Christmas came early this year for anyone holding shares of these three biotech stocks. Each one produced eye-popping gains in 2019, but investors need to know if they can keep climbing in 2020 and beyond.

Company Year-to-Date Gain Market Cap
Axsome Therapeutics (NASDAQ:AXSM) 3,480% $3.5 billion
Kodiak Sciences (NASDAQ:KOD) 856% $3.0 billion
Karuna Therapeutics (NASDAQ:KRTX) 245% $1.8 billion

Data source: Yahoo! Finance.

While the short answer's "yes," there are some important caveats to consider. Here's what needs to happen before these top-performing biotech stocks provide further gains.

Two scientists looking at a slide.

Image source: Getty Images.

1. Axsome Therapeutics: Rags to riches

This has been the top-performing biotech stock this year for a couple of good reasons. First, Axsome stock had a very low starting point in 2019 thanks to a flop with its former lead candidate in 2018.

The company's market cap was just $85 million at the beginning of 2019 and has since soared to $3.5 billion at recent prices thanks to surprisingly good data from the company's new lead candidate, AXS-05. This is a proprietary mixture of bupropion and dextromethorphan, the active ingredients in Wellbutrin and over-the-counter cough syrup, respectively.

Results from a mid-stage study, and more recently a late-stage clinical trial designed to support a new drug application, prove AXS-05 is significantly more effective at treating patients with major depressive disorder (MDD) than Wellbutrin on its own. 

There are a handful of upcoming events that could help Axsome stock climb even higher. A speedy approval for AXS-05 from the Food and Drug Administration for the treatment of MDD could boost the stock in late 2020 or early 2021. In the meantime, we'll get to see late-stage data from trials with AXS-05 and patients with treatment-resistant depression and another with people trying to quit smoking. 

Axsome's also developing a potential new treatment for narcolepsy patients that suffer from temporary bouts of dreamlike paralysis. The candidate, AXS-12, significantly lowered cataplexy attacks in a mid-stage study and repeating this performance in an ongoing phase 3 trial could boost this leading biotech stock much further.

Man with a lab coat and a clipboard.

Image source: Getty Images.

2. Kodiak Sciences: Long-lasting therapy

Unnecessary new blood vessels invading the retina is the leading cause of progressive vision loss among older adults. Inhibiting vascular endothelial growth factor (VEGF) with an injection every other month can halt vision loss, but drugs like Eylea and Lucentis don't always remain at effective concentrations for the entire time between doses.

Shares of Kodiak Sciences have soared this year because the company's lead candidate, another anti-VEGF antibody called KSI-301, looks like a huge improvement over today's standard treatments. Kodiak's building a better mousetrap by attaching a long biopolymer to an anti-VEGF antibody, and the results have been better than expected. 

Eylea sales will probably reach $7.4 billion in 2019 and KSI-301 might do just as well. In October, Kodiak announced phase 1 trial results that suggest an injection of KSI-301 remains active more than twice as long as Eylea.

Kodiak has already started a pivotal study with patients losing vision to age-related macular degeneration (AMD) and phase 3 trials addressing two related indications will begin in the first half of 2020. If late-stage readouts fall in line with previous observations, this stock will climb much higher.

Scientist inspecting a capsule.

Image source: Getty Images.

3. Karuna Therapeutics: Rookie of the year?

Shares of this biotech stock didn't begin trading until June 28, 2019, but it's already delivered huge returns for investors that got in early. Karuna Therapeutics is developing a potential new treatment for schizophrenia, called KarXT, and mid-stage trial results announced in November sent the stock rocketing higher.

During a trial with 182 schizophrenia patients, those treated with KarXT showed PANSS score improvements that were 11.6 points better than the placebo group. Since announcing proof-of-concept results with its lead candidate, though, safety concerns have pulled the stock around 40% lower than a peak it reached in November.

KarXT is a combination of xanomeline, a drug that acts on muscarinic receptors in the brain, and the body. Eli Lilly abandoned the development of xanomeline due to intestine-related side effects, but Karuna Therapeutics had the bright idea to combine it with trospium chloride. This is a common treatment for overactive bladder that shuts down muscarinic receptors in the peripheral nervous system. That allows xanomeline to do its job in the brain with fewer side effects.

While KarXT significantly helped patients tune out sights and sounds that aren't actually there, a majority of those treated also reported side effects similar to those that caused Lilly to abandon xanomeline years ago. It looks like the observed side effects were far milder than xanomeline without trospium chloride, but investors want to keep an eye out for more safety data before diving in.

Most likely to succeed

A clinical-stage development pipelined limited to KarXT makes Karuna the riskiest stock here. A handful of potential new treatments that address macular degeneration could also begin pulling market share from Eylea and Lucentis before the FDA sees an application for KSI-301.

Like Karuna, Kodiak doesn't have anything beyond its lead candidate in clinical-stage testing yet. Axsome's pipeline already boasts three clinical-stage candidates behind AXS-05, which means the company can probably survive any unforeseen mishaps with its lead candidate.

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.