Editor's note: This article has been corrected. Karuna announced the data from KarXT's phase 3 EMERGENT-2 trial on Aug. 8.

Clinical-stage biopharmaceutical companies Karuna Therapeutics (KRTX) and Reata Pharmaceuticals (RETA) are up more than 64% and 17% so far this year thanks to potential blockbuster drugs.

Karuna's lead candidate, KarXT, has excited investors because it is a potentially new way to treat schizophrenia as well as psychosis in Alzheimer's disease, while Reata's Omaveloxolone has the potential to be the first approved therapy to treat Friedrich's ataxia, a rare genetic neurodegenerative disease. Reata also has a therapy in late-stage trials, Bardoxolone Methyl, that is showing promise to treat chronic kidney disease (CKD) caused by various conditions.

Both companies are awaiting word as to whether their drugs will be approved by the Food and Drug Administration, based on positive phase 3 trials.

Karuna's KarXT takes a different path

Karuna specializes in central nervous system therapies to treat people living with psychiatric and neurological conditions. KarXT has the potential to have a huge impact on patients living with schizophrenia, a mental health condition that affects 24 million people worldwide, generally taking effect in late adolescence or the early 20s, according to the World Health Organization (WHO).

The disease leaves patients with hallucinations and delusions, which are called positive symptoms by experts. It also creates what experts call negative symptoms as patients suffer from dulled emotions, social withdrawal, and feelings of purposelessness. Patients with schizophrenia generally struggle with adult life, rarely can hold a job, and typically die 10 to 20 years earlier than the rest of the population.

The condition has generally been treated with anti-psychotics that can help control the positive symptoms by limiting the amount of dopamine produced by patients. The problem is those therapies don't treat the negative symptoms. The WHO estimates that more than two out of three schizophrenia patients do not receive any medical care.

On Aug. 8, Karuna announced the data from KarXT's phase 3 EMERGENT-2 trial. Its dual mechanism is unique in that it does not rely on the dopaminergic or serotonergic pathway but instead works on activating muscarinic receptors that are underrepresented in schizophrenia patients. In the EMERGENT-2 trial, the therapy showed a statistically significant reduction in both the positive and negative symptoms of schizophrenia compared to a placebo and was generally well-tolerated.

The company is continuing other phase 3 trials to determine KarXT's efficacy and safety and said it expects to submit a New Drug Application (NDA) for KarXT in mid-2023. The drug is also in three phase 3 trials for psychosis related to Alzheimer's disease.

In Karuna's second-quarter report, the company said that as of June 30 it had $407 million in cash, which is enough to fund operations another year as it prepares for KarTX's NDA and commercialization.

Reata's one-two punch of late-stage treatments

Reata Pharmaceuticals focuses on finding molecular pathways to regulate cellular metabolism, inflammation, and cellular response to treat rare diseases.

In March, the company filed an NDA for Omaveloxolone to treat Friedrich's ataxia, based on the oral therapy's data from several recent studies. Friedrich's ataxia is a debilitating degenerative neuro-muscular disorder that effects one in 50,000 people in the United States, according to the Friedreich's Ataxia Research Alliance. 

The FDA extended its review timeline for the drug by three months and raised concerns regarding its efficacy. In response, the company presented more data. When the FDA told the company that no further advisory committee meeting was needed, investors took this as a good sign and the stock jumped. A decision on the drug's approval is scheduled by Feb. 28.

The company is also seeking an NDA for Bardoxolone Methyl to treat patients' CKD caused by Alport syndrome, a rare genetic disorder. The road may be tougher as the company already is facing an FDA complete response letter before approving the therapy. Reata has requested another meeting with the FDA to figure out its next steps regarding the therapy.

In the second quarter, the company said that as of June 30 it had $481.5 million in cash, enough to fund operations through the end of 2024.

High risk, high reward

While some of the good news regarding these two clinical-stage biotech companies has been priced into their stocks, an FDA approval of any of their therapies would certainly give their stocks another boost. It's important to note that neither company has significant revenue yet, so the risk to investors is high.

Of the two, Karuna appears to have more upside because of the large numbers of people with schizophrenia, meaning a much larger market. On top of that, KarXT has had fewer hiccups so far going through the approval process, which may mean it has a better chance of approval than either of Reata's lead therapies.

While Reata's Omaveloxolone would initially have a smaller market, it also is in a phase 1 trial to treat diabetic peripheral neuropathic pain, which is quite common. Bardoxolone Metyl, if approved by the FDA, would also have a potentially large market because of the high incidence of CKD, particularly if the drug is approved for other indications that cause CKD.