What happened

Shares of Karuna Therapeutics (NASDAQ:KRTX) fell more than 20% today after the company announced the pricing of a stock offering. The pharma company will offer up to nearly 3 million shares at $96 apiece, which is expected to raise gross proceeds of up to $288 million and will increase the number of shares outstanding by about 13%.

Karuna Therapeutics is wisely taking advantage of a soaring share price. At the beginning of the week, the company reported solid results for its lead drug candidate, KarXT, in a phase 2 trial of acute psychosis in patients with schizophrenia. Shares gained as much as 750% by mid-week before receding to a weekly gain of "only" 400%.

As of 11:06 a.m. EST, the pharma stock had settled to a 17.9% loss.

A pink arrow crashing through the x-axis on a chart.

Image source: Getty Images.

So what

Karuna Therapeutics ended September with $161 million in cash, so the stock offering will significantly increase the health of its balance sheet. The cash will be needed to advance its early-stage pipeline comprising five unique programs evaluating KarXT. 

The drug candidate is designed to interact with muscarinic receptors in the central nervous system, but there's a catch. While stimulating the receptors in the brain can reduce psychotic symptoms and cognitive impairment, stimulating receptors in peripheral tissues can have undesirable effects. That's why KarXT is a combination of xanomeline (capable of stimulating muscarinic receptors in the brain) and trospium (capable of inhibiting muscarinic receptors, but with limited ability to cross the blood-brain barrier).

The rational approach to KarXT received a boost with the latest clinical results. In a phase 2 study evaluating the drug candidate's potential to treat acute psychosis in schizophrenia, individuals receiving KarXT demonstrated statistically significant and clinically meaningful improvements in total Positive and Negative Syndrome Scale (PANSS) scores compared to those taking placebo. The PANSS system is widely used in schizophrenia treatment and care.

Now what

Karuna Therapeutics is scheduled to meet with U.S. regulators in the second quarter of 2020 and expects to initiate a phase 3 trial evaluating KarXT as a treatment for acute psychosis in schizophrenia by the end of 2020. The company also expects to begin phase 1b trials for the drug candidate in pain indications and psychosis in Alzheimer's by the end of 2019, followed by two phase 1b trials for different symptoms in schizophrenia by the end of the first half of 2020. Now that the company has bolstered its cash position, investors can focus primarily on preliminary results from the trials in the next 12 to 18 months.