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Why Karuna Therapeutics Stock Tumbled This Week

By George Budwell – Nov 12, 2021 at 8:46AM

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Investors apparently weren't thrilled by the company's licensing agreement with Zai Lab.

What happened

Shares of clinical-stage biotech Karuna Therapeutics (KRTX -0.95%) are down by a hefty 10% through the first four days of trading this week, according to data from S&P Global Market Intelligence. Karuna's shares started to slide earlier this week after the company announced a collaboration and licensing agreement with Zai Lab Limited (ZLAB -4.68%) for the experimental pysch medication KarXT (xanomeline-trospium) in Greater China.

Per the terms of the deal, Karuna will pocket $35 million in an upfront cash payment. The biotech is also in line to receive up to $80 million in additional development and regulatory milestones. If KarXT is approved in China, Karuna will also take home $72 million in sales milestones, along with low-double-digit to high-teens tiered royalties. Zai Lab is reportedly on the hook for the drug's development, regulatory, and commercialization activities in Greater China. 

Close-up image of the human brain.

Image source: Getty Images.

So what

Why are investors displeased with this licensing agreement with Zai Lab? The long and short of it is that Karuna isn't getting all that much for KarXT's commercial rights in Greater China. The company has billed KarXT as an important new medication for a variety of psychiatric disorders, such as schizophrenia and Alzheimer's disease psychosis. If true, Karuna's lead product candidate should be worth a lot more than a meager $35 million in terms of upfront cash -- especially for a key commercial territory like China.  

Now what

Is Karuna's stock a buy on this recent weakness? It all depends on your investing time line. The company is on track to produce top-line data for some of KarXT's ongoing late-stage trials in the middle and second half of 2022. And if everything goes according to plan, this novel psych medication could make its commercial debut in 2023. Another important issue to understand is that novel psych meds tend to have a slow commercial ramp. Put simply, investors shouldn't buy this mid-cap biotech stock without a long-term mindset.  

George Budwell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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