 billion, without a currently listed price-to-earnings (P/E) ratio and without an annual dividend as well.
Initially, all of this makes sense as this company likely has a considerable amount of hype around it and its current and future product pipeline, however, at the same rate it likely doesn’t have any earnings to report as its either not profitable at the moment or if it is attaining revenue, the proceeds are just going back into the business in efforts to fuel growth, therefore there are no earnings to technically distribute.
We have no qualms with either of these scenarios as this is incredibly common, especially for companies in the industry.
Nevertheless, nearly $200 seems like a lofty share price to consider paying for a company that is hardly off the ground in relation to its pipeline and lackluster history of regulatory approval.
Let’s investigate this company further and see where the value is to be found, if any.
When it comes to Karuna’s balance sheet, the company’s executive team is tasked with overseeing $528 million in total assets and $26 million in total liabilities.
Well done so far, Karuna, well done.
There isn’t much to say regarding the company’s balance sheet as its total assets outweigh the amount of its total liabilities by a more than healthy margin.
Although there is likely a lot of growth to be had and thus debt to be incurred in the near future, Karuna has crafted a fantastic financial base from which it can leap.
Onto the company’s income statement, the company has had no total revenue to report between 2017 and 2020 which to a certain degree is sort of scary, at least to investors such as ourselves.
Of all of the companies we have written stock analysis articles on, we don’t think we’ve written a single piece on a company that has had no revenue to report in a single year, let alone a handful of years.
However, the company, according to TD Ameritrade’s platform did thankfully have some revenue to report in the latest recorded year (2021), nearing $37 million for the year.
This can likely be attributed to the company receiving some form of regulatory approval that enabled it to sell some of its products, however, we certainly hope this isn’t the ceiling for Karuna given its seemingly locked and loaded pipeline.
All that to say, there is inherently added risk(s) in considering investing in a company that hasn’t had revenue to report up until two years ago, especially given that the company was founded in 2009.
According to Karuna’s cash flow statement, the negative net income, as expected, has been resoundingly negative, not to imply that this reaffirmed truth makes us feel any better.
Specifically, the company’s negative net income has only gotten increasingly negative as of recent, pegged at around -$6 million in 2017, extending its further negative trend to -$17.5 million in 2018 to its latest report of nearly -$144 million, as reported in 2021.
Suffice it to say research and development (R&D) and other expenses associated with getting a specialized, clinical stage biotechnology company off the ground can add up rather quickly, however, given the current shape of the company’s balance sheet, we’re not terribly concerned for Karuna in the near-term, however, it is critically important that as the expenses and cash burn continue to run their painfully tortuous yet reasonable courses that the company’s executive team proves they are prudent debt managers and deployers.
Of course, only time will tell.
Karuna’s stock fundamentals
As can be expected given the company’s aforementioned total revenue figures (or lack thereof, really), it makes sense that the company’s trailing twelve month (TTM) net profit margin is still well below that of the industry’s average.
Specifically, according to TD Ameritrade’s platform, Karuna’s TTM net profit margin sits at -538.91% compared to the industry’s average of -420.85%.
Obviously, both of these trailing twelve month net profit margins are far from ideal, however, it’s not awfully shocking that Karuna’s is as deep in the red as it is, at least for the time being.
Every single penny that can go back into this company’s business and pipeline will likely go exactly there, prolonging the time between now and when the company becomes profitable on an annual, net basis.
Again, time will tell.
Therefore, we also weren’t flabbergasted to find that the company’s TTM returns on both assets and investment are considerably lower than that of the industry’s average as well. For instance, Karuna’s TTM returns on assets stand at -25.79% to the industry’s average of -1.71%, according to TD Ameritrade’s platform.
Should you buy Karuna Therapeutics stock?
From our vantage point, if this company plays its cards right we see it as a quintessential acquisition target candidate (of course, once its technology and medicines are approved by the FDA among other relevant regulatory agencies) for a larger, well established pharmaceutical company that wants to obtain a larger slice of the pie in Karuna’s current wheelhouse, the neuroscience and mental health spaces.
Given all of the current mergers and acquisitions (M&A) buzz surrounding the pharmaceutical sector such as Johnson & Johnson’s acquisition of medical device company Abiomed along with Amgen’s announced acquisition of biopharmaceutical company Horizon Therapeutics, it is our view that as long as Karuna executes and sticks to its craft it will gain and more and more notoriety and major pharmaceutical companies along the lines of the aforementioned ones as well as many others will get closer and closer to considering acquiring Karuna.
To us, this is a great eventual outcome for the company.
Apart from that, we don’t find the risk-reward profile to be particularly attractive at the moment, especially given Karuna’s rather elevated share price and the fact that this company has only begun generating revenue as of a couple of years ago.
Putting aside any of our acquisition hopes, this company alone has a lot of compelling technology and medicines within its current pipeline, however, we just don’t feel as though we it makes the most financial sense to get into this company’s stock at this price level until it proves that it can both generate consistent, outsized revenue over the next decade as well as manage its debt responsibly, and obviously, obtain the needed regulatory approvals.
Given all of this information we give Karuna’s stock a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.