Viking Therapeutics (VKTX +0.94%), a clinical-stage biotech, has seen its shares rise by more than 900% in the past 12 months. However, the biotech's shares have taken a breather in the past few sessions, thanks to President Donald Trump's ongoing trade war that has rocked the broader markets.
Turning to the details, Viking's stock has fallen by more than 16% in the past two trading sessions. Despite this double-digit pullback, I think this fear-driven move lower represents a compelling buying opportunity for risk-tolerant investors.
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Viking could become a major NASH player
The underlying reason Viking's stock shot up is primarily due to the company's experimental nonalcoholic steatohepatitis (NASH) drug VK2809. The market's enthusiasm is centered around two inter-related issues. First off, the NASH market is expected to balloon in size over the next few years, and potentially reach a peak value of $35 billion in annual sales.
If that line holds true, this emerging space should be able to support multiple new drugs, meaning that the current leaders in the field -- Intercept Pharmceuticals (ICPT +0.00%) and Genfit -- probably won't be able to monopolize the market before other competitors like Viking get their drugs past the FDA. In fact, this market is so large it could feasibly support several blockbuster level products.
Second, Vikings shares got a boost from the positive midstage trial results for Madrigal Pharmaceuticals' (MDGL 0.92%) MGL-3196 not long ago. As VK2809 and MGL-3196 share a similar mechanism of action, Wall Street apparently believes MGL-3196's midstage results will turn out to be a preview for VK2809's midstage trial that's scheduled to readout later this year. While speculative, the bottom line here is that Viking could be developing a drug capable of generating over $1 billion in annual sales at its peak. That's a sizable revenue stream for a company with a market cap of only $617 million right now.
Although Viking still has to shepherd VK2809 through the risky clinical trials process, the key takeaways are that this drug is arguably de-risked at this stage in light of Madrigal's successful readout with a similar product candidate, and that the industry leaders won't have enough time to establish an entrenched position. As such, Viking does appear to be grossly undervalued when viewed in this context.
What's next?
As usual for clinical-stage biotechs, Viking took advantage of this run-up in its share price to raise capital earlier this month. But that savvy business decision arguably makes this stock all the more attractive right now. With the threat of heavy dilution off the table for now and a key data readout on the horizon, Vikings' shares appear ready to regain their momentum once this political storm fades away.
As proof, Madrigal has already started to attract the attention of potential suitors, and the same fate could be in store for Viking. The big unknown, though, is whether big pharma will wait until VK2809 reads out to make an offer, or whether a suitor will take the plunge to secure this high-value asset before VK2809's midstage readout. After all, Madrigal is reportedly attracting interest from suitors, but the company's stately $4.26 billion market cap may turn out to be a tough barrier to overcome in terms of getting a deal done. As such, Viking might prove to be a much more attractive option based on the company's far cheaper valuation and VK2809's overall similarity to MGL-3196.
