Viking Therapeutics (NASDAQ:VKTX) stock soared after announcing positive results from a phase 2 study for experimental drug VK2809 in treating non-alcoholic fatty liver disease (NAFLD) and high low-density lipoprotein (LDL) cholesterol. However, the biotech promptly moved forward with a stock offering to capitalize on its dramatic share price increase. This resulted in Viking giving up some of its big gains.

Sometimes it doesn't make sense to buy a stock when it pulls back after a huge jump. In Viking's case, though, buying on the dip looks like a smart choice that could pay off big over time. Here are three reasons why.

Businessman holding up a lot of cash in front of his face

Image source: Getty Images.

1. The data for VK2809 was really that good 

VK2809 reduced LDL cholesterol (the bad kind of cholesterol) by 20% or more compared to placebo. But the really impressive news was the drug's impact in reducing liver fat.

Viking stated that a daily 10 mg dose of VK2809 lowered liver fat by at least 30% in 90.9% of patients. In patients on this dosage, the median change in liver fat as evaluated by magnetic resonance imaging (protein density fat fraction (MRI-PDFF)) was 59.7%. This is enormously important because previous studies found that a reduction in MRI-PDFF of at least 30% is linked to a greater probability of response in patients with non-alcoholic steatohepatitis (NASH), a severe type of NAFLD.

Some industry observers predict that NASH could become a $35 billion market. Should VK2809 prove as successful in phase 3 studies as it was in phase 2, Viking will likely have a megablockbuster on its hands.

2. Another drug -- VK5211 -- looks pretty good, too

Viking announced additional data on Oct. 1 from its phase 2 study of another pipeline candidate, VK5211, in patients recovering from hip fracture. The biotech had already reported that VK5211 met the primary endpoint of the study -- statistically significant dose-dependent increases in lean body mass.

The company's latest update showed that three different doses of VK5211 increased lean body mass (less the mass of patients' heads). The highest of these doses, a 2 mg administration of VK5211, increased lean body mass by 9.1% after 12 weeks of treatment.

Viking has already requested a meeting with the U.S. Food and Drug Administration (FDA) to talk about next steps for VK5211, including requirements for a pivotal phase 3 study. The company is also exploring partnership opportunities for the drug.   

3. Potential suitors could line up 

That leads us to the third reason to buy Viking on the dip: Potential suitors could very well line up in the not-too-distant future. Viking definitely wants to partner on further development of VK5211. But VK2809 should attract a lot of attention, too -- and maybe not just for a partnership.

NASH is one of the hottest areas of development in the biopharmaceutical industry. And it's an indication where combination therapies could be more effective than monotherapies. That's why Gilead Sciences (NASDAQ:GILD), one of several big drugmakers with a strong NASH pipeline, is evaluating combos of its NASH drugs.

Viking and Madrigal Pharmaceuticals (NASDAQ:MDGL) both have thyroid receptor beta agonists. Madrigal reported positive phase 2 results in December 2017 for its lead candidate MGL-3196. The two biotechs appear to be top acquisition targets for bigger players seeking to bolster their NASH pipelines. But since Viking's market cap is only one-third that of Madrigal's, it would be the cheaper alternative for a major drugmaker to acquire -- perhaps even Gilead.

The inevitable caveat

All of these reasons to buy Viking stock hinge on one major assumption: that the biotech's top pipeline candidates will continue to fare well in clinical studies. The inevitable caveat that must be added with any clinical-stage biotech is that there's a risk that clinical testing won't go so well.

Drugs that address metabolic disorders that are in phase 3 testing, which VK2809 should advance to in the near future, have a 55.6% chance of ultimately winning approval, according to historical data collected by the Biotechnology Innovation Organization (BIO). My view is that the risk-reward proposition for Viking is very good, especially with its latest pullback.

Could the stock be a big flop? Maybe. But for aggressive investors, buying Viking on the dip looks like a smart move, in my view. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.