Investing in clinical-stage pharmaceutical companies comes with a lot of risk, but also a lot of potential upside. When such a company delivers a successful product that passes regulatory muster -- or better yet, one that becomes a blockbuster drug -- that can be a game changer, and lead to a soaring share price.
But on the flip side, these types of companies generate little to no income until (and unless) they get a drug approved, and they burn lots of cash in the attempt.
Investors have been bullish about Viking Therapeutics (VKTX 0.78%) of late, but it's still a clinical-stage company, and it comes with no shortage of risks. But because it has a promising glucagon-like peptide 1 (GLP-1) agonist in development that may end up winning a share of the lucrative weight-loss drug market, its market capitalization has climbed to $8 billion.
Is Viking Therapeutics worth that elevated price, or is there too much hype behind the stock right now to make it a good buy?
The stock's future hinges on the success of VK2735
VK2735 is Viking's GLP-1 agonist, and it has achieved strong results in clinical trials. Participants in a phase 2 trial who used the injectable drug for 13 weeks lost, on average, around 15% of their body weight. And the majority of the adverse side effects related to the drug were categorized as either mild or moderate.
Viking is going to meet with the Food and Drug Administration to discuss the next steps for VK2735, but investors should expect a phase 3 clinical trial to take place. And then, if all goes well, the drug may obtain approval. But that won't happen until sometime next year at the earliest.
In addition, the company is working on a pill form of VK2735, and that, too, has been generating positive results. In a phase 1 trial, people taking the pill lost more than 5% of their body weight after just 28 days, and it was safe and well-tolerated among trial participants. The oral version of the drug is still in its early stages of clinical testing, so it has even further to go before potentially obtaining approval than the injectable version, but it's a promising start nonetheless.
Viking's cash position is strong
During the first quarter of 2024, Viking closed a common stock offering that raised $632.5 million, and finished the period with $963 million on its books in cash and securities. Viking has periodically raised cash to fund its operations, and as it's without a source of revenue, more such stock offerings may occur in the future.
VKTX Shares Outstanding data by YCharts.
What's encouraging, however, is that Viking isn't burning a ton of money right now. During the first quarter, it used just $6.1 million over the course of its day-to-day operations. But on a quarterly basis, there can be wide fluctuations in cash due to the timing of payables and receivables.
During 2023, the company's operating cash burn totaled $73.4 million. Even though Viking's cash burn is likely to increase as it initiates larger trials involving its drugs, given the size of its cash position, it may not need to engage in another large stock offering in the near future.
Should you buy Viking Therapeutics stock?
This year, shares of Viking Therapeutics are already up a staggering 290%. Investors are valuing the company at $8 billion, based primarily on the hopes that VK2735 will come to market and potentially generate billions in annual sales.
My concern is that there's a lot of optimism priced into the stock, and there could be significant downside risk. That's arguably the case with many clinical-stage healthcare stocks, however. But at such a high valuation, there may be a bit too much risk compared to the potential upside right now.
Unless you have a high risk tolerance, you'd be better served to hold off on buying the stock right now, as its price tag is a bit steep. And while VK2735 has been demonstrating positive results, it still hasn't obtained approval, and by the time it does (assuming it does), there could be many more options in what's shaping up to be a competitive GLP-1 agonist drug market.
