Investing in biotech stocks can be very risky. Positive results from a clinical trial can send a stock's valuation through the roof, while a poor result can send it crashing in a hurry. A great example is what's happened with Karuna Therapeutics (KRTX -1.16%) and the wild ride it has taken investors on, leaving many wondering where it will go from here.
Let's take a closer look at the stock to see what's behind its recent movements and whether it's a good buy today.
Stock surges 400% in November
Karuna started trading on the Nasdaq in June 2019, and there wasn't much movement from the stock until November when shares jumped from less than $18 on Nov. 15 to $96 the following trading day. The stock's volume also spiked, with nearly 15 million shares traded on that day. Previously, Karuna's shares had averaged volumes of less than 100,000.
The stock went on to reach its peak price of $152 on Nov. 19. For investors who sold near the peak, their investment would have yielded a return of around 760% in a period of just two days. By the end of the month, the stock was still more than $71 a share and up over 400% from its October closing price of $13.92.
Why did the stock have such a big rally?
The company reported earnings in November, but with no sales and a net loss, so it wasn't the catalyst behind its performance. Instead, the surge was caused by news that its key drug, KarXT, which can potentially treat schizophrenia, had positive results from its phase 2 clinical trial.
It was a great development for the company, and CEO Steve Paul highlighted why the results were so encouraging for the drug, which is being tested on its ability to treat people with schizophrenia who experience acute psychosis: "KarXT offers a new mechanism of action with the potential for not only improved efficacy, but safety and tolerability as well. If approved, KarXT could substantially improve the treatment paradigm for people suffering from this debilitating and potentially fatal disease."
The stock declined more than 40% since then
On Nov. 19, the stock closed at $123.99. A day later, Karuna announced a public offering where it issued 2.6 million shares at a price of $96. Unsurprisingly, the stock fell well below that price, closing below $80 the following day. It was a great opportunity for the company to take advantage of a higher share price, but the stock continued falling since then, leaving many investors with significant losses along the way. Currently trading at around $72, the stock has fallen more than 40% in just a month.
The hype surrounding the company's phase 2 results also slowly disappeared. Karuna's stock saw trading volumes reach more than 20 million during Nov. 18 to 19. Aside from an odd day where the stock's volumes rise above 1 million, its volumes are typically below 500,000. News of the clinical results helped put the stock on the map for many investors, but the excitement surrounding it has certainly subsided.
Key takeaways for investors
Karuna is a company still in the very early stages of its growth. While the phase 2 results were encouraging, KarXT still needs to go through more testing, including phase 3 clinical trials. It's by no means a sure thing that it will hit the market. And it could be years before all the necessary testing takes place. With no sales and no profits, the stock is a very speculative buy, with investors' hopes tied to the success of one drug.
As tempting as it may be to get on the bandwagon, this biotech stock is just too risky a buy today.