What happened

Shares of Karuna Therapeutics (NASDAQ:KRTX) were up 50% higher as of 11:03 a.m. EST on Tuesday. This marked the second day of big gains for the clinical-stage biopharmaceutical company. Karuna's stock more than tripled on Monday after the company announced great results from a phase 2 clinical study of its experimental schizophrenia drug KarXT.

So what

Some good news is so good that it takes a while for the market to completely process it. That's what we're seeing with Karuna's clinical update.

Hand holding a blue figure of a head with a jigsaw puzzle piece cut out of it and the person's other hand holding a red jigsaw puzzle piece that fits into the cutout space in the blue head, with people walking on a city street in the background.

Image source: Getty Images.

The company reported that KarXT delivering a statistically significant reduction in total Positive and Negative Syndrome Scale (PANSS) compared to placebo as well as meeting key secondary endpoints of the phase 2 study. More impressively, though, the drug's tolerability was exceptionally good. KarXT didn't appear to cause the troublesome side effects experienced with many current antipsychotic drugs.

Karuna stock probably would have moved even higher today were it not for other news announced on Monday. The company plans to conduct a public offering of 2.6 million shares to raise additional capital. These new shares will dilute the value of existing shares. However, it's relatively common for small biotechs to announce a public offering after a big spike in their share prices.

Now what

The next major milestone for Karuna is its meeting with the U.S. Food and Drug Administration (FDA) planned for the second quarter of 2020. This meeting should lead to advancing KarXT to a phase 3 clinical study, which Karuna intends to initiate by late next year.

Many investors in biotech stocks love to find early winners that have a great shot at winning regulatory approval of a potential blockbuster drug. While there's additional testing to be done, Karuna's results for KarXT should put the stock on the list of hot biotech stocks that could move much higher.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.